PURCHASE AGREEMENT
Dated as of December 17, 1999,
by and between
TESORO PETROLEUM CORPORATION
and
TESORO GAS RESOURCES COMPANY, INC.
as "Seller"
and
EEX OPERATING LLC
as "Buyer"
SCHEDULES
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1A HEDGING CONTRACTS
1B PERMITTED ENCUMBRANCES
2.6(a) RETAINED LIABILITIES
4.1(b)(iv) NO CONFLICT - SELLER
4.1(b)(v) CONSENTS AND WAIVERS - SELLER
4.1(g) LITIGATION
4.1(h) LABOR MATTERS
4.1(i) TAXES
4.1(k) ABSENCE OF CERTAIN CHANGES
4.1(m)(iii) PERMITS AND LICENSES
4.1(m)(iv) EXCEPTIONS TO RIGHT TO USE ASSETS
4.1(o) SUSPENSE FUNDS
4.1(p) INSURANCE
4.1(q) CONTRACTS ON PRODUCTION
4.1(s) TAX PARTNERSHIPS
4.1(u) ENVIRONMENTAL CONDITIONS
4.1(v) CONTRACTS
4.1(x) XXXXX
4.1(z) PAYOUT BALANCES
9.2 EXCEPTIONS TO PRE-CLOSING OPERATING COVENANTS
9.2(f) COMMITTED EXPENDITURES
9.4 EXCEPTIONS TO PRE-CLOSING FINANCIAL COVENANTS
EXHIBITS
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A ALLOCATED VALUES
B LEASES AND RELATED PIPELINES
C SUBSIDIARIES AND PARTNERSHIP BALANCE SHEET
D SETTLEMENT STATEMENT
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT is dated December 17, 1999, but effective as of the
Effective Time, between Tesoro Petroleum Corporation, a Delaware corporation,
and Tesoro Gas Resources Company, Inc., a Delaware corporation, collectively as
"Seller", and EEX Operating LLC, a Delaware limited liability company, as
"Buyer".
WITNESSETH:
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WHEREAS, Tesoro Gas Resources Company, Inc. owns all of the Membership
Interests in Tesoro Reserves Company, LLC, a Delaware limited liability company
("Reserves LLC"); and
WHEREAS, Tesoro Petroleum Corporation, a Delaware corporation, and Tesoro
Gas Resources Company, Inc., a Delaware corporation, collectively as "Seller",
and EEX Operating LLC, a Delaware limited liability company, as "Buyer", and EEX
Corporation, entered into a Stock Purchase Agreement (the "Stock Purchase
Agreement") dated October 8, 1999 providing for the sale by Seller to Buyer of
all shares of capital stock of Tesoro Exploration and Production Company, a
Delaware corporation ("Exploration") and Tesoro Reserves Company, a Delaware
corporation ("Reserves"), together with the partnership interests in Tesoro E&P
Company, L.P., a Delaware limited partnership (the "Partnership"); and
WHEREAS, the Partnership owns certain assets used in the business of the
exploration, production, gathering, transportation and marketing of oil, natural
gas, condensate and associated hydrocarbons; and
WHEREAS, on the date of the Stock Purchase Agreement, Exploration and
Reserves were the two partners in the Partnership, in which Exploration was the
general partner owning a 1% interest and Reserves was the limited partner owning
a 99% interest; and
WHEREAS, the Partnership was converted into a series limited partnership.
with the entire Series A limited partnership interest remaining in Reserves,
insofar as such interest covers the revenues, expenses, profits and losses from
the Properties described in Exhibit B; and
WHEREAS, Section 9.12 of the Stock Purchase Agreement provides for the
Parties to cooperate at no cost or liability to Buyer, to enable Seller at
Seller's election, to transfer the Operating Assets to Buyer in a manner
enabling the transfer to qualify as a part of a like-kind exchange of property
by Seller within the meaning of Section 1031 of the Code; and
WHEREAS, the Stock Purchase Agreement has been amended to provide for such
a like-kind exchange of property, among other purposes, by a First Amendment to
Stock Purchase Agreement dated December 16, 1999 (the "Amendment"); and
WHEREAS, Reserves LLC is not currently participating in a like-kind
exchange as are the other two limited partners in the Partnership; and
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WHEREAS, Seller desires to sell to Buyer and Buyer desires to purchase from
Seller all issued and outstanding Membership Interests of Reserves LLC,
including all of Reserves LLC's rights and interests in the Partnership and the
Reserves Properties, under the terms and conditions set forth in this Agreement
and the Stock Purchase Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereby agree as follows:
ARTICLE I.
DEFINITIONS
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"Accepting Party" shall have the meaning set forth in Section 16.1(e).
"Accounts Receivable" shall have the meaning set forth in Section 13.5.
"Action" means any action, appeal, petition, plea, charge, complaint,
claim, suit, demand, litigation, arbitration, mediation, hearing, inquiry,
investigation or similar event, occurrence, or proceeding.
"Affiliate" shall have the same meaning set forth in Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act of 1934, as amended.
"Agreement" shall mean this Purchase Agreement.
"Allocated Value" shall mean the monetary value allocated to each Property
or group of Properties on Exhibit A.
"Amendment" shall mean the First Amendment to Stock Purchase Agreement
dated December 16, 1999, by and among Tesoro Petroleum Corporation, a Delaware
corporation, Tesoro Gas Resources Company, Inc., a Delaware corporation, and EEX
Operating LLC, a Delaware limited liability company, and EEX Corporation, a
Texas corporation, for the limited purposes set forth therein
"APO" shall mean "after payout", as such payout may be established under
the respective farmout agreements, joint operating agreements, participation
interests and similar agreements affecting each Property, including payouts
providing reversionary rights of parties who have elected not to participate in
an operation under a joint operating agreement. If there are multiple
outstanding payouts affecting any particular well or Property, then the APO
interest shall mean the interests after all applicable payouts have occurred.
If at the Effective Time there are no outstanding payout balances affecting any
particular well or Property, then the listed APO interest in such well or
Property shall reflect the Partnership's WI and NRI at the Effective Time.
"Applicable Environmental Laws" means all Applicable Laws in effect
pertaining to (i) pollution, or the protection of the environment, including
those relating to waste materials and/or hazardous substances, (ii) the
protection of Persons or property from actual or potential exposure (or the
effects of exposure) to an actual or potential spill or release of Hazardous
Substances or petroleum or produced brine or (iii) the manufacture, processing,
production, gathering,
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transportation, use, treatment, storage or disposal of a Hazardous Substance or
petroleum or produced brine.
"Applicable Law" means any statute, law, rule, or regulation or any
judgment, order, writ, injunction, or decree of any Governmental Authority to
which a specified Person, Operating Asset or property is subject.
"Balance Sheets" shall mean the unaudited combined financial balance sheet
of Reserves LLC and the Partnership as of June 30, 1999, attached hereto as
Exhibit C.
"Books and Records" shall mean all of the following which pertain to the
conduct of the Business: books, records, manuals and other materials, accounting
books and records, continuing property records for property, plant and
equipment, land and lease files, title opinions, suspense records, production
records, any inventories of equipment and property, well files, engineering
files, maps, surveys, electric logs, seismic records, geological and geophysical
files, and all other technical data, division order files, contract files, other
files, computer tapes, disks, other storage media and records, advertising
matter, correspondence, lists of customers and suppliers, maps, photographs,
production data, sales and promotional materials and records, purchasing
materials and records, work and recent salary history for personnel, credit
records, manufacturing and quality control records and procedures, patent and
trademark files and disclosures, litigation files, leases, oil and gas leases,
deeds, easements and other instruments relating to the Business, any copies of
Tax Returns filed by or with respect to Reserves LLC or the Partnership,
including copies of all work papers and calculations relating to Reserves LLC
and the Partnership in support of such Tax Returns, and any comparable
information with respect to predecessors of Reserves LLC or the Partnership to
the extent available, and copies of any other applicable accounting and tax
records of the Seller and the Partnership pertaining to the Business.
"BPO" shall mean "before payout", as such payout may be established under
the respective farmout agreements, joint operating agreements, participation
interests and similar agreements affecting each Property, including payouts
providing reversionary rights of parties who have elected not to participate in
an operation under a joint operating agreement. If at the Effective Time there
is an outstanding payout balance affecting any particular well or Property, the
listed BPO interest in such well or Property shall reflect the Partnership's WI
and NRI at the Effective Time.
"Business" shall mean the Partnership's business of exploring for,
developing, producing, gathering, transporting and marketing natural gas,
condensate and oil.
"Business Day" shall mean any day exclusive of Saturdays, Sundays and
national holidays.
"Buyer Group" shall have the meaning set forth in Section 15.3.
"Buyer's Knowledge" shall mean knowledge of Buyer and management employees
of Buyer's ultimate parent, EEX Corporation, with knowledge of Buyer's
activities, including the negotiation of this Agreement.
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"Bylaws" shall mean a corporation's bylaws, code of regulations or
equivalent document.
"Charter" shall mean a company's management agreement, articles of
association, articles of incorporation, certificate of incorporation or
equivalent organizational documents.
"Closing" shall have the meaning set forth in Section 12.1.
"Closing Date" shall have the meaning set forth in Section 12.1.
"Closing Settlement Price" shall mean the Settlement Price calculated in
accordance with the best information available to the Seller prior to Closing,
as reflected on the Settlement Statement delivered prior to Closing pursuant to
Article X and Section 13.1(a).
"Code" shall mean the United States Internal Revenue Code of 1986 and any
successor statute thereto, as amended.
"Consent to Assignment" shall mean an existing contractual or legal right
of any third party to consent to the Partnership's assignment of a Property to
Buyer under such terms as are set forth in this Agreement.
"Contracts" shall mean all of the contracts that govern or relate to the
ownership or operation of the Operating Assets (including without limitation,
the xxxxx, facilities and equipment associated therewith and the production
therefrom, acreage contribution agreements, assignments, bidding agreements,
bottom-hole agreements, contribution agreements, drilling contracts, dry-hole
agreements, exploration agreements, development agreements, farm-in and farmout
agreements, gas balancing agreements, joint venture agreements, production,
sales, marketing and/or brokerage contracts, gas processing agreements,
operating agreements, participation agreements, service contracts, storage
contracts, gathering agreements, transportation agreements, treating contracts,
water rights agreements and the unitization, unit operating, communitization and
pooling declarations, agreements and orders that create or govern units). To
the extent that Seller, Reserves LLC or the Partnership have rights of
indemnification or warranty rights with respect to any Operating Asset or any
part of an Operating Asset, the same shall be included in the meaning of
"Contracts."
"Damages" shall mean any and all claims, actions, causes of action,
demands, assessments, losses, damages, liabilities, judgments, settlements,
penalties, costs, and expenses (including reasonable attorneys' fees and
expenses, expert fees and expenses and court costs), of any nature whatsoever.
"Effective Time" shall mean July 1, 1999, at 12:00 a.m. local time for each
Operating Asset.
"Encumbrance" shall mean any interest (including any security interest),
pledge, mortgage, lien, charge, adverse claim or other right of third Persons.
"Environmental Conditions" shall have the meaning set forth in Section 7.3
of the Stock Purchase Agreement.
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"Exploration" shall mean Tesoro Exploration and Production LLC, a Delaware
limited liability company.
"Final Settlement Price" shall mean the Settlement Price calculated in
accordance with the best information available to the Parties during the one
hundred twenty (120) day period after Closing, as reflected on the Final
Statement agreed upon pursuant to Article XIII.
"Final Statement" shall mean the final accounting statement to be agreed
upon by the Parties no later than one hundred twenty (120) days after Closing
pursuant to Section 13.1(c).
"Financial Assets and Liabilities" shall mean the assets, liabilities and
other financial items on the Balance Sheets, effective as of 11:59 p.m. on June
30, 1999, (i) as adjusted for revenues, income, expenses and other assets and
liabilities incurred between the Effective Time and the Closing Date and
included within the Adjustment Assets and Liabilities, and (ii) as adjusted for
the Pre-Closing Financial Adjustments and (iii) as otherwise adjusted as
provided herein. The term "Financial Assets" shall not include any assets,
liabilities or other financial items included within the Operating Assets.
"GAAP" shall mean U.S. generally accepted accounting principles, unless
expressly described otherwise.
"Governmental Authority" shall mean any international, national, Federal,
state, municipal or local government, governmental authority, regulatory or
administrative agency, governmental commission, department, board, bureau,
agency or instrumentality, court, tribunal, arbitrator or arbitral body.
"Governmental Order" shall mean any order, writ, rule, judgment,
injunction, decree, stipulation, determination or award entered by or with any
Governmental Authority.
"Grande" shall mean Tesoro Grande LLC, a Delaware limited liability company
"Hazardous Substance" means a substance, chemical, pollutant, waste or
other material (i) that consists, wholly or in part, of a substance that is
regulated as toxic or hazardous to human health or the environment under any
Environmental Law or (ii) that exists in a condition or under circumstances that
constitute a violation of any Environmental Law. "Hazardous Substance" includes
without limitation any "hazardous substance" under the Comprehensive
Environmental Response, Compensation and Liability Act, any "hazardous chemical"
under the Occupational Safety and Health Act, any "hazardous material" under the
Hazardous Materials Transportation Act, any "hazardous chemical substance" under
the Federal Water Pollution Control Act and any "hazardous waste" under the
Resource Conservation and Recovery Act.
"Hedging Contracts" shall mean those natural gas derivative pricing
contracts listed on Schedule A.
"Income Taxes" shall mean any Taxes, including franchise taxes, which are
based upon or in respect of income.
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"Indemnified Party" shall mean any Party or other Person entitled to an
indemnity under Article XV of this Agreement, with respect to the indemnity so
owed.
"Indemnifying Party" shall mean a Party owing an indemnity to any other
Party or Person under Article XV of this Agreement, with respect to the
indemnity so owed.
"Lender" shall have the meaning set forth in Section 9.12(d).
"Liabilities" shall mean any and all debts, claims, liabilities and
obligations of any nature whatsoever, whether accrued or fixed, absolute or
contingent, mature or unmatured or determined or indeterminable.
"Material Adverse Effect" shall mean any event with respect to, change in,
or effect on, Reserves LLC, the Partnership or the Business which, individually
or in the aggregate, is reasonably likely to have a material adverse effect on
the Business, or the financial results of operations, assets or properties or
financial condition of Reserves LLC and the Partnership, taken as a whole, but
the term "Material Adverse Effect" shall not include any change in market
conditions or other conditions affecting the oil and gas exploration and
production industry generally.
"Membership Interests" shall mean shall mean all issued and outstanding
membership interests in Reserves LLC.
"NORM" shall have the meaning set forth in Section 7.2.
"NRI" shall mean the decimal net revenue interest in oil and gas production
from a Property.
"Operating Assets" shall mean all property rights and interests of the
Partnership being sold hereunder in the lands and leases described in Exhibit
"B", as set forth in Section 2.4.
"Other Taxes" shall mean all Taxes other than Income Taxes.
"Parties" shall mean Buyer and Seller, collectively.
"Partnership" shall mean Tesoro E&P Company, L.P., a Delaware limited
partnership.
"Partnership Agreement" means the Agreement of Limited Partnership of the
Partnership, as amended.
"Party" shall mean either Buyer or Seller.
"Permitted Encumbrances" shall include any Encumbrance which is: (i) listed
on Schedule 1B, for which a duly executed release in recordable form will be
delivered to Buyer at or before Closing; (ii) a lien securing amounts claimed
for services provided by operators or other oil field contractors which are not
yet due and owing or which are being contested in good faith, through adequate
procedures; (iii) a statutory lien arising for Taxes not yet delinquent or which
are being contested in good faith, through adequate procedures; (iv) a
reservation,
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exception, limitation, encumbrance or burden expressly included within a
recorded oil and gas lease constituting part of a Property with respect to which
Seller or the Partnership is not in default at Closing which does not reduce the
Partnership's NRI in such Property below the respective decimal interests set
forth in Exhibit A; (v) any royalty, overriding royalty or other production
burden affecting any Property which does not and will not reduce the
Partnership's NRI in such Property below the respective decimal interests set
forth in Exhibit A; (vi) any joint operating agreement containing terms and
conditions reasonable and customary in the industry (other than a Preferential
Right to Purchase that is exercised prior to Closing or a required Consent to
Assignment, or a reversionary right that is not reflected in the BPO and APO
interests on Exhibit A); (vii) the right of a third party under any equipment
rental or lease contract, oilfield service contract, production sales contract
or transportation contract affecting any Property, which either may be
terminated by the parties thereto without penalty or does not extend for a term
of more than sixty days after the Closing Date; (viii) any other easement,
operating right, concurrent use right or similar encumbrance that does not
affect the Partnership's rights to a Property or reduce the production revenues
attributable thereto or increase the costs associated with ownership or
operation of that Property; and (ix) a severance tax, production tax, occupation
tax, ad valorem tax or similar tax of general application.
"Person" shall include any individual, trustee, firm, corporation,
partnership, limited liability company, Governmental Authority or other entity,
whether acting in an individual, fiduciary or any other capacity.
"Post-Closing Return" shall have the meaning set forth in Section 16.2(c).
"Pre-Closing Financial Adjustments" shall mean those certain financial
accounting adjustments and payments set forth in Section 2.6.
"Pre-Closing Period" shall have the meaning set forth in Section 16.2(c).
"Pre-Closing Return" shall have the meaning set forth in Section 16.2(c).
"Preferential Right to Purchase" shall mean the right of any third party
under an existing contract or agreement allowing that third party to purchase
the Partnership's interest in a Property whenever Seller proposes to transfer
its interests in the Partnership under terms such as are set forth in this
Agreement and the Stock Purchase Agreement.
"Production" shall mean all oil, natural gas, condensate, natural gas
liquids, and other hydrocarbons or products produced from or attributable to the
Properties.
"Properties" shall mean, collectively, (i) all valid and existing oil and
gas leaseholds and mineral fee rights, and all rights and interests appurtenant
thereto, which are owned by the Partnership in the lands and leases described on
Exhibit B attached hereto, including without limitation all oil and gas WIs,
NRIs, mineral fee interests, oil, gas and mineral deeds, leases and/or
subleases, royalties, overriding royalties, leasehold interests, mineral
servitudes, production payments and net profits interests, fee mineral
interests, surface estates, fee estates, royalty interests, overriding royalty
interests, or other non-working or carried interests, reversionary rights,
farmout and farmin rights, operating rights, pooled or unitized acreage, and
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all other rights, privileges and interests in such oil, gas and other minerals
(and the production thereof), and other mineral rights of every nature now owned
by the Partnership in such lands and leases listed on Exhibit B hereto, (ii) all
of the contractual rights to interests described in (i) above and in all units
in which such interests are pooled, communitized or unitized, and in any other
oil, gas and/or mineral leases or assets arising pursuant to the terms of the
oil and gas leases listed on Exhibit B hereto, and any other rights and
agreements or contracts affecting or relating to interests described in (i)
above, or to Production, whether or not listed on Exhibit B, including any
tenements, appurtenances, surface leases, easements, permits, licenses,
servitudes, franchises or rights of way.
"Property" shall mean any individual one of the Properties.
"Property Tax Period" shall have the meaning set forth in Section 13.2(a).
"Property Taxes" shall have the meaning set forth in Section 13.2(a).
"Proposed Settlement" shall have the meaning set forth in Section 16.1(e).
"Purchase Price" shall have the meaning set forth in Section 3.1.
"Refusing Party" shall have the meaning set forth in Section 16.1(e).
"Reserves LLC" shall mean Tesoro Reserves Company, LLC, a Delaware limited
liability company.
"Seller" shall mean, collectively, Tesoro Petroleum Corporation, a Delaware
corporation, and Tesoro Gas Resources Company, Inc., a Delaware corporation.
"Seller's Knowledge" shall mean actual knowledge of any fact, circumstance
or condition by the officers or management employees (including those with
titles of "Manager", "Vice President" and "President" or those in the internal
legal department of Seller, Reserves LLC and the Partnership who provide
specific advice related to the operations of the Business) of Seller, Reserves
LLC and the Partnership involved and knowledge of any fact, circumstance or
condition which such officer or management employee would have been aware of
with the exercise of reasonable diligence and inquiry in the course of his or
her duties.
"Settlement Price" shall have the meaning set forth in Section 3.2.
"Settlement Statement" shall mean the accounting statement calculating the
Settlement Price, to be furnished by Seller to Buyer prior to Closing, pursuant
to Article X and Section 13.1(a).
"Southeast" shall mean Tesoro Southeast LLC, a Delaware limited liability
company.
"Stock Purchase Agreement" shall mean the Stock Purchase Agreement dated
October 8, 1999, as amended by the Amendment, by and among Tesoro Petroleum
Corporation, a Delaware corporation, Tesoro Gas Resources Company, Inc., a
Delaware corporation, and EEX
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Operating LLC, a Delaware limited liability company, and EEX Corporation, a
Texas corporation, for the limited purposes set forth therein.
"Straddle Period" shall have the meaning set forth in Section 16.1(e).
"Straddle Return" shall have the meaning set forth in Section 16.2(c).
"Subsidiaries" shall mean Exploration, Reserves LLC, Southeast and Grande,
collectively.
"Tax" shall mean any federal, state, local, or foreign income, gross
receipts, license, payroll, parking, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under
Section 50A of the Code), customs duties, capital stock, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, ad valorem,
value added, alternative or add-on minimum, estimated tax, or other tax of any
kind whatsoever, including any interest, penalty, or addition thereto, whether
disputed or not, including such item for which Liability arises as a transferee
or successor-in-interest.
"Tax Claim" shall have the meaning set forth in Section 16.1(c).
"Tax Return" shall mean any return, declaration, report, claim for refund,
information return or statement relating to Taxes, including any schedules or
attachments thereto, and including any amendment thereof.
"Taxing Authority" shall mean any Governmental Authority responsible for
the imposition or collection of any Tax.
"Tesoro Group" shall have the meaning set forth in Section 4.1(i).
"Tesoro Parent" shall have the meaning set forth in Section 4.1(i).
"Transaction" shall mean the purchase and sale of the Membership Interests
pursuant to this Agreement and the related transactions contemplated herein.
"WI" shall mean a working interest under an oil and gas lease or other
Contract affecting a Property which shall reflect the decimal interest for
participation in the decisions, costs and risks concerning operations.
"Working Capital" shall mean, at any time, the difference between (a) the
sum of the amounts on the line items "cash", "accounts receivable",
"inventories" and "prepayment and other" on the Balance Sheet, less (b) the sum
of the amounts on the line items "accounts payable" and "accrued liabilities" on
the Balance Sheet; all as computed in accordance with GAAP and past practice for
Reserves LLC and the Partnership except as expressly provided herein, and in a
manner as reflected on the Balance Sheets; provided, however, that the amounts
on the line items "prepayment and other", "accounts payable" and "accrued
liabilities" on the Balance Sheet shall not include the impact of any amounts
referred to in the first proviso in Section 3.2(a)(i); and
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provided further, that the stated amount of Working Capital shall be reduced by
the amount of inventories that existed as of the Effective Time.
"Working Capital Accounts" shall mean the line items "cash", "accounts
receivable", "inventories", "prepayment and other", "accounts payable" and
"accrued liabilities" on the Balance Sheet, all as computed in accordance with
GAAP and past practice for Reserves LLC and the Partnership, and in a manner as
reflected on the Balance Sheets; provided, however, that the line items
"prepayment and other", "accounts payable" and "accrued liabilities" shall not
include the impact of any items referred to in the first proviso in Section
3.2(a)(i).
ARTICLE II.
PURCHASE AND SALE
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2.1 Sale of Membership Interests. Subject to the terms and conditions of
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this Agreement, Seller agrees to sell and assign to Buyer, and Buyer agrees to
purchase and pay for, at Closing, all of the Membership Interests.
2.2 Effect of Sale. The sale of the Membership Interests at Closing
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shall transfer to Buyer all of Seller's rights in Reserves LLC. On the Closing
Date, Reserves LLC shall hold certain interests, assets and liabilities, as set
forth in this Article II. Except as otherwise specifically set forth in this
Agreement, the transfer of Seller's rights in Reserves LLC shall assign to Buyer
all of Seller's beneficial right, title, interest and obligations in and to such
interests, assets and liabilities held by Reserves LLC.
2.3 Partnership. On the Closing Date, Exploration and Reserves LLC shall
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own the rights and interests in the Partnership, insofar as they pertain to the
Properties. Exploration shall be the general partner, of the Partnership and
Reserves LLC shall own the entire Series A limited partnership interest in the
Partnership insofar as it pertains to allocable revenues and expenses
attributable to the Properties. The partnership rights and interests of
Reserves LLC described in this Section 2.3 shall pass to Buyer as an attribute
of the sale of the Membership Interests pursuant to this Agreement.
2.4 Operating Assets. On the Closing Date, the Partnership shall own the
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Operating Assets, subject to the Permitted Encumbrances, as follows:
(a) Exploration and Production Assets.
---------------------------------
(i) the Properties;
(ii) All the interests in oil and gas xxxxx described on Exhibit A,
together with an interest in the production, compression,
treating, dehydration or processing facilities and other real or
tangible personal property appurtenances and fixtures, which are
located on the lands covered by or within the Properties or are
being used by the Partnership in connection with the operations
on the Properties or Production;
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(iii) Subject to the license granted under the License Agreement
(with respect to the rights covered thereby), rights and
interests in geological data and records, seismic data, whether
in digital or paper format, well logs, well files, geological
data, records and maps, land and contract files and records,
accounting files, data and records, computer hardware and
software and other materials (whether electronically stored or
otherwise) used or held for use by Seller, Reserves LLC or the
Partnership, or any of their direct or indirect parents,
subsidiaries or other Affiliates, regarding ownership of the
Properties or operations and Production which relate to the
Properties, and other files, documents and records which relate
to the Properties;
(iv) Rights, obligations, title and interests in and to permits,
orders, contracts, abstracts of title, leases, deeds,
unitization agreements, pooling agreements, operating
agreements, farmout agreements, participation agreements,
division of interest statements, division orders, participation
agreements, and other agreements and instruments applicable to
the Properties;
(v) All the rights, obligations, title and interests of Seller in
and to all easements, rights of way, certificates, licenses and
permits and all other rights, privileges, benefits and powers
conferred upon the owner and holder of interests in the
Properties, or concerning software used in conjunction with
ownership or operation of the Properties;
(vi) Rights, title, obligations and interests in or concerning any
gas imbalances affecting the Properties; and
(vii) All office equipment, computer equipment, light tables,
drafting tables, drafting equipment, office supplies, facsimile
machines, pool cars and any other equipment or furniture not
herein named which is utilized by the Partnership in its day to
day operations.
(b) Leased Assets. To the extent any of the items of office equipment
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listed in Section 2.4(a) above are leased and not owned, Seller, Reserves LLC
and the Partnership shall use their best efforts to cause such leases to be
assigned to Buyer at Closing.
2.5 Financial Assets and Liabilities . On the Closing Date, the
--------------------------------
Partnership shall own the Financial Assets and Liabilities. Reserves LLC shall
be allocated its share of the Partnership's respective Financial Assets and
Liabilities attributable to ownership and operation of the Properties in
proportion to its ownership of the Partnership's interests in the Properties.
The Financial Assets and Liabilities at Closing of the Partnership and each
partner in the Partnership shall be computed by Seller in accordance with GAAP,
and shall be allocated to the Properties and the partners in the Partnership in
accordance with the Partnership Agreement. The Financial Assets and Liabilities
shall be adjusted from those set forth on the Balance Sheet to reflect certain
Pre-Closing Financial Adjustments and the Adjustment Assets and Liabilities, as
set forth in Sections 2.6 and 2.7.
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2.6 Pre-Closing Financial Adjustments. Prior to the Closing Date, Seller
---------------------------------
shall make certain accounting adjustments and payments regarding the assets,
liabilities and equity of the Partnership and Reserves LLC, to the effect that
Sellers shall remove all intercompany accounts involving the Partnership,
Reserves LLC and their Affiliates, and all intercompany liabilities shall have
been removed. At Closing the only assets and liabilities of the Partnership and
Reserves LLC shall be the Operating Assets and the Adjustment Assets and
Liabilities.
(a) Certain Accounts. Immediately prior to the Closing, Seller shall take,
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and shall cause Reserves LLC and the Partnership to take, all necessary action
deemed appropriate to adjust the Balance Sheets to account for those items that
are to be retained by Seller, as set forth in Schedule 2.6(a). In doing so,
Seller shall take, and shall cause Reserves LLC and the Partnership to take, all
necessary actions deemed appropriate so that the Balance Sheets as of the
Closing Date, as adjusted to reflect such actions, will show zero for those line
items listed in Schedule 2.6(a) as financial items that are to be retained by
Seller.
(b) Pre-Closing Cash Distribution. Immediately prior to the Closing,
-----------------------------
Tesoro Gas Resources Company, Inc. shall cause Reserves LLC to pay to it an
amount equal to the arithmetic mean of Seller's and Buyer's good faith estimates
of the consolidated cash and cash equivalents (other than amounts in suspense
accounts) of Reserves LLC as of the Closing Date.
(c) Changes in Balance Sheets Due to Continuing Operations. Buyer and
------------------------------------------------------
Seller expressly recognize that the assets and liabilities of Reserves LLC and
the Partnership shall be affected by the effects of ongoing ownership and
operation of the Operating Assets between the Effective Time and the Closing
Date. These changes shall be handled exclusively by adjustments to the
Settlement Price as set forth in Section 3.2 and Article XIII.
2.7 Adjustment Assets and Liabilities. At Closing, the Partnership shall
---------------------------------
retain, to the extent permitted by applicable law and regulations, the following
interests:
(a) All rights, obligations, liabilities, title and interests of Seller
and the Partnership in and to all Hedging Contracts in effect at the Effective
Time or thereafter;
(b) All Working Capital Accounts; and
(c) All rights to future proceeds, defenses and indemnities owed under any
bonds or insurance policies covering the Operating Assets, the Partnership,
Reserves LLC or the Business for policy periods prior to the Closing Date, for
losses, claims or occurrences, as applicable, arising prior to the Closing Date.
ARTICLE III.
PURCHASE PRICE AND SETTLEMENT PRICE
-----------------------------------
3.1 Purchase Price. The monetary consideration ("Purchase Price") for
--------------
the sale and conveyance of all the Membership Interests to Buyer, effective as
of the date of Closing, is Buyer's payment of $85,523,212 in cash.
12
3.2 Settlement Price. Pursuant to the provisions as described below, the
----------------
Purchase Price to be paid by Seller will be subject to certain adjustments made
at Closing and within one hundred twenty (120) days thereafter, as set forth in
Article XIII, to determine the Settlement Price amount that will actually be
paid by Buyer. The Settlement Price will be calculated as follows:
(a) Increases. The Purchase Price shall be increased by the following
---------
amounts:
(i) An amount equal to the expenses properly accrued in accordance
with GAAP and past practice, and allocated to Reserves LLC
under the Partnership Agreement, and as provided for in Section
13.3, attributable to the period from the Effective Time to the
end of business on the Closing Date; provided, however, that
such expenses shall exclude all (1) depreciation, depletion and
amortization, (2) income and franchise taxes, (3) one-half of
the amount accrued by and the Partnership and allocated to
Reserves LLC under the Partnership Agreement, incentive
compensation arrangements for the Retained Employees, as
provided in Section 9.9(c), and (4) severance obligations and
other amounts accrued under any employment retention and
management stability agreements, as provided in Section 9.9(b);
provided, further, however that Seller and the Partnership
shall be permitted to accrue no more than $40,000 per month
from the close of business on June 30, 1999 to the Closing Date
for corporate general and administrative expenses;
(ii) An amount equal to the capital expenditures relating to the
Business properly accrued in accordance with GAAP and past
practice and allocated to Reserves LLC under the Partnership
Agreement, attributable to the period from the Effective Time
to the end of business on the Closing Date; and
(iii) The amount of change in Working Capital and allocated to
Reserves LLC under the Partnership Agreement between the
Effective Time and the end of business on the Closing Date, if
the amount of change is a positive number.
(b) Decreases. The Settlement Price shall be decreased by the following
---------
amounts:
(i) An amount equal to the revenues properly accrued in accordance
with GAAP and past practice and allocated to Reserves LLC under
the Partnership Agreement attributable to the period from the
Effective Time to the end of business on the Closing Date;
(ii) An amount equal to any Settlement Price Adjustment allocated to
Reserves LLC under the Partnership Agreement, subject to the
application of Section 13.1;
13
(iii) The amount, stated as a positive number, of any change in
Working Capital and allocated to Reserves LLC under the
Partnership Agreement between the Effective Time and the end of
business on the Closing Date, if and only if, the amount of
change is a negative number.
The Purchase Price as adjusted pursuant to this Section 3.2 is herein called the
"Settlement Price".
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
------------------------------
4.1 Seller's Representations and Warranties. Effective as of the Closing
---------------------------------------
Date, Seller shall represent and warrant that:
(a) Disclosure. To Seller's Knowledge, the representations and
----------
warranties set forth in this Section 4.1 of this Agreement, the exhibits to this
Agreement, and the information, documents and Balance Sheets provided under the
terms of this Agreement represent full and fair disclosure as of the Closing
Date and do not contain any untrue statement of any material fact or omit any
material fact necessary in order to make the facts stated not misleading.
(b) Authorization and Enforceability.
--------------------------------
(i) This Agreement and the Transaction have been duly authorized
by each Seller.
(ii) Neither the execution and delivery of this Agreement by
Seller, nor the consummation by Seller of the transactions
contemplated hereby, will violate or conflict with, or result
in the acceleration of rights, benefits or obligations under,
(1) any provision of any of Seller's, Reserves LLC's or the
Partnerships' respective Charters, Bylaws, management
agreements, limited liability company agreements, operating
agreements or partnership agreements, or (2) any applicable
statute, law, regulation or Governmental Order to which Seller
or Reserves LLC or the Partnerships or the assets and
properties of such entities, including without limitation the
Operating Assets, are bound or subject.
(iii) This Agreement has been duly executed and delivered by each
Seller and constitutes the valid and binding obligation of
each Seller, enforceable against it in accordance with its
terms, except as such enforceability may be limited by
bankruptcy, insolvency or other laws relating to or affecting
the enforcement of creditors' rights generally and general
principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at
law).
(iv) Except as set forth on Schedule 4.1(b)(iv), or as otherwise
specifically provided herein, the execution, delivery, and
performance of this Agreement (assuming that all applicable
consents are received and all applicable Preferential Rights
to Purchase individual Operating Assets are waived) will not
(A) be in violation of any provisions of any regulation or
14
order that could reasonably be expected to adversely affect the
ownership or operations of the Operating Asset affected thereby
or give rise to damages, penalties or claims of third parties,
or (B) result in the breach of, or constitute a default under,
any indenture or other material agreement or instrument to which
Seller, Reserves LLC or the Partnerships are bound, or (C) cause
the recognition of ain for which the Buyer (or, after the
Closing, the Subsidiaries) will be responsible for the tax
thereon or subject any Subsidiary or its assets to any Tax other
than Tax for which Seller is responsible under Article XVI;
(v) Except as set forth on Schedule 4.1(b)(v) or as otherwise
specifically provided herein, no consent, waiver, approval,
order or authorization of, notice to, or registration,
declaration, designation, qualification or filing with, any
Governmental Authority or third Person, domestic or foreign, is
or has been or will be required on the part of Seller in
connection with the execution and delivery of this Agreement or
the consummation by Seller of the transactions contemplated
hereby or thereby, other than (A) consents and Preferential
Rights to Purchase affecting individual Operating Assets; (B)
filings required (1) to form Reserves LLC under Delaware law;
(C) tax filings or (D) where the failure to obtain such
consents, waivers, approvals, orders or authorizations or to
make or effect such registrations, declarations, designations,
qualifications or filings (1) is not reasonably likely to
prevent or materially delay consummation of the transactions
contemplated by this Agreement (2) could reasonably be expected
to adversely affect the Business or (3) could give rise to
damages, penalties or claims of third parties.
(c) Organizational Status.
---------------------
(i) Each Seller: (1) is a corporation duly organized, validly
existing and in good standing under the laws of Delaware, (2) is
duly qualified to transact business in each jurisdiction where
the nature and extent of its business and properties require
such qualification, and (3) possesses all requisite authority
and power to conduct its business and execute, deliver and
comply with the terms and provisions of this Agreement and to
perform all of its obligations hereunder. There are no pending
or threatened Actions (or basis therefor) for the dissolution,
liquidation, insolvency, or rehabilitation of any Seller.
(ii) Reserves LLC(1) is a limited liability company duly organized,
validly existing and in good standing under the laws of
Delaware, (2) is duly qualified to transact business in each
jurisdiction where the nature and extent of its business and
properties require such qualification, and (3) possesses all
requisite authority and power to conduct its business. There are
no pending or threatened Actions (or basis therefor) for the
dissolution, liquidation, insolvency, or rehabilitation of
Reserves LLC.
(iii) The Partnership (1) is a limited partnership duly organized,
validly existing and in good standing under the laws of
Delaware, (2) is duly
15
qualified to transact business in each jurisdiction where the
nature and extent of its business and properties require such
qualification, and (3) possesses all requisite authority and
power to conduct its business. There are no pending or threatened
Actions (or basis therefor) for the dissolution, liquidation,
insolvency, or rehabilitation of the Partnership.
(d) Subsidiary and Other Equity Interests.
-------------------------------------
(i) Reserves LLC has no subsidiaries and does not own any stock or
other interest in any other corporation, partnership, joint
venture, or other business entity, with the exception of the
Partnership.
(ii) The Partnership has no subsidiaries and does not own any stock or
other interest in any other corporation, partnership, joint
venture, or other business entity.
(e) Membership Interests and Partnership Interests.
----------------------------------------------
(i) Reserves LLC has authorized membership interests, of which all
are issued and outstanding and owned by Tesoro Gas Resources
Company, Inc. The membership interests have been duly authorized
by Reserves LLC, and the membership interests owned by Tesoro Gas
Resources Company, Inc. are validly issued and outstanding, fully
paid and nonassessable. There are no preemptive rights,
subscriptions, options, consents to assignment or rights of first
refusal, convertible securities, warrants, calls, stock
appreciation rights, phantom stock, profit participation, or
other similar rights, or other agreements or commitments
obligating Seller or Reserves LLC to issue or to transfer (or
preventing the transfer of) any membership interests, capital
stock or other equity interest in Reserves LLC.
(ii) In the Partnership, the entire Series A limited partnership
interest (representing a 99% interest in all of the capital and
assets of Series A) is held by Reserves LLC. Exploration LLC is
the general partner of the Partnership (representing a 1%
interest in all of the capital and assets of Series A). Such
interests are duly authorized under the agreement governing the
Partnership, as currently amended, and are valid. There are no
preemptive rights, or authorized or outstanding subscriptions,
options, consents to assignment or rights of first refusal,
convertible securities, warrants, calls, appreciation rights,
phantom interests, profit participation, or other similar rights,
or other agreements or commitments obligating Seller, the
Partnership, Grande, Reserves LLC, Southeast or Exploration LLC
to issue or to transfer (or preventing the transfer of) any
equity interest in the Partnership.
(iii) Seller has delivered to correct and complete copies of Reserves
LLC's and the Partnership's respective Charter, Bylaws,
management agreement, limited liability company agreement,
operating agreement or partnership agreement, as amended to date,
and the minute books of Reserves LLC and the Partnership. Neither
Reserves LLC nor the Partnership is in
16
breach of any provision of its Charter, Bylaws, management
agreement, limited liability company agreement, operating
agreement or partnership agreement.
(f) Title to Membership Interests, Partnership Interests and Assets.
---------------------------------------------------------------
(i) The Membership Interests constitute all of the issued and
outstanding membership interests and other equity interests in
Reserves LLC. All of the issued and outstanding membership
interests of Reserves LLC are owned of record and beneficially
with good and valid title by Tesoro Gas Resources Company, Inc.,
free and clear of any Encumbrance. Upon delivery to Buyer of the
certificates representing the Membership Interests in the manner
and with the powers described in Section 12.2(a), assuming that
Buyer pays the consideration contemplated by this Agreement and
has no notice of any adverse claim, good and valid title to the
Membership Interests will have been transferred to Buyer, free
and clear of any Encumbrances. Neither Tesoro Petroleum
Corporation nor Tesoro Gas Resources Company, Inc. has received
any notice of any adverse claim to their title to the Membership
Interests.
(ii) All of the issued and outstanding partnership interests in the
Partnership are owned of record and beneficially with good and
valid title by Grande, Reserves LLC, Southeast, and Exploration,
free and clear of any Encumbrance. Neither Grande, Reserves LLC,
Southeast, nor Exploration has received any notice of any
adverse claim to their respective interests in the Partnership.
(iii) Reserves LLC and the Partnership have good title to all of the
assets and properties (except the Operating Assets) which they
own or purport to own, including the Financial Assets and
Liabilities reflected on the Balance Sheets and allocable to the
Properties under the Partnership Agreement, except for
properties sold, consumed or otherwise disposed of in the
ordinary course of business since the date of the Balance
Sheets, free and clear of any Encumbrances other than Permitted
Encumbrances.
(g) Litigation. Except as set forth in Schedule 4.1(g), none of Seller,
----------
Reserves LLC or the Partnership have been served with and, to Seller's
Knowledge, there are no pending or threatened Actions before any Governmental
Authority against or affecting Seller, Reserves LLC, the Partnership or the
Operating Assets, which, if adversely determined, either would be reasonably
expected to expose Reserves LLC or the Partnership to a risk of loss after the
Effective Time or would interfere with Seller's ability or right to execute and
deliver this Agreement or consummate the transactions contemplated by this
Agreement.
(h) Labor Matters. Except as set forth on Schedule 4.1(h), there are no
-------------
contracts, agreements, or other arrangements whereby Reserves LLC or the
Partnership are obligated to compensate or provide health and welfare benefit
plans or retirement benefits to any employees or other persons, except for
employment agreements that are terminable at will, without breach or penalty.
To Sellers' Knowledge, Seller, Reserves LLC and the Partnership are in
compliance with all federal, state, and local laws respecting employment and
employment practices, terms
17
and conditions of employment, and wages and hours and are not engaged in any
unfair labor practice with regard to those persons employed in connection with
Reserves LLC's or the Partnership's operations. No employee of Reserves LLC is
covered under any collective bargaining agreement. There is no unfair labor
practice complaint against Reserves LLC pending or, to Seller's Knowledge,
threatened before the National Labor Relations Board or any comparable state or
local Governmental Authority. There is no labor strike, slowdown or work
stoppage pending or, to Seller's Knowledge, threatened against or directly
affecting Reserves LLC, and no grievance or any Action arising out of or under
collective bargaining agreements is pending or, to Seller's Knowledge,
threatened against Reserves LLC.
(i) Taxes.
-----
(i) Except as set forth in Schedule 4.1(i), Seller, and the
Partnership have timely filed or caused to be timely filed (or
will timely file or cause to be timely filed) with the
appropriate Taxing Authorities, all Tax Returns required to be
filed on or prior to the Closing Date by or with respect to
Sellers and the Partnership (or their respective Operating
Assets) and have timely paid or adequately provided for (or will
timely pay or adequately provide for) all Taxes shown thereon as
owing, except where the failure to file such Tax Returns or pay
any such Taxes would not, or could not reasonably be expected
to, in the aggregate, result in losses or costs or expenses to
Reserves LLC's interests or the Partnership after the Closing
Date.
(ii) Sellers are members of an affiliated group of corporations which
file consolidated federal income tax returns ("Tesoro Group")
with Tesoro Petroleum Corporation as the common parent ("Tesoro
Parent"). Reserves LLC is not required to and does not file
federal income tax returns as a taxpaying entity, and, for
purposes of federal income taxation, Reserves LLC is accounted
for and included as a part of Tesoro Gas Resources Company, Inc.
The Tesoro Group has been subject to normal and routine audits,
examinations and adjustments of Taxes from time to time, but
there are no current audits or audits for which written
notification has been received, other than those set forth in
Schedule 4.1(i). There are no written agreements with any Taxing
Authority with respect to or including Reserves LLC's interests
which will in any way affect liability for Taxes attributable to
Reserves LLC's interests after the Closing Date.
(iii) Except as set forth in Schedule 4.1(i), no assessment,
deficiency or adjustment for any Taxes has been asserted in
writing or, to the knowledge of Sellers, is proposed with
respect to any Tax Return of, or which includes, Reserves LLC's
interests.
(iv) Except as set forth in Schedule 4.1(i), there is not in force
any extension of time with respect to the due date for the
filing of any Tax Return of or with respect to or which includes
Reserves LLC's interests or any waiver or agreement for any
extension of time for the assessment or payment of any Tax of or
with respect to or which includes Reserves LLC's interests.
18
(v) Except for Taxes due with respect to Tax Returns that will be
paid by Tesoro Parent (and not subject to reimbursement by
Reserves LLC), the accounting records of Reserves LLC will
include immediately prior to the Closing Date adequate
provisions for the payment of all Taxes allocable to Reserves
LLC's interests for all taxable periods or portions thereof
through the Closing Date.
(vi) All Tax allocation or sharing agreements or arrangements have
been or will be canceled on or prior to the Closing Date. No
payments are or will become due by Reserves LLC after the
Closing Date pursuant to any such agreement or arrangement.
(vii) Except as set forth on Schedule 4.1(i), none of the Sellers or
Reserves LLC will, as a result of the transactions contemplated
by this Agreement, be obligated to make a payment after the
Closing Date to an individual that would be a "parachute
payment" as defined in Section 280G of the Code without regard
to whether such payment is reasonable compensation for personal
services performed or to be performed in the future.
(viii) Neither Reserves LLC nor the Partnership have participated in
or cooperated with an international boycott within the meaning
of Section 999 of the Code.
(ix) Neither Reserves LLC nor the Partnership has filed a consent
under Code Section 341(f) concerning collapsible corporations.
(x) Neither Reserves LLC nor the Partnership has been a United
States real property holding corporation within the meaning of
Code Section 897(c)(2) during the applicable period specified
in Code Section 897(c)(1)(A)(ii).
(xi) All monies required to be withheld by either Seller, Reserves
LLC and the Partnership and paid to Taxing Authorities for all
Taxes have been (i) collected or withheld and either paid to
the respective Taxing Authorities or set aside in accounts for
such purpose or (ii) properly reflected in the Balance Sheets.
(j) Balance Sheets.
--------------
(i) The Balance Sheets have been prepared in accordance with GAAP
applied on a basis consistent with prior periods, except as
described in the notes thereto, which will qualify that the
Partnership and Reserves LLC have been accounted for as part of
a consolidated financial group with their affiliates and not as
completely separate stand-alone entities.
(ii) The Balance Sheets present fairly, in all material respects,
the financial condition of the combined Partnership and
Reserves LLC as of June 30, 1999. The books and records of
Reserves LLC and the Partnership from which the Balance Sheets
were prepared were complete and accurate in all material
respects at the time of such preparation.
19
(iii) Reserves LLC and the Partnership have no Liabilities, except
for Liabilities (1) reflected in the Balance Sheets, (2)
incurred by Reserves LLC or the Partnership in the ordinary
course of business and consistent with past practices since the
date of the Balance Sheets, or (3) which are Permitted
Encumbrances, or (4) for which the Buyer is being indemnified
hereunder. As used in this subparagraph, the term "Liabilities"
excludes any Liabilities not required to be reflected in the
Balance Sheets under GAAP.
(k) Absence of Certain Changes. Except as set forth in Schedule 4.1(k), or
--------------------------
as otherwise contemplated by this Agreement (including without limitation
Sections 2.5 and 2.6), or with Buyer's prior written consent, since the close of
business on June 30, 1999:
(i) Neither Reserves LLC nor the Partnership has sold, leased,
transferred, or assigned any assets other than surplus
equipment not necessary for operations of the Business and for
a reasonable consideration;
(ii) Reserves LLC and Partnership have not incurred, assumed or
become subject to any additional indebtedness for money
borrowed or purchase money indebtedness, including capitalized
leases;
(iii) Reserves LLC and Partnership have not entered into any
transaction not in the ordinary course of business, except as
contemplated by this Agreement;
(iv) there have been no additional Encumbrances placed on the assets
of Reserves LLC or the Partnership other than Permitted
Encumbrances;
(v) no event has occurred which constitutes a Material Adverse
Effect;
(vi) Neither Reserves LLC nor the Partnership has made any loan to,
or entered into any contract with (other than severance
agreements for which Seller shall remain responsible), any of
its directors or officers;
(vii) Reserves LLC has not issued, sold, or otherwise disposed of any
of its interests in the Partnership, except in connection with
the transactions outlined in Section 9.4(b) of the Stock
Purchase Agreement;
(viii) there has been no change made or authorized to the Charter,
Bylaws management agreement, limited liability company
agreement, operating agreement or partnership agreement of
Reserves LLC or the Partnership, except in connection with the
transactions outlined in Section 9.4(b) of the Stock Purchase
Agreement;
(ix) Neither Reserves LLC nor the Partnership has canceled,
compromised, waived, or released any debt or Action (or series
of related debts or Actions);
(x) Neither Reserves LLC nor the Partnership has delayed or
postponed the payment of accounts payable or other Liabilities
owed, other than amounts which Seller reasonably and in good
faith disputes;
20
(xi) Neither Reserves LLC nor the Partnership has made any capital
investment in, any loan to, or any acquisition of the
securities or assets of, any other Person (or series of related
capital investments, loans, and acquisitions), except in
connection with operations conducted pursuant to Section 9.2(f)
or in connection with the transactions outlined in Section
9.4(b) of the Stock Purchase Agreement;
(xii) Neither Reserves LLC nor the Partnership has made any capital
expenditure (or series of related capital expenditures), except
in connection with operations conducted pursuant to Section
9.2(f); or in connection with the transactions outlined in
Section 9.4(b) of the Stock Purchase Agreement
21
(xiii) Neither Reserves LLC nor the Partnership has entered into any
Contract (or series of related Contracts) other than (i) to
effectuate operations set forth on Schedule 9.2(f) or (ii)
constituting joint operating agreements or oil and gas leases
entered into in the ordinary course of business or (iii)
contracts with officers and directors for which the Seller
shall remain responsible or (iv) contracts in connection with
the transactions outlined in Section 9.4(b) of the Stock
Purchase Agreement;
(xiv) to Seller's Knowledge, neither Reserves LLC nor the Partnership
has materially breached any Contract by which it is bound or to
which any of its assets is subject; and
(xv) Neither Reserves LLC nor the Partnership has declared, set
aside, or paid any dividend or made any distribution with
respect to its interests in the Partnership (whether in cash or
in kind) or redeemed, purchased, or otherwise acquired any of
its interests in the Partnership, other than in the ordinary
course of business or as contemplated by this Agreement or in
connection with the transactions outlined in Section 9.4(b) of
the Stock Purchase Agreement.
(l) Compliance With Law. Since June 30, 1999, neither Reserves LLC nor the
-------------------
Partnership has violated any law, statute or regulation which have subjected
them to fines or penalties (nor to Seller's Knowledge have any third parties
violated any Applicable Law for which Reserves LLC or the Partnership may have
any responsibility). As of the date of this Agreement, to Seller's Knowledge,
Reserves LLC and the Partnership are in compliance in all material respects with
all laws, statutes or regulations applicable to Reserves LLC and the
Partnership, except where the noncompliance with which would not, in the
aggregate, result in the imposition on Reserves LLC and the Partnership of fines
or penalties.
(m) Operating Assets.
----------------
(i) Seller represents that as of Closing, Seller's and the
Partnership's interests in the Operating Assets shall be free
and clear of any liens other than Permitted Encumbrances.
(ii) To Seller's Knowledge, the Operating Assets are being operated
in compliance in all material respects with all applicable
federal, state or local laws, and the rules and regulations of
any agency or authority having jurisdiction.
(iii) Except as set forth in Schedule 4.1(m)(iii), Reserves LLC and
the Partnership possess all permits, licenses, orders,
approvals and authorizations required by any applicable law,
statute, regulation or Governmental Order, or by the property
and contract rights of third Persons, reasonably necessary to
permit the operation of the Business in the manner currently
conducted by Reserves LLC and the Partnership. Neither Reserves
LLC nor the Partnership has received written notice from any
Governmental Authority that any such permit, license, order,
approval or authorization has been, or will be, revoked or
terminated.
22
(iv) Except as set forth in Schedule 4.1(m)(iv), immediately before
the Closing Date, Reserves LLC and the Partnership will hold or
have the right to use in the Business all of the assets and
properties (including all licenses and agreements) currently
being used (except those disposed of or expiring in the
ordinary course of business or otherwise as contemplated or
permitted by this Agreement) or which are reasonably necessary
to permit the operation of the Business in the manner currently
conducted by Reserves LLC and the Partnership. Since June 30,
1999, Reserves LLC have conducted no business other than the
Business.
(n) No Brokers' Fees. Except for Credit Suisse First Boston, the fees and
----------------
expenses of which will be paid by Seller, neither Seller nor any of its
directors, officers or employees has employed any broker, finder or investment
banker or incurred any Liability for any brokerage fees, commissions, finders'
fees or similar fees in connection with the transactions contemplated by this
Agreement. Buyer shall have no responsibility whatsoever, contingent or
otherwise, for any brokers' or finders' fees incurred by Seller, Reserves LLC or
the Partnership relating to the Transaction.
(o) Suspense Funds. Schedule 4.1(o) is a true and correct list as of
--------------
August 31, 1999 of all amounts held by the Partnership and/or Reserves LLC in
suspense accounts, or otherwise, related to the Properties for the benefit or
account of any other Person.
(p) Insurance. As listed on Schedule 4.1(p) Seller, Reserves LLC and the
---------
Partnership maintain insurance on and bonds with respect to the Operating
Assets, as set forth on Schedule 4.1(p), covering such risks and with such
deductible amounts as are consistent with general oil and gas industry practice.
(q) Contracts on Production. Except as set forth on Schedule 4.1(q), there
-----------------------
are no Contracts involving the purchase, marketing, brokering or sale of
Production that require a dedication of Production for a term in excess of three
(3) months that will not be terminable without penalty or other liability at the
sole discretion of Reserves LLC or the Partnership upon not more than one (1)
month's notice, except for commitments under operating agreements.
(r) Equipment. Since June 30, 1999, neither Seller, Reserves LLC nor the
---------
Partnership, nor to Seller's Knowledge the operator of any of the Operating
Assets, has removed any of the equipment, facilities or other property from the
Operating Assets except in the ordinary course of business.
(s) Tax Partnerships. Except as disclosed in Schedule 4.1(s), no Property
----------------
is subject to, or considered to be held by, any partnership for federal income
tax purposes, other than tax partnerships under joint operating agreements.
(t) Disclaimer. Except as otherwise expressly set forth in this Article
----------
and elsewhere in this Agreement, Seller and the Affiliates of Seller expressly
disclaim any representations or warranties of any kind or nature, express or
implied, as to the condition, value or quality of the assets or properties
currently or formerly used, operated, owned, leased, controlled, possessed,
occupied or maintained by Reserves LLC or the Partnership, and SELLERS AND ALL
OTHER TESORO AFFILIATES SPECIFICALLY DISCLAIM ANY REPRESENTATION OR WARRANTY OF
MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE WITH
RESPECT
23
TO SUCH ASSETS OR PROPERTIES, OR ANY PART THEREOF, OR AS TO THE WORKMANSHIP
THEREOF, OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT, IT
BEING UNDERSTOOD THAT SUCH ASSETS AND PROPERTIES ARE BEING ACQUIRED "AS IS,
WHERE IS" ON THE CLOSING DATE, AND IN THEIR PRESENT CONDITION, WITH ALL FAULTS,
AND THAT BUYER SHALL RELY ON ITS OWN EXAMINATION AND INVESTIGATION THEREOF.
(u) Environmental Matters. Except as set forth on Schedule 4.1(u), to
---------------------
Seller's Knowledge:
(i) There are no underground storage tanks, as defined in
Applicable Environmental Law, on the Properties or any of the
Operating Assets which constitute a violation of Environmental
Law.
(ii) The Operating Assets contain no friable asbestos, mercury or
polychlorinated biphenyls above 50 ppm or other Hazardous
Substances which constitute a violation of Applicable
Environmental Law.
(iii) The Operating Assets have been used solely for oil and gas
operations and related operations. Except for the production,
storage and transportation of oil, gas and other hydrocarbons
and the storage and disposal of brine in the ordinary course of
business consistent with prevailing oil and gas industry
practices, the Properties have not been used to dispose of
Hazardous Substances. No Hazardous Substances have been
disposed of that would cause an adverse material impact to any
of the Operating Assets.
(iv) There have been no spills or releases of any Hazardous
Substance related to the ownership or operation of the
Operating Assets which constitutes a violation of Applicable
Environmental Law, except for matters that have been addressed
and have no continuing adverse consequence to Seller, Reserves
LLC, the Partnership or the Operating Assets.
(v) There are no Actions pending or threatened against the
Partnership, Reserves LLC, or either Seller with respect to any
of the Operating Assets relating to the violation of, liability
under, or noncompliance with, any Applicable Environmental Law;
the discharge, disposal or release of a Hazardous Substance; or
the exposure of a Person or property to a Hazardous Substance.
Seller, Reserves LLC and the Partnership have no current
contingent liability in connection with the release of
Hazardous Substances.
(vi) The Operating Assets have been, and are operating, in material
compliance under all Applicable Environmental Laws.
(vii) Seller, Reserves LLC and the Partnership have provided Buyer
all environmental audits, tests, results of investigations and
analyses that have been performed with respect to the Operating
Assets.
24
(v) Contracts. Except as set forth on Schedule 4.1(v) or Section 4.1(q)
---------
and in joint operating agreements entered into in the normal course of business,
the Operating Assets are not subject to any instrument, agreement or other
Contract evidencing or related to indebtedness for borrowed money. All of the
existing Contracts between any of Reserves LLC, the Partnership and/or either
Seller and any of their respective Affiliates with respect to sales, services or
support to any of the Operating Assets or operations on the Operating Assets
shall terminate except for such Contracts otherwise indicated on Schedule 4.1(v)
to survive Closing. Except as set forth on Schedule 4.1(v) and other than
Consents to Assignment or Preferential Rights to Purchase, to Seller's
Knowledge, no Contracts to which Seller, Reserves LLC or the Partnership is a
party or a successor-in-interest and to which Buyer will be subject after the
Effective Time contain any provision that prevents Buyer from owning, managing
and operating the Operating Assets in accordance with the Partnership's past
practices.
(w) Seismic Information. At Closing, subject to the terms of the License
-------------------
Agreement, neither Seller nor any affiliate of Seller other than Reserves LLC
and the Partnership shall have any further right to any of the seismic data of
Reserves LLC or the Partnership which has been assigned or leased to Reserves
LLC, the Partnership and/or the Buyer.
(x) Xxxxx. Except to the extent set forth on Schedule 4.1(x), to Seller's
-----
Knowledge, no well included in the Properties is subject to material penalties
on allowables because of any overproduction or any other violation of Applicable
Law. Except for the xxxxx included in the Properties and listed in Schedule
4.1(x), there are no xxxxx included in the Properties that Seller, Reserves LLC
or the Partnership, or to Seller's Knowledge the operator of such xxxxx, are
currently obligated by Applicable Law, Applicable Environmental Law or order of
any Governmental Authority to plug and abandon within a time certain or that
have been shut-in or temporarily abandoned.
(y) Expenditure Obligations. Except as set forth on Schedule 9.2(f),
-----------------------
Reserves LLC and the Partnership have not executed or are not otherwise
contractually bound by any authority for expenditure with respect to any of the
Operating Assets under any operating agreement, unit operating agreement, or
other similar agreements. Except as set forth on Schedule 9.2(f), with respect
to authorizations for expenditure relating to any of the Operating Assets, (i)
there are no outstanding calls under such authorizations for expenditures for
payments which are due or which Reserves LLC or the Partnership have committed
to make which have not been made; (ii) there are no material operations with
respect to which any of Reserves LLC and/or the Partnership has become a non-
consenting party where the effect of such non-consent is not disclosed on
Exhibit B, and (iii) there are no commitments for the expenditures of funds for
drilling or other capital projects other than projects with respect to which the
operator is not required under the applicable operating agreement to seek
consent.
(z) Payout. To Seller's Knowledge, the payout balances with respect to any
------
of the Properties operated by the Partnership that are subject to future change
on account of reversionary interests, non-consent penalties or similar
agreements or arrangements are set forth on Schedule 4.1(z) and are correct as
of the dates shown on such statements.
(aa) Absence of Certain Changes Regarding Properties. Since June 30, 1999,
-----------------------------------------------
except as listed on Schedule 4.1(k), Reserves LLC and the Partnership:
25
(i) have maintained and operated each of the Properties operated by
any of them as a reasonably prudent operator consistent with
prevailing oil and gas industry practice;
(ii) have used reasonable efforts consistent with their past
practices to cause each of the Properties not operated by them
to be maintained and operated in a good and workmanlike manner
and in substantially the same manner as theretofore operated;
(iii) have paid timely their share of all costs and expenses
attributable to the Operating Assets, except for such costs and
expenses that they were contesting in good faith by appropriate
action;
(iv) have performed all accounting, royalty disbursement and
reporting requirements, as applicable, related thereto for the
Production; and
(v) have not agreed, whether in writing or otherwise, to take any
action described in this Section 4.1(aa).
(bb) Schedule 1B states all liens and mortgages that previously encumbered
the Membership Interests or the Operating Assets, securing obligations of
Seller, Reserves LLC or the Partnership (other than those items listed in clause
(ii) through (ix) of the definition of "Permitted Encumbrances"), and all of the
liens and mortgages listed on Schedule 1B have been released, insofar as they
encumber the Membership Interests or the Operating Assets.
4.2 Buyer's Representations. Buyer represents that:
-----------------------
(a) Disclosure. To Buyer's Knowledge, the representations and warranties
----------
set forth in this Agreement represent full and fair disclosure as of the date of
this Agreement and the date of Closing and do not contain any untrue statement
of any material fact or omit any material fact necessary in order to make the
facts stated not misleading.
(b) Authorization and Enforceability
--------------------------------
(i) This Agreement and the Transaction have been duly authorized by
Buyer.
(ii) Neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby or
thereby, will violate or conflict with (1) any provision of
Buyer's Charter or Bylaws, or (2) any applicable statute, law,
regulation or Governmental Order to which Buyer or the assets
or properties of Buyer are bound.
(iii) This Agreement has been duly executed and delivered by Buyer
and constitutes the valid and binding obligation of Buyer,
enforceable against it in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency or
other laws relating to or affecting the enforcement of
creditors' rights generally and general principles of equity
(regardless of whether such enforceability is considered in a
proceeding in equity or at law).
26
(iv) Except as set forth on Schedule 4.2(b)(iv) or as otherwise
specifically provided herein, the execution, delivery, and
performance of this Agreement (assuming that all applicable
consents are received) will not (A) be in material violation of
any provisions of any regulation, or order or (B) result in the
breach of, or constitute a default under, any material indenture
or other agreement or instrument to which Buyer is bound.
(v) Except as set forth on Schedule 4.2(b)(v) or as otherwise
specifically provided herein, no consent, waiver, approval, order
or authorization of, notice to, or registration, declaration,
designation, qualification or filing with, any Governmental
Authority or third Person, domestic or foreign, is or has been or
will be required on the part of Buyer in connection with the
execution and delivery of this Agreement or the consummation by
Buyer of the transactions contemplated hereby or thereby, other
than where the failure to obtain such consents, waivers,
approvals, orders or authorizations or to make or effect such
registrations, declarations, designations, qualifications or
filings is not reasonably likely to prevent or materially delay
consummation of the transactions contemplated by this Agreement
or prevent Buyer from performing its obligations under this
Agreement.
(c) Organizational Status. Buyer: (i) is a limited liability company duly
---------------------
organized, validly existing and in good standing under the laws of Delaware,
(ii) is duly qualified to transact business in each jurisdiction where the
nature and extent of its business and properties require the same in order for
it to perform its obligations under this Agreement; and (iii) possesses all
requisite authority and power to conduct its business and execute, deliver and
comply with the terms and provisions of this Agreement, to purchase, receive,
and accept conveyance of the Membership Interests from Seller and to perform all
of its obligations hereunder.
(d) Ability to Perform. On the Closing Date, Buyer will have sufficient
------------------
cash, available lines of credit or other sources of immediately available funds
to enable it to make its payment of the Closing Settlement Price at the Closing.
(e) Investment Intent. The Membership Interests are being purchased for
-----------------
Buyer's own account and not with a view to, or for resale in connection with,
any distribution or public offering thereof within the meaning of the Securities
Act. Buyer understands that the Membership Interests have not been registered
under the Securities Act by reason of their issuance in transactions exempt from
the registration and prospectus delivery requirements of the Securities Act
pursuant to Section 4(2) thereof. Buyer is knowledgeable, competent, and
experienced in the oil and gas industry and has independently evaluated and
interpreted the technical data and other information regarding the Operating
Assets prior to entering into this Agreement, understands and is financially
able to bear the risk associated with ownership of Reserves LLC and the
Partnership, and will independently conduct all the due diligence investigations
and reviews of all matters concerning Reserves LLC, the Partnership and the
Operating Assets as it deems necessary prior to Closing. Buyer acknowledges
that Buyer is not relying upon any statement or representations made by Seller
concerning the present or future value of, or anticipated income, costs, or
profits, if any, to be derived from, Reserves LLC, the
27
Partnership or the Operating Assets, and Buyer has relied solely upon its
independent inspections, estimates, computations, evaluations, reports, studies,
knowledge and other information regarding Reserves LLC, the Partnership and the
Operating Assets.
(f) Litigation. There are no pending or, to Buyer's Knowledge, threatened
----------
suits, actions, proceedings, claims, or investigations that would interfere with
Buyers ability or right to execute and deliver this Agreement or consummate the
transactions contemplated by this Agreement.
(g) No Brokers' Fees. Buyer has incurred no liability, contingent or
----------------
otherwise, for brokers' or finders' fees relating to the Transaction for which
Seller shall have any responsibility whatsoever.
(h) Buyer's Knowledge. To Buyer's Knowledge, on the date hereof, Buyer's
-----------------
representations and warranties made in this Section 4.2 are true and correct in
all material respects.
ARTICLE V.
ACCESS TO INFORMATION AND INSPECTION
------------------------------------
5.1 Access to Information. Prior to the Closing Date, upon reasonable
---------------------
notice, Seller, Reserves LLC and the Partnership have (i) afforded the officers,
employees and authorized agents and representatives of Buyer reasonable access
during normal business hours to the offices, Operating Assets and Books and
Records, title and contract files, permit files, legal, evidentiary, litigation
support, records and data financial and accounting records and operating and
maintenance files, and related documents, records and materials concerning the
Operating Assets data in possession of Seller and (ii) furnished to the
officers, employees and authorized agents and representatives of Buyer such
additional financial and operating data and other information regarding the
assets, Operating Assets and Liabilities of Reserves LLC, the Partnership, and
the Business (or legible copies thereof) as Buyer may have from time to time
reasonably requested.
5.2 Warranties As to Documents. Seller has advised Buyer of the nature
--------------------------
and existence of any confidential documents that have been withheld from
disclosure. Seller does not warrant or represent the accuracy of any materials
that may have been made available for Buyer's review, except that Seller does
represent and warrant that it has not concealed or intentionally or willfully
misrepresented or withheld any information, data or materials in its possession
except for confidential information, data or materials, the existence of which
has been disclosed as otherwise provided herein.
ARTICLE VI.
TITLE
-----
6.1 Governmental Consents. After the execution of this Agreement, and
---------------------
upon Closing and thereafter, Buyer and Seller shall cooperate to obtain all
routine or standard governmental consents or waivers necessary to transfer
Seller's rights and interests in Reserves LLC and the Partnership owning the
Operating Assets to Buyer.
28
ARTICLE VII.
ENVIRONMENTAL
-------------
7.1 Disclosures and Availability of Data to Buyer. The Operating Assets
---------------------------------------------
have been utilized by the Partnership for the purposes of exploration,
development and production of oil and gas, for related oilfield operations and
possibly for the storage and disposal of waste materials or hazardous substances
generated or otherwise used in association with oil and gas exploration and
production activities on the Properties. The Operating Assets also may contain
buried pipelines, the locations of which may not now be known by Seller or
readily apparent by a physical inspection of the Operating Assets. In addition
to providing any environmental audits and studies as per Section 4.1(u), Seller
has made and shall make available to Buyer Seller's historical files regarding
the foregoing operations, to the extent available and to the extent Seller,
Reserves LLC and the Partnership are authorized to disclose same (excepting
documents which Seller, Reserves LLC or the Partnership are contractually
prohibited from disclosing or are subject to legal privilege or are in the
possession of another operator, and with respect to which Seller has been unable
to secure consent to disclose despite its commercially reasonable efforts to do
so).
7.2 NORM. Without affecting Seller's representations and warranties or
----
the provisions of Section 7.3, Buyer acknowledges that some or all of the
Operating Assets may contain naturally occurring radioactive materials ("NORM"),
and that NORM is an anticipated hazard in oil and gas production operations.
Certain of the Operating Assets, including without limitation, pipe and
equipment may have deposits that contain NORM. Buyer agrees that it shall cause
the Partnership to properly handle and dispose of all materials containing NORM
in a safe manner in accordance with all applicable laws and regulations, at
their sole risk, liability and expense.
7.3 Buyer's Environmental Assessment. Buyer has pursued such
--------------------------------
environmental assessments of the Operating Assets as Buyer has desired.
7.4 Responsibilities for Remediation of Contamination. As between the
-------------------------------------------------
parties hereto, but subject to the provisions of applicable laws, joint
operating agreements, other third party agreements and the indemnities and other
provisions set forth herein, from and after the Closing, the Partnership shall
remain responsible for costs of remediation of all Environmental Conditions
occurring on or arising from any Operating Asset at any time, whether before, on
or after the Effective Time; provided however, that Seller shall fund payment of
any fines or regulatory penalties that might be assessed against the Partnership
by reason of any violation of regulatory or permit requirements before the
Closing Date.
ARTICLE VIII.
CASUALTY LOSS AND CONDEMNATION
------------------------------
29
8.1 No Termination. Except as specifically provided to the contrary
--------------
herein, Reserves LLC and the Partnership shall retain all risk of loss with
respect to any loss of, reduction in value of or damage to the Operating Assets
from the Effective Time until Closing, and Buyer assumes the risk of loss of
value of Reserves LLC and the Partnership associated with such matters. If
after the Effective Time and prior to the Closing, any part of the Operating
Assets should be destroyed by fire or other casualty or if any part of the
Operating Assets should be taken in condemnation or under the right of eminent
domain or if proceedings for such purposes should be pending or threatened, this
Agreement shall remain in full force and effect notwithstanding any such
destruction, taking or proceeding or the threat thereof, except as expressly
provided in Article XX.
8.2 Proceeds and Awards. In the event of any loss described in Section
-------------------
8.1, Seller (with Buyer's consent, which shall not be unreasonably withheld)
shall either (a) at the Closing assign to the Partnership all of Seller's rights
in any insurance proceeds, third party damage payments, condemnation awards or
other amounts paid or to be paid by reason of such destruction, less any costs
and expenses incurred by Seller in collecting same, or (b) prior to Closing, use
or have the Partnership apply such sums (less any costs and expenses incurred by
Seller in collecting same) to repair, restore or replace such damaged or taken
Operating Assets. In addition, Seller shall at Closing assign to the
Partnership all of the right, title and interest of Seller in and to any claims
for loss of or damages to the Operating Asset, that might be asserted against
third parties with respect to the event or circumstance causing such loss to and
any unpaid insurance proceeds, condemnation awards or other payments arising out
of such destruction or taking, less any costs and expenses previously incurred
by Seller in collecting same. The Settlement Price shall be reduced by the
Casualty Price Adjustment, if any, attributable to casualty losses that are not
fully covered by insurance. Notwithstanding anything to the contrary in this
Section 8.2, neither Seller, Reserves LLC nor the Partnership shall be obligated
to carry or maintain, nor shall they have any obligation or liability to Buyer
for their failure to carry or maintain any insurance coverage with respect to
any of the Operating Assets, except as required by Section 9.2.
8.3 Risks Of Other Losses. Except as otherwise set forth in this
---------------------
Agreement, Buyer shall assume all risks of loss with respect to the
Partnership's ownership or operation of the Operating Assets after the Effective
Time, including without limitation, the following risks:
(a) Operations. With respect to each Operating Asset, Buyer shall assume
----------
all risk of loss with respect to any loss of value or change in the condition of
the Operating Asset, and all xxxxx thereon, after the Effective Time, relating
to the production of oil, gas or other hydrocarbons, including without
limitation normal depletion, water encroachment, coning, pressure depletion,
formation changes and sand infiltration. The Partnership shall continue to bear
its proportionate share of the risks allocated under applicable joint operating
agreements and assume their proportionate share of the risks that such
operations may be unsuccessful, and Closing shall not be conditioned upon the
success of any operations.
30
(b) Market Conditions. With respect to each Operating Asset, Buyer shall
-----------------
assume all risk of loss with respect to any change in market conditions
affecting any Operating Asset or production therefrom after the Effective Time,
and this Agreement shall not be terminated or suspended, nor shall Closing be
delayed, due to any such change in market conditions.
ARTICLE IX.
COVENANTS
---------
9.1 Pre-Closing Covenants of Seller Regarding the Business. Sellers shall
------------------------------------------------------
cause Reserves LLC and the Partnership to operate the Business only in its
usual, regular and ordinary manner and substantially in the same manner as
heretofore conducted, and as set forth in Section 9.2. Sellers shall cause
Reserves LLC and the Partnership to use commercially reasonable efforts and as
set forth in Section 9.2, to (i) preserve the Business; (ii) keep available to
Buyer the services of the present officers, employees, agents and independent
contractors of Reserves LLC; and (iii) maintain the assets of the Business in
their current state of repair, order and condition, usual and ordinary wear and
tear excepted and subject to requirements in the ordinary course of business.
9.2 Pre-Closing Covenants of Seller Regarding the Operating Assets.
--------------------------------------------------------------
Subject to the terms of applicable operating and other existing agreements,
Seller covenants and agrees that between the date of this Agreement and the
Closing Date, except as set forth on Schedule 9.2 or as may be consented to in
writing by Buyer, which consent shall not be unreasonably withheld, Seller shall
manage the Partnership's ownership of the Operating Assets as follows:
(a) Disposal of Operating Assets. The Partnership shall not sell or
----------------------------
otherwise dispose of any of the Operating Assets, except for the sale in the
ordinary course of the Partnership's business of oil, gas, condensate and
products thereof and surplus equipment.
(b) New Third Party Rights. Except for Contracts entered into in
----------------------
furtherance of operations listed on Schedule 9.2 and Schedule 9.2(f), without
Buyer's consent, the Partnership shall not enter into any new or amended
contracts, agreements or relationships (i) granting any Preferential Right to
Purchase or Consent to Assignment affecting any of the Operating Assets
hereunder, or (ii) which if in existence as of the date hereof would be a
material Contract.
(c) Preservation of Operating Assets. The Partnership shall use reasonable
--------------------------------
efforts to preserve in full force and effect all leases, operating agreements,
easements, rights-of-way, permits, licenses, contracts and other agreements
which relate to the Operating Assets and shall perform the obligations of the
Partnership in or under any such agreement relating to such Operating Assets as
a reasonable and prudent operator, provided however, that the Partnership shall
not be required to conduct any drilling, recompletion or reworking activities to
maintain any lease, farmout agreement or other defeasible interest in force or
to settle any adverse claims, demands or litigation in a manner that Seller
deems inappropriate.
(d) Maintenance of Equipment. The Partnership shall maintain all material
------------------------
and equipment within the Operating Assets in accordance with customary industry
operating practices and procedures.
31
(e) Insurance. The Partnership shall maintain in full force and effect all
---------
policies of insurance now maintained by Seller and the Partnership covering the
Operating Assets. Seller and Buyer will cooperate in making claims under
Seller's insurance policies prior to the Closing. Seller additionally agrees to
cooperate with Buyer to allow Buyer, Reserves LLC or the Partnership to obtain,
at Buyer's expense, at a reasonable market price an additional reporting period
policy for any of Seller's insurance policies which are on a claims-made basis.
(f) Operations.
----------
(i) Except for operations covered by committed expenditures listed on
Schedule 9.2(f), the Partnership shall not propose or conduct for
its own account any operation. The Partnership shall have the
right to conduct, at its sole election and discretion, any
operations that either (1) are covered by committed expenditures
listed on Schedule 9.2(f), (2) are required by law or
regulations, or (3) are required under a binding existing
agreement with a third party.
(ii) Except for operations covered by committed expenditures listed on
Schedule 9.2(f), the Partnership shall not agree to participate
in any reworking, deepening, drilling, completion, recompletion,
equipping or other operation that is proposed by a co-owner in
any well or other asset without Seller having first provided
Buyer written or oral notice thereof as soon as reasonably
practicable after the Partnership receives notice thereof from
the Partnership's co-owner in such Operating Asset. If Seller
provides Buyer with such notice, Buyer and Seller shall promptly
consult about the advisability of participating in such
operations. If Buyer and Seller cannot agree, the following
provisions shall apply:
(1) If Seller should wish to participate in an operation proposed
by a third party and Buyer should object to the operation, then
the Partnership may agree to participate, but Buyer may assert a
Title Defect with respect to the Property affected by such
operation, and in such event such Property shall be excluded from
the sale hereunder and instead shall be assigned to another
subsidiary of Seller prior to Closing and the Purchase Price
shall be reduced by the Allocated Value of the affected Property.
In such event, Seller shall indemnify and defend Buyer against
any and all Damages relating to such operation and such Property.
(2) If Buyer should wish to participate in such operation and
Seller objects to the operation, the Partnership shall not be
obligated to make any such payment or to elect to participate in
such operation unless within a reasonable time prior to the date
when such payment or election is required to be made by the
Partnership, the Partnership receives from Buyer, (A) the written
election and agreement of Buyer to require the Partnership to
take such action and to indemnify Seller therefrom and (B) all
funds necessary for such action.
32
(3) If (A) Buyer advances any funds pursuant to subparagraph (2),
and (B) the Membership Interests are not assigned to Buyer at
Closing, and (C) Seller does not reimburse Buyer for all advances
made by Buyer with respect to such Operating Assets pursuant to
subparagraph (2) within thirty (30) days after this Agreement
terminates, then Buyer shall own and be entitled to any right of
the Partnership that would have lapsed but for such payment, and
in the case of operations, Seller shall be entitled to receive
the penalty which the Partnership, as non-consenting party, would
have suffered under the applicable operating agreement with
respect to such operations as if Buyer were a consenting party
thereunder.
(g) Data Restrictions. Seller shall advise Buyer in writing of the
-----------------
identity, nature and existence of any technical or interpretive information or
data that cannot be assigned to Buyer hereunder because of confidentiality
agreements with third parties, identify such third parties, and provide
reasonable cooperation (for before and up to one year after Closing) in
obtaining the agreement of such third parties to the release or assignment of
such information and data to Buyer; provided however, that Seller shall not be
required to expend any material funds or release any rights to allow such
release or assignment.
(h) Operating Assets Operated by Others. To the extent the Partnership is
-----------------------------------
not the operator of any Operating Asset, the obligations of Seller in this
Section 9.2, which have reference to operations or activities which normally are
or pursuant to existing contracts are to be carried out or performed by
operator, shall be construed to require only that the Partnership use reasonable
efforts to request that the operator of such Operating Asset either take such
actions, render such performance or refrain from performance, within the
constraints of the applicable operating agreements, applicable agreements and
applicable law.
9.3 Seller's Covenants Regarding Encumbrances. Seller covenants that on
-----------------------------------------
or before the Closing Date, Seller shall cause the Encumbrances in Schedule 1B
to be released, in a form reasonably acceptable to Buyer.
9.4 Covenants Regarding Corporate and Financial Matters. Through the
---------------------------------------------------
Closing Date, except as set forth in Schedule 9.4 or as contemplated by this
Agreement (including without limitation Sections 2.5 and 2.6) or otherwise
consented to or approved by Buyer in writing, which consent or approval shall
not be unreasonably withheld, Seller shall cause Reserves LLC and the
Partnership not to:
(a) Amend the Charter, Bylaws, management agreement, limited liability
company agreement or operating agreement of any Reserves LLC or amend the
partnership agreement of the Partnership;
(b) Incur, assume or become subject to any additional indebtedness for
money borrowed or purchase money indebtedness, except in the ordinary course of
business and consistent with past practices;
33
(c) Except as necessary to effect the transactions contemplated herein,
declare or pay any dividend or make any other distribution to any shareholder of
any of Reserves LLC or any partner of the Partnership;
(d) Redeem or otherwise acquire any shares of capital stock of any of
Reserves LLC or issue any capital stock of any Reserves LLC or any option,
warrant or right relating thereto or any securities exchangeable for or
convertible into any such shares;
(e) Permit or allow any of Reserves LLC' assets or properties to be
subject to any additional Encumbrance (other than Permitted Encumbrances) or
sell, transfer, lease or otherwise dispose of any such assets or properties,
other than surplus equipment not necessary for operations of the Business and
sold for a reasonable consideration of less than $25,000;
(f) Make any change in any method of accounting or accounting practice or
policy, other than those required by GAAP;
(g) Engage in any transactions with an Affiliate of Seller, other than
transactions in the ordinary course and consistent with past practices;
(h) Make any changes in the method of selling natural gas, condensate, oil
or products thereof which is not consistent with past practices;
(i) Enter into any new derivative or Hedging Contracts with respect to
natural gas, condensate, oil, products thereof, interest or any other
commodities or other financial instruments; or
(j) Agree, whether in writing or otherwise, to do any of the foregoing.
9.5 No Solicitation of Transactions. Except as otherwise permitted herein
-------------------------------
from the date of this Agreement through the Closing Date, neither Seller nor any
of their representatives, Affiliates, directors, officers, employees,
subsidiaries or agents will (a) solicit, consider, encourage or accept any other
offers to acquire any of the Membership Interests or Seller's interests in the
Partnership or (b) solicit, consider, encourage or accept any other offers to
acquire any of the assets or properties of the Partnership (other than as
permitted by this Agreement) or (c) assist any third Person in preparing or
soliciting such an offer. Seller shall not have, and shall cause such
representatives, Affiliates, directors, officers, employees, subsidiaries and
agents not to have any discussions, conversations, negotiations or other
communication with any Person(s) expressing an interest in any such offer.
9.6 Emergencies and Oversights. Notwithstanding the other provisions of
--------------------------
this Article IX, (a) Seller, Reserves LLC and/or the Partnership may take any
action with respect to the Operating Assets without penalty, if reasonably
necessary under emergency circumstances or if required to protect life, public
safety or the environment, and provided Buyer is notified as soon thereafter as
reasonably practical, and (b) Seller shall have no liability to Buyer for the
loss or reduction of any rights or interests by reason of the nonpayment or
incorrect payment of delay rentals, royalties, shut-in royalties or similar
payments or for any failure to pay any such
34
payments through mistake or oversight; provided, however, Buyer shall be
permitted to assert the items in this clause (b) as Title Defects under Article
VI.
9.7 Buyer's Covenants Regarding Performance and Continued Existence.
---------------------------------------------------------------
Buyer covenants that between the date of this Agreement and the Closing Date:
(a) Buyer shall take all steps and perform all operations reasonably
necessary to allow Buyer to perform its obligations at Closing;
(b) Buyer shall maintain its existence as a limited liability company in
good standing in Delaware; and
(c) Buyer shall cause the representations and warranties of Buyer to be
true and correct as of the Closing Date.
9.8 Buyer's Covenants Regarding Trade Name. Buyer acknowledges and agrees
--------------------------------------
with Seller that Seller shall have the absolute and exclusive proprietary right
to all names, marks, trade names, trademarks and corporate symbols and logos
incorporating "Tesoro," together with all other names, marks, trade names,
trademarks and corporate symbols and logos owned by any Affiliates of Seller
(collectively, the "Tesoro Marks"), all rights to which and the goodwill
represented thereby and pertaining thereto are being retained by Seller and the
Affiliates of Seller. Within ninety (90) days after the Closing Date, Buyer
shall change the name of Reserves LLC and the Partnership, to not include the
name "Tesoro", cease using any Xxxxxx Xxxx and shall promptly remove from all
the assets and properties of Reserves LLC any and all Tesoro Marks, and change
the name on all permits and licenses, to not include the name "Tesoro".
Thereafter, Buyer shall not use any Xxxxxx Xxxx in connection with the conduct
of its business. In the event that Buyer breaches this Section 9.8, Seller shall
be entitled to specific performance of this Section 9.8 and to injunctive relief
against further violations, as well as any other remedies available at law or in
equity.
9.9 Buyer's Covenants Regarding Employment.
--------------------------------------
(a) Schedule 9.9(a) sets forth the employees of Seller or its Affiliates
to whom Buyer (or an Affiliate of Buyer) expects to offer employment after the
Closing. Buyer in its sole discretion will determine the capacity in which the
employees listed on Schedule 9.9(a) who accept employment with Buyer or its
Affiliate (the "Retained Employees") will be employed and with which entity each
of the Retained Employees will be employed after the Closing. After the Closing,
Buyer (or its Affiliates which will employ Retained Employees) will initially
provide to the Retained Employees the same base salary or wages (but not any
retention-related salary increases described in Schedule 9.9(c)) provided to
such employees prior to the Closing, subject to such changes in base salary or
wages as are consistent with the Buyer's compensation structure. Buyer will take
all actions necessary or appropriate to permit the Retained Employees to
participate from and after the Closing in the employee benefit plans or
arrangements of Buyer and/or Affiliates of Buyer customarily provided to new
employees of Buyer and its Affiliates (including, without limitation, the
Employee Stability Plan); provided that Buyer shall, with respect to Buyer's or
its Affiliate's group health and dental plans ("Buyer's Group Health Plans"), to
the extent necessary after the Closing, (i) reimburse such Retained Employees,
for the
35
year during which participation in Buyer's Group Health Plan begins, for any
duplicate deductibles and copayments already incurred during such year under the
group health and dental plans of Seller or its Affiliates ("Seller's Group
Health Plans"), and (ii) waive any preexisting condition limitations applicable
to the Retained Employees (and their eligible dependents) under Buyer's Group
Health Plans to the extent that a Retained Employee's (or dependent's) condition
would not have operated as a preexisting condition under Seller's Group Health
Plans.
(b) Buyer (and its Affiliates) will not be required to assume any
obligation to Retained Employees (or any other employees of Seller or its
Affiliates) under Seller's existing severance, retention or management stability
agreements, or similar agreements. As described in Section 9.9(a), from and
after the Closing, the Retained Employees will be permitted to participate in
the employee benefit plans or arrangements of Buyer and/or its Affiliates
customarily provided to new employees of Buyer and its Affiliates (including,
without limitation, the Employee Stability Plan), or other benefits as may be
individually negotiated between Buyer and a Retained Employee.
(c) Buyer (or its Affiliate) will assume half, and Seller and its
Affiliates will remain responsible for half, of the liability to all Retained
Employees for the annual incentive compensation bonuses described on Schedule
9.9(c). Buyer (or its Affiliate) will not assume the liability to certain
Retained Employees for the retention-related salary payment.
(d) Any obligations to employees of Seller and its Affiliates not
specifically assumed by Buyer (or its Affiliates) in this Section 9.9, including
without limitation all such obligations accrued prior to the Closing, will be
the responsibility of the Seller, and Seller will indemnify Buyer with respect
to those obligations.
(e) Buyer agrees to open an office in San Antonio, Texas and to maintain
such office for so long as prudent business practices justify its operation.
(f) If after the Closing Date, Seller or any of its Affiliates continues
to employ any individual listed on Schedule 9.9(a), Seller agrees to cooperate
with Buyer to make such individual available to provide services required by
Buyer for up to six months after the Closing Date for transition purposes, with
Buyer reimbursing Seller for the actual cost of such employee's services
(including without limitation, salary and benefits).
9.10 Authorizations.
--------------
(a) Each of Buyer and Seller, as promptly as practicable after the
Agreement Date, shall (i) deliver, or cause to be delivered, all notices and
make, or cause to be made, all such declarations, designations, registrations,
filings and submissions under all statutes, laws, regulations and Governmental
Orders applicable to it as may be required for it to consummate the sale of the
Membership Interests and the other transactions contemplated hereby in
accordance with the terms of this Agreement; (ii) use commercially reasonable
efforts to obtain, or cause to be obtained, all authorizations, approvals,
orders, consents and waivers from all Persons necessary to consummate the
foregoing; and (iii) use commercially reasonable efforts to take, or cause to be
taken, all other actions necessary, proper or advisable in order for it to
fulfill its respective obligations hereunder and to carry out the intentions of
the parties expressed
36
herein. The preceding sentence notwithstanding, neither party shall have any
obligation to waive any condition herein for its benefit or any performance
hereunder by any other party.
(b) Each Party shall use its commercially reasonable efforts to satisfy
the conditions to Closing applicable to it in Article XI as soon as commercially
practicable.
9.11 Software and Computer Programs. From the date of this Agreement
------------------------------
through the date which is ninety (90) days after the Closing Date, each Seller,
Reserves LLC and the Partnership, as applicable, agree to engage in discussions
with the licensors of applicable software and computer programs and seismic data
and processing identified in a written notice provided to Seller by Buyer on or
prior to the Closing Date, the purpose of which discussions shall be to assist
Buyer in its efforts to obtain a license with respect to such software and/or
computer programs and seismic data and processing with terms acceptable to
Buyer. Buyer will pay all fees (including fees agreed to as part of a
settlement) required to transfer or retain such records, programs and data that
Buyer chooses to retain after Closing.
9.12 General.
-------
(a) Each of the Parties will use their reasonable best efforts to take all
action and to do all things necessary in order to consummate and make effective
the transactions contemplated by this Agreement (including satisfaction, but not
waiver, of the closing conditions set forth in Article XI).
(b) Buyer agrees to cooperate at no cost or liability to Buyer with Seller
so that Seller's transfer of the Operating Assets to Buyer shall, at Seller's
election, be accomplished in a manner enabling the transfer to qualify as a part
of a like-kind exchange of property by Seller within the meaning of Section 1031
of the Code. If Seller so elects, Buyer shall reasonably cooperate with Seller
to effect such like-kind exchange, which cooperation shall include, without
limitation, taking such actions as Seller reasonably requests in order to pay
the Purchase Price in a manner which enables such transfer to qualify as part of
a like-kind exchange of property within the meaning of Section 1031 of the Code,
and Buyer agrees that Seller may assign its rights (but not its obligations)
under this Agreement to an escrow agent acting as a qualified intermediary under
United States Treasury Regulations, to qualify the transfer of the Purchase
Price as a part of a like-kind exchange of property within the meaning of
Section 1031 of the Code.
(c) Seller shall reimburse Buyer for Buyer's reasonable costs and expenses
incurred in connection with evaluating and implementing the like kind exchange
transaction, including without limitation, legal and accounting fees incurred in
connection with evaluating and implementing the like kind exchange transaction
and revising this Agreement. Seller shall reimburse Buyer in cash for such
costs and expenses within ten (10) days after receiving a notice from Buyer
describing such costs and expenses in reasonable detail, and requesting payment.
(d) If prior to Closing Buyer elects to obtain financing for a portion
of the Purchase Price from a bank or other lender (the "Lender") (whether
through conventional loans or through a production payment or similar off-
balance sheet financing mechanism), Seller shall (and shall cause Reserves LLC
and the Partnership to) cooperate reasonably with Buyer in Buyer's
37
negotiation and finalization of any loan or other documents with the Lender,
provided that such cooperation does not result in Seller, Reserves LLC and the
Partnership incurring material additional expenses. Seller shall (and shall
cause Reserves LLC and the Partnership to) use its commercially reasonable
efforts to give representatives of the Lender the access to information and
right to inspection provided to Buyer under Article V, subject to the Lender
agreeing to be bound by the terms of the Confidentiality Agreement. This Section
9.12(d) does not change or modify Buyer's obligation to close the Transactions
in accordance with the other provisions of this Agreement.
9.13 Covenant and Indemnity with Respect to Cash Flow. Seller covenants to
------------------------------------------------
use its best efforts to insure that after the Closing all cash, checks, wire
transfers and other cash flow attributable to the Operating Assets received by
Seller or any Affiliate of Seller will be transferred on or before the next
Business Day after such cash flow is received by Seller or such Affiliate of
Seller to an account designated by Buyer prior to the Closing (such that the
transfer is recorded by the transferring bank on or before the next Business Day
after such cash flow is received by Seller or an Affiliate of Seller). To the
extent Seller does not make the transfer required by this Section 9.13 on or
before the next Business Day after receipt of such cash flow, Seller agrees to
pay to Buyer (a) interest at the prime rate of Buyer's primary lender (accruing
from the second Business Day after receipt by Seller of such cash flow) on any
such cash flow remaining outstanding for the second and third Business Day after
receiving such funds and (b) the maximum interest allowable by Applicable Law on
any such cash flow remaining outstanding thereafter. Seller agrees to indemnify
and hold the Buyer Group harmless for any Damages asserted against, resulting
to, imposed upon or incurred by the Buyer Group arising from any failure by
Seller to transfer any amounts that, together with any other amounts not
transferred pursuant to this Section 9.13, aggregate greater than $1 million and
that Seller has not transferred within one Business Day after written notice by
Buyer is received by Seller. Buyer and Seller agree to cooperate in identifying
amounts that may need to be transferred by Seller to Buyer under this Section
9.13.
ARTICLE X.
PRE-CLOSING PROCEDURES
----------------------
10.1 Initial Settlement Statement. Before Closing, Seller shall furnish
----------------------------
Buyer with a preliminary draft of the Settlement Statement, in accordance with
Section 13.1. Buyer shall have the right to audit and request appropriate
adjustments to the amounts reflected therein. Buyer shall furnish Seller with
any comments, and adjustments or revisions Buyer believes are appropriate to
conform the Settlement Statement to accurately reflect the best information
available at Closing, and the Parties shall endeavor in good faith to reconcile
the accounting issues and to produce as accurate a Settlement Statement as
possible based upon the information available at Closing. Seller shall then
furnish Buyer with the Settlement Statement, including any appropriate updates,
adjustments or revisions, showing the Closing Settlement Price.
10.2 Closing Documents. Before Closing, the Parties shall provide each
-----------------
other with preliminary drafts of all attorneys opinions, certificates, corporate
guarantees, assignments and other instruments to be delivered at Closing. The
Parties shall thereafter cooperate to make such revisions as are needed to
prepare mutually acceptable forms of all such instruments.
38
10.3 Escrow Agent. If the Parties should agree to place any funds into an
------------
escrow account at Closing, then they shall negotiate in good faith to select a
mutually acceptable escrow agent, who is willing and able to perform such role.
In such an before the Closing Date, the Parties shall agree upon an escrow
agent, and they shall use their best efforts to negotiate a mutually acceptable
Escrow Agreement before the Closing Date.
10.4 Wire Transfer Instructions. At least two (2) Business Days prior to
--------------------------
the Closing Date, Seller shall provide to Buyer wire transfer instructions
designating a bank account and Federal Reserve ABA designation ID number, at a
bank within the United States of America where the Closing Settlement Price
shall be paid.
ARTICLE XI.
CLOSING CONDITIONS
------------------
11.1 Seller's Closing Conditions. Seller's obligation to consummate the
---------------------------
Transaction is subject to the satisfaction by Buyer or the waiver by Seller, at
or before the Closing, of the following conditions:
(a) Representations. The representations and warranties of Buyer contained
---------------
in Section 4.2 shall be true and correct in all material respects on the Closing
Date as though made on and as of that date.
(b) Performance. Buyer shall have performed in all material respects the
-----------
obligations, covenants and agreements hereunder to be performed by it at or
prior to Closing.
(c) Corporate Certificates and Opinion. Buyer shall have delivered to
----------------------------------
Seller (i) a certificate of an executive officer, dated the Closing Date,
certifying on behalf of Buyer that the representations set forth in Section 4.2
are true and correct as of the Closing Date; (ii) a certificate of incumbency;
(iii) a certificate of good standing of Buyer as a limited liability company;
(iv) certified resolutions of the members of Buyer, authorizing Buyer to enter
into this Agreement and the Transaction and to perform its obligations at
Closing; and (v) an opinion of counsel for Buyer, acceptable to Seller, dated
the Closing Date, as to such matters as may reasonably be requested by Seller
and its counsel and are typical for transactions such as the Transaction.
(d) Pending Matters. No suit, action or other legal proceeding by a third
---------------
party or a governmental authority shall be pending which seeks material damages
from Seller in connection with, or seeks to restrain, enjoin or otherwise
prohibit, the consummation of the Transaction.
(e) No Orders. This Closing hereunder shall not violate any order or
---------
decree of any governmental authority having competent jurisdiction over the
Transaction.
(f) HSR. Any applicable waiting period under the HSR Act shall have
---
expired or been terminated.
39
11.2 Buyer's Closing Conditions. Buyer's obligations to consummate the
--------------------------
Transaction is subject to the satisfaction by Seller or the waiver by Buyer, at
or before the Closing, of the following conditions:
(a) Representations. The representations and warranties of Seller
---------------
contained in Section 4.1 (other than with respect to paragraphs (u), (w), (x),
(y), (z) and (aa) of Section 4.1) shall be true and correct in all material
respects on the Closing Date as though made on and as of that date; provided,
however, that the accuracy of the representations and warranties in
subparagraphs (k)(i), (ix), (x), (xi), (xii) and (xiii) of Section 4.1 shall,
for purposes of satisfying this condition, not be affected to the extent of
inaccuracies resulting solely from Buyer unreasonably withholding its prior
written consent (after written request by Seller duly provided to Buyer) to the
action taken by (or omission of) Seller, Reserves LLC or the Partnership which
caused such representations and warranties to be inaccurate.
(b) Performance. Seller shall have performed, or caused to be performed,
-----------
in all material respects the obligations, covenants and agreements hereunder to
be performed by it, Reserves LLC and the Partnership at or prior to Closing.
(c) LLC Certificates and Opinion. Each Seller shall have delivered to
----------------------------
Buyer, and Seller shall cause Reserves LLC and the Partnership to deliver to
Buyer: (i) a certificate of an executive officer, dated the Closing Date,
certifying on behalf of such Seller that the representations made in Section
4.1, are true and correct as of the Closing Date; (ii) a certificate of
incumbency for each Seller, (iii) a certificate of corporate good standing for
the Partnership as a Delaware limited partnership, for each Seller as Delaware
corporations and for Reserves LLC as a Delaware limited liability company; (iv)
with respect to each Seller only, certified resolutions of the Boards of
Directors of each Seller, authorizing each Seller to enter into this Agreement
and the Transaction and to perform its obligations at Closing; and (v) an
opinion of counsel for the Seller and each of Reserves LLC and the Partnership,
acceptable to Buyer, dated the Closing Date, as to such matters as may
reasonably be requested by Buyer and its counsel and are typical for
transactions such as the Transaction.
(d) Other Certificates and Documents. Buyer shall have also received the
--------------------------------
certificates and documents described in Section 12.2.
(e) Pending Matters. No suit, action or other legal proceeding by a third
---------------
party or a governmental authority shall be pending which seeks material damages
from Buyer in connection with, or seeks to restrain, enjoin or otherwise
prohibit, the consummation of the Transaction.
(f) No Orders. The Closing hereunder shall not violate any order or decree
---------
of any governmental authority having competent jurisdiction over the
Transaction.
(g) Adjustments. The reduction (if any) to be made at Closing to the
-----------
Purchase Price which results from the application of Articles VIII and XIII does
not exceed fifteen percent (15%) of the Purchase Price.
40
(h) Liens and Mortgages. Seller shall have secured release of all liens
-------------------
and mortgages listed on Schedule 1B and released all obligations of Reserves LLC
and the Partnerships under the Seller's credit facility and provided Buyer
evidence of the same.
(i) There shall not have occurred a Material Adverse Effect.
(j) HSR. Any applicable waiting period under the HSR Act shall have
---
expired or been terminated.
(k) Seller shall have delivered proof, acceptable to Buyer in its
reasonable discretion, of the effectiveness of a post-effective amendment to
Seller's Registration Statement on Form S-3 (Reg. No. 333-51789), as amended,
removing any entities being transferred hereunder as co-registrants under such
registration statement.
ARTICLE XII.
CLOSING
-------
12.1 Closing. The closing of the Transaction (the "Closing") shall be held
-------
on December 17, 1999 (the "Closing Date"), at 9:00 a.m. Houston time, at the
office of Seller's counsel, 0000 XxXxxxxx, Xxxxx 0000, Xxxxxxx, Xxxxx 00000, or
at such other date or place as the parties may direct; provided, however, that
if all conditions to Closing set forth in Article XI have not been waived or
satisfied prior to December 17, 1999, the Closing Date shall be on the second
Business Day following the waiver or satisfaction of such conditions.
12.2 Seller's Closing Obligations. At Closing, Seller shall deliver to
----------------------------
Buyer the following:
(a) The certificates representing Membership Interests in Reserves LLC,
duly endorsed in blank or with separate duly executed powers duly endorsed in
blank;
(b) All organizational documents and books and records of each of Reserves
LLC and Exploration;
(c) All books and records of the Partnership;
(d) The resignations of the officers and directors of Reserves LLC;
(e) Such other documents or authorizations as Buyer may reasonably
request, or as might be reasonably necessary to assign all of Seller's interest
in Reserves LLC, the Partnership and the Operating Assets to Buyer in accordance
with the provisions hereof;
(f) A certificate of each Seller signed under penalties of perjury (i)
stating that it is not a foreign corporation, foreign partnership, foreign trust
or foreign estate, (ii) providing its U.S. Employer Identification Number (if
applicable) and (iii) providing its address, all pursuant to Section 1445 of the
Code.
(g) The certificates of Seller referred to in Section 11.2(c) hereof;
41
(h) The opinion of counsel referred to in Section 11.2(c) hereof; and
(i) Releases, in a form acceptable to Buyer, of all liens and mortgages
listed on Schedule 1B.
12.3 Buyer's Closing Obligations. At Closing, Buyer shall deliver the
---------------------------
following:
(a) The Closing Settlement Price, paid to the Seller in immediately
available funds, by wire transfer into the U.S. bank account designated by the
Seller;
(b) The certificates of Buyer referred to in Section 11.1(c) hereof; and
(c) The opinions of counsel referred to in Section 11.1(c) hereof.
12.4 Governmental Filings. At Closing, the Parties shall execute such
--------------------
guarantees, bonds, forms and other instruments as are needed allow Buyer to
assume all of Seller's existing obligations under governmental permits and
licenses and leases affecting the Operating Assets. Buyer shall diligently file
such instruments and obtain governmental approval of the transfer of all such
rights, obligations and interests.
ARTICLE XIII.
ADJUSTMENT BASKET; PRORATION OF REVENUES AND COSTS
--------------------------------------------------
13.1 Settlement Statements.
---------------------
(a) Pre-Closing. The Settlement Statement is attached hereto as Exhibit D.
-----------
(b) Final Statement. As soon as practicable after the Closing Date, but in
---------------
no event later than one hundred twenty (120) days thereafter, Buyer shall
prepare and submit to Seller a draft Final Statement, which shall show the
calculation of the adjusted Final Settlement Price, based upon the best
information then available. Seller shall have the right to audit such Final
Statement and all supporting data and accountings. As soon as practicable after
receipt of the Final Statement, but in any event within thirty (30) days after
receipt thereof, Seller shall deliver to Buyer a written report containing the
changes, if any, which Seller proposes be made to the Final Statement. If no
response is made by Seller within such thirty (30) day period, it shall be
presumed that Seller concurs with the Final Statement, and such Final Statement
shall be the basis for the Final Settlement Price. If Seller submits a response,
the Parties shall cooperate in good faith to produce not later than one hundred
eighty (180) days after the Closing Date as accurate a Settlement Statement as
possible based upon the information then available. After agreement upon a Final
Statement setting forth the Final Settlement Price, the difference between such
Final Settlement Price and the Closing Settlement Price paid at Closing shall be
paid within five (5) Business Days thereafter by the Party owing the same.
13.2 Operating Taxes.
---------------
(a) Apportionment of Ad Valorem and Property Taxes. All ad valorem, real
----------------------------------------------
property taxes and personal property taxes, including interest and penalties
attributable thereto (hereinafter "Property Taxes"), attributable to Reserves
LLC's limited partnership interest in the Partnership's
42
ownership and operation of the Properties with respect to the assessment period
("Property Tax Period") during which the Effective Time occurs shall be
apportioned between Seller and Buyer by multiplying the total amount of such
Property Taxes by a fraction, the numerator of which is the number of days in
the partial period through and including the Effective Time and the denominator
of which is the total number of days in the Property Tax Period. The Partnership
shall file or cause to be filed all required reports and returns incident to the
Property Taxes and shall pay or cause to be paid to the taxing authorities all
Property Taxes relating to the Property Tax Period during which the Effective
Time occurs. If Seller is the owner of Reserves LLC on the Property Tax
assessment date, then the Settlement Price shall be increased by the amount of
Buyer's portion of Property Taxes owed as set forth above. If the Property Tax
assessment date occurs after Closing, then the Settlement Price shall be reduced
by the estimated amount of Seller's portion of Property Taxes owed as set forth
above. The allocation and payment of ad valorem taxes shall be handled through
adjustments to the Settlement Price.
(b) Other Operating Taxes. With the exception of Income Taxes, all other
---------------------
federal, state, foreign and local Taxes (including interest and penalties
attributable thereto) on the ownership or operation of the Operating Assets
which are imposed upon Reserves LLC or the Partnership for periods or portions
of periods prior to the Effective Time shall be borne by Seller, and all such
Taxes imposed upon the Partnership for periods or portions of periods beginning
on or after the Effective Time shall be borne by Buyer. Such Taxes shall be
apportioned between Seller and Buyer for the period or portion thereof up to and
including the Effective Time, (i) in the case of a flat minimum dollar amount of
tax, by multiplying the total amount of such Taxes by a fraction, the numerator
of which is the number of days in the partial period through and including the
Effective Time and the denominator of which is the total number of days in such
tax period, and (ii) in the case of all other operating Taxes, on the basis of
actual activities creating such Tax liability of Reserves LLC and the
Partnership for the partial period through and including the Effective Time as
are determined from their respective Books and Records. To the extent any such
amounts are borne prior to the delivery of the Final Statement by a Party who is
not required to bear them hereunder, they shall be included in the adjustments
to the Settlement Price. The allocation and payment of these Taxes shall be
handled through adjustments to the Settlement Price.
13.3 Shared Obligations. If an invoice or other evidence of an obligation
------------------
is received which under the terms of this Article XIII is partially the
obligation of Seller and partially the obligation of Buyer, then the parties
shall consult with each other, the Partnership shall promptly pay such
obligation to the obligee, and Seller shall promptly reimburse Buyer for
Seller's portion so paid.
13.4 Uncollectible Accounts Receivable. Buyer (and, prior to the Closing,
----------------------------------
Seller) shall cause Reserves LLC and the Partnership to use commercially
reasonable efforts to collect in full, consistent with the past practices of the
Business, all accounts receivable of the Business (the "Accounts Receivable").
If the Accounts Receivable outstanding at the Closing shall not have been fully
collected within 120 days following the Closing Date in an amount equal to the
outstanding unpaid amounts thereof at the Closing, Buyer may require the Seller
to purchase any Accounts Receivable that have not been so fully collected at a
purchase price equal to the original outstanding amount of such Accounts
Receivable at the Closing less net collections
43
thereon from the Closing Date to the repurchase date; provided, however, that
the Seller shall be required to repurchase such unpaid Accounts Receivable only
to the extent that the aggregate amount of such unpaid Accounts Receivable
exceeds the allowance for doubtful accounts deducted from accounts receivable
set forth on the Balance Sheets, and if such an excess exists, the Seller shall
only be required to pay an amount for such unpaid Accounts Receivable equal to
such excess; provided, further, during such 120-day period, that Buyer may not
settle or compromise any Accounts Receivable without the prior written consent
of Seller. As a condition to any such repurchase, Buyer shall reconvey to the
Seller the unpaid Accounts Receivable to be repurchased and shall provide Seller
with sufficient detail regarding such Accounts Receivable. Buyer shall not
transfer or convey such Accounts Receivable to any other Person. Payment for the
repurchase of any Accounts Receivable shall be made within ten (10) days
following the transfer thereof to Seller. Buyer shall provide to the Seller any
documents or information reasonably requested by the Seller in connection with
the Seller's collection of any Accounts Receivable repurchased from Buyer.
ARTICLE XIV.
POST-CLOSING PROCEDURES
-----------------------
14.1 Delivery of Files. Within ten (10) days after Closing, Buyer shall,
-----------------
at Buyer's expense, take delivery at Seller's present offices in San Antonio,
Texas of all of the Partnership's and Reserves LLC's original land, lease,
revenue and cost accounting, geologic, geophysical, engineering and well files,
data and materials which relate to the Operating Assets. Applicable legal and
litigation files shall be delivered by Seller to Buyer at Seller's present
office location in San Antonio, Texas, subject to the Parties and their
attorneys making mutually acceptable arrangements for preserving the privileged
and confidential nature of protected information. Seller may retain copies of
its accounting and legal files, data and information, as might be needed by
Seller, and Seller shall retain all originals of insurance policies covering
periods prior to the Effective Time. Subject to the License Agreement, Seller
shall not retain originals or copies of any seismic, geological, geophysical or
engineering files, materials, data or interpretations thereof concerning the
Operating Assets sold hereunder, without Buyer's prior written consent; provided
however, that Seller shall not be required to deliver to Buyer, nor shall Buyer
be required to accept delivery of any such data or materials which either Party
reasonably believes to be subject to confidentiality agreements with third
parties that would prevent Buyer from obtaining such data or expose either Party
to a claim for material damages if Buyer were to receive such data or materials.
Notwithstanding the above, Seller shall be permitted to retain original tax and
financial accounting records for the period prior to the Closing, copies of
which will be delivered to Buyer.
14.2 Third Party Data. To the extent not obtained or satisfied as of
----------------
Closing, Seller agrees to continue to use reasonable efforts, but without any
obligation to incur any cost or expense in connection therewith, and to
cooperate with Buyer's efforts to obtain for Buyer, the Partnership and Reserves
LLC (i) access to files, records and data relating to the Operating Assets in
the possession of third parties; (ii) access to xxxxx constituting a part of the
Operating Assets operated by third parties for purposes of inspecting same; and
(iii) the waiver of confidentiality or other restrictions on the review by
and/or transfer of seismic, geophysical,
44
engineering or other data pertaining to the Operating Assets that might be
triggered by Seller's assignment to Buyer of the Partnership and Reserves LLC.
14.3 Cooperation. After the Closing, each Party shall provide the other
-----------
Party with reasonable access to all relevant documents, data and other
information (other than that which is subject to any attorney-client privilege)
which may be required by the other Party for the purpose of financial reporting,
preparing tax returns, filing refund claims, responding to any audit by any
taxing jurisdiction or replying to any third party or governmental claim or
demand concerning the Partnership, Reserves LLC or the Operating Assets. Each
Party shall cooperate with all reasonable requests of the other Party made in
connection with contesting the imposition of Taxes. Notwithstanding anything to
the contrary in this Agreement, neither Party shall be required at any time to
disclose to the other Party any Tax Return or other confidential information,
except for Tax Returns concerning Taxes of the Partnership and Reserves LLC.
Except where disclosure is required by applicable law or judicial order, any
information obtained by a Party pursuant to this Section 14.3 shall be kept
confidential by such Party, except to the extent disclosure is required in
connection with the filing of any Tax Returns or claims for refunds or in
connection with the conduct of an audit, or other proceedings in response to an
audit, by a taxing jurisdiction, or otherwise required by law or binding
judicial order.
14.4 Preferential Rights to Purchase and Consents to Assignment. Before
----------------------------------------------------------
Closing and for up to one year after Closing, the Parties shall continue to
provide reasonable cooperation in obtaining all required Consents to Assignment
and in complying with all enforceable Preferential Rights to Purchase that
remain in force after Closing. Buyer shall be primarily responsible for
handling such matters, shall assume all risks and liabilities in connection with
the rights of the holders thereof, and shall release, indemnify and defend
Seller against any claims, damages, suits, demands or other liabilities
associated with any Consents to Assignment or Preferential Rights to Purchase.
14.5 Filing and Recording of Documents. Buyer shall promptly file all
---------------------------------
appropriate forms, declarations or bonds with governmental agencies relative to
its assumption of ownership of Reserves LLC, and Seller shall cooperate with
Buyer in connection with such filings. Seller shall not be responsible for any
loss to Buyer because of Buyer's failure to file or record documents correctly
or promptly.
14.6 Further Assurances. After Closing, each of the Parties will execute,
------------------
acknowledge and deliver to the other such further instruments, and take such
other action, as may be reasonably requested in order to more effectively assure
to each Party all of the respective properties, rights, titles, interests,
estates, and privileges intended to be assigned, delivered or to inure to the
benefit of such Party in consummation of the Transaction.
14.7 Incidental Costs. Each party shall bear its own respective expenses
----------------
incurred in connection with the Closing of the Transaction, including its own
consultants' fees, attorney's fees, accountants' fees, and other similar costs
and expenses.
45
ARTICLE XV.
SURVIVAL; INDEMNITIES
---------------------
15.1 Survival. All representations, warranties or covenants made herein,
--------
except for those in Sections 4.1(a), 4.1(e), 4.1(f), 4.1(g), 4.1(i), 4.1(k),
4.1(l), 4.1(m), 4.1(n), 4.1(o), 4.1(q), 4.1(u), 4.1(v), 4.1(w), 4.1(x), 4.1(y),
4.1(z), 4.1(aa), 4.1(bb) (with respect to Operating Assets only), 4.2(e),
4.2(i), Sections 5.6, 7.1, 7.2, 7.3, 7.4, 8.3, 9.1, 9.2(e), 9.9(d), 9.12(b),
9.12(c) and 9.13, and Articles XV, XVI, XVII and XXI, shall survive for two
years from the Closing Date. The representations and warranties or covenants
made in Sections 4.1(a), 4.1(g), 4.1(k), 4.1(l), 4.1(m), 4.1(o), 4.1(q), 4.1(u),
4.1(v), 4.1(w), 4.1(x), 4.1(y), 4.1(z), 4.1(aa), 4.1(bb) (with respect to
Operating Assets only) and Section 9.1 shall not survive Closing and shall
automatically expire upon Closing. The representations, releases, covenants,
indemnities, defenses and hold harmless obligations and other obligations
referenced in Sections 4.1(e), 4.1(f), 4.1(i), 4.1(n), 4.2(e), 4.2(i), 7.1, 7.2,
7.4, 8.3, 9.2(e), 9.9(d), 9.12(b), 9.12(c) and 9.13 and this Article XV, and all
provisions of Article XVI, Article XVII and Article XXI shall each survive
Closing, and each shall continue to remain fully enforceable in accordance with
its terms.
15.2 Buyer's Indemnity. EXCEPT AS EXPRESSLY AND SPECIFICALLY INDICATED
-----------------
OTHERWISE IN THIS AGREEMENT (INCLUDING WITHOUT LIMITATION SECTIONS 9.9(D) AND
15.3), AFTER THE CLOSING DATE, BUYER SHALL AND HEREBY DOES RELEASE, DEFEND,
INDEMNIFY, SAVE, AND HOLD HARMLESS SELLER AND THEIR RESPECTIVE OFFICERS,
DIRECTORS, AFFILIATES, EMPLOYEES, ATTORNEYS, CONTRACTORS AND AGENTS, AGAINST ANY
AND ALL DAMAGES WHICH ARISE OUT OF OR IN CONNECTION WITH THE OWNERSHIP OF,
OPERATION OF, PRODUCTION FROM OR ACCOUNTING BY, INCOME OF OR PAYMENTS BY THE
PARTNERSHIP, RESERVES LLC OR THE OPERATING ASSETS, AT ANY TIME EITHER BEFORE OR
AFTER THE EFFECTIVE TIME, OR WHICH ARISE OUT OF ANY ENVIRONMENTAL CONDITION OR
OTHER HAZARDOUS CONDITION RELATING TO OR AFFECTING ANY OPERATING ASSET AT ANY
TIME EITHER BEFORE OR AFTER THE EFFECTIVE TIME, INCLUDING WITHOUT LIMITATION,
ALL SUCH COSTS, CLAIMS OR LIABILITIES ARISING OUT OF SELLER'S NEGLIGENCE OR
STRICT LIABILITY.
15.3 Seller's Indemnity. SUBJECT TO THE TERMS AND CONDITIONS OF THIS
------------------
ARTICLE XV, SELLER SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS BUYER, AND ITS
PARENT OR SUBSIDIARY COMPANIES, PARTNERS AND OTHER AFFILIATES (INCLUDING AFTER
CLOSING, RESERVES LLC AND THE PARTNERSHIP), AND THEIR RESPECTIVE OFFICERS,
DIRECTORS, AFFILIATES, EMPLOYEES, ATTORNEYS, CONTRACTORS AND AGENTS (HEREINAFTER
COLLECTIVELY REFERRED TO AS THE "BUYER GROUP"), FROM AND AGAINST ANY AND ALL
DAMAGES ASSERTED AGAINST, RESULTING TO, IMPOSED UPON, OR INCURRED BY THE BUYER
GROUP, DIRECTLY OR INDIRECTLY, BY REASON OF OR RESULTING FROM OR RELATING TO (I)
ANY BREACH BY SELLER (FOR WHICH SELLER SHALL BE RESPONSIBLE) OF ITS SURVIVING
REPRESENTATIONS, WARRANTIES, COVENANTS OR AGREEMENTS CONTAINED IN THIS
AGREEMENT, (II) ANY LIABILITIES OF RESERVES LLC AND THE PARTNERSHIP WHICH ARE
46
UNRELATED TO THE OPERATING ASSETS, (III) ANY LIABILITIES OF RESERVES LLC AND
RESERVES LLC'S INTEREST IN THE PARTNERSHIP FOR INCOME TAXES PRIOR TO CLOSING,
AND (IV) ANY EXISTING LIABILITIES OF RESERVES LLC AND RESERVES LLC'S INTEREST IN
THE PARTNERSHIP OWED UNDER FEDERAL LEASES FOR PRIOR ROYALTIES RELATED TO THE
PERIOD OF TIME PRIOR TO CLOSING.
15.4 Procedure for Indemnification.
-----------------------------
(a) Any Indemnified party making a claim for indemnification hereunder
shall notify the indemnifying party or parties of the claim in writing. Subject
to Sections 17.1, 17.2, 17.3 and 17.4, an indemnified party may take any and all
actions against an indemnifying party or parties to enforce its rights to
indemnification under this Agreement.
(b) With respect to third Person claims which are indemnifiable hereunder,
promptly after receipt by an Indemnified Party under Sections 15.2 or 15.3 of
notice of the commencement of any action, such Indemnified Party shall, if a
claim in respect thereof is to be made against an Indemnifying Party under such
Section, give written notice to the Indemnifying Party of the commencement
thereof. The failure to so notify the Indemnifying Party shall relieve the
Indemnifying Party of any liability that it may have to an Indemnified Party
with respect to such action, only to the extent the Indemnifying Party is
prejudiced by the failure to be so notified. In case any such action shall be
brought against an Indemnified Party and the Indemnified Party shall give
written notice to the Indemnifying Party of the commencement thereof, the
Indemnifying Party shall be entitled to participate therein and, to the extent
that it may wish, to assume the defense thereof with counsel reasonably
satisfactory to such Indemnified Party. If the Indemnifying Party elects to
assume the defense of such action, the Indemnified Party shall have the right to
employ separate counsel at its own expense and to participate in the defense
thereof. If the Indemnifying Party elects not to assume (or fails to assume)
the defense of such action, the Indemnified Party shall be entitled to assume
the defense of such action with counsel of its own choice, at the expense of the
Indemnifying Party. If the action is asserted against both the Indemnifying
Party and the Indemnified Party and there is a conflict of interests which
renders it inappropriate for the same counsel to represent both the Indemnifying
Party and the Indemnified Party, the Indemnifying Party shall be responsible for
paying for separate counsel for the Indemnified Party; provided, however, that
if there is more than one Indemnified Party, the Indemnifying Party shall not be
responsible for paying for more than one separate firm of attorneys to represent
the Indemnified Parties, regardless of the number of Indemnified Parties. If
the Indemnifying Party elects to assume the defense of such action, (a) no
compromise or settlement thereof may be effected by the Indemnifying Party
without the Indemnified Party's written consent (which shall not be unreasonably
withheld) unless the sole relief provided is monetary damages that are paid in
full by the Indemnifying Party and (b) the Indemnifying Party shall have no
liability with respect to any compromise or settlement thereof effected without
its written consent (which shall not be unreasonably withheld).
15.5 Exclusivity. The parties hereto agree that, in relation to any breach,
-----------
default, or nonperformance of any representation, warranty, covenant, or
agreement made or entered into by a party hereto pursuant to this Agreement or
any certificate, instrument, or document delivered
47
pursuant hereto or arising out of the transactions contemplated herein or the
ownership or operation of the Operating Assets, the only relief and remedy
available to the other party hereto in respect of said breach, default, or
nonperformance shall be:
(a) termination, but only if said termination is expressly permitted under
the provisions of Article XX; or
(b) actual damages, but only to the extent properly claimable hereunder
and as limited pursuant to this Article XV or otherwise hereunder; or
(c) specific performance if a court of competent jurisdiction in its
discretion grants the same; or
(d) injunctive or declaratory relief if a court of competent jurisdiction
in its discretion grants the same.
15.6 Assignment of Third Person Indemnities. To the extent the same are
--------------------------------------
assignable by an Indemnified Party, such Indemnified Party does hereby assign to
the Indemnifying Party all rights to defense, contribution and indemnity that
the Indemnified Party may hold with respect to the obligations for which the
Indemnifying Party is indemnifying and defending the Indemnified Party
hereunder, and the Indemnifying Party shall be subrogated to assert the
Indemnified Party's rights to such third-party defense, contribution and
indemnity obligations with respect to the indemnified claims or Actions.
ARTICLE XVI.
TAX MATTERS
-----------
16.1 Indemnification for Taxes.
-------------------------
(a) Seller shall be responsible for, and shall indemnify Buyer against,
all (i) Income Taxes imposed on Reserves LLC or Reserves LLC's interest in
Partnership, and all Liabilities, losses, costs, fines, penalties, damages
(actual, punitive or other), reasonable attorneys' fees, and expenses arising
therefrom, relating to (A) taxable periods or portions thereof ending on or
before the Closing Date, (B) Income Taxes resulting from the application of
Treas. Reg. (S) 1.1502-6 or any comparable state, local or foreign tax law
attributable to Tesoro Parent, or any corporation or entity which is or has been
affiliated with or been part of a combined, unitary or affiliated group with
Tesoro Parent, and (C) the portion of the Income Taxes for any Straddle Period
(as defined in subsection 16.1(e)) allocable to Sellers with respect to either
Reserves LLC or Reserves LLC's interest in the Partnership under subsection
16.2(e) and (ii) all Other Taxes imposed on Reserves LLC or Reserves LLC's
interest in the Partnership relating to the taxable periods or portions thereof
ending on or before the Effective Time (allocated as described in Section 13.3);
provided, Sellers shall not be responsible for, and shall not be required to
indemnify Buyer against, any Taxes to the extent that such Taxes do not exceed
the accrued liability for Taxes on the Balance Sheets which are taken into
account in determining the Working Capital.
48
(b) Buyer shall be responsible for and shall indemnify Sellers against all
(i) Income Taxes imposed upon Reserves LLC or Reserves LLC's interest in the
Partnership and all Liabilities, losses, costs, fines, penalties, damages
(actual, punitive, or other), reasonable attorneys' fees and expenses arising
therefrom, relating to (A) taxable periods beginning after the Closing Date or
(B) the portion of the Income Taxes for any Straddle Period which are allocable
to Buyer under subsection 16.2(e), and (ii) except as provided in Section 13.3
and in this Article XVI, all Other Taxes imposed upon Reserves LLC or Reserves
LLC's interest in the Partnership and all Liabilities, losses, costs, fines,
penalties, damages (actual, punitive or other), reasonable attorneys fees and
expenses arising therefrom arising in or relating to taxable periods or portions
thereof beginning after the Effective Time (allocated as described in Section
13.3).
(c) Each Party shall promptly notify the other Party of the commencement
of any demand, claim, audit, examination, Action or other proposed change or
adjustment by any Taxing Authority concerning any Tax which could give rise to a
claim for indemnity pursuant to subsection 16.1(a) or subsection 16.1(b), as the
case may be (each a "Tax Claim"). Such notice shall contain factual information
describing the asserted Tax Claim in reasonable detail and shall include copies
of any notice or other document received from any Taxing Authority in respect of
any such asserted Tax Claim.
(d) Seller, at its own expense, shall have the sole right to represent
Reserves LLC and the Partnership's interests in any Tax Claim for Taxes for
which it is indemnifying Buyer against and to employ counsel of its choice.
Buyer shall have the right to participate in such Action at its own expense.
Seller shall not consent to any settlement that reasonably would be expected to
have an adverse effect on the Income Taxes of Reserves LLC or Reserves LLC's
interest in the Partnership in any period after the Closing Date without Buyer's
consent, which consent shall not be unreasonably withheld. Buyer's consent
shall in no way reduce any indemnification due to Buyer under subsection
16.1(a). If Seller elects to control the defense, compromise or settlement of
any Tax Claim, Seller shall keep Buyer informed of the progress and disposition
of such Tax Claim. Buyer shall handle any other Tax Claims of Reserves LLC or
Reserves LLC's interest in the Partnership, and Buyer shall be entitled to
defend, compromise or settle such Tax Claims in its sole discretion without in
any way reducing its rights to indemnification under subsection 16.1(a), unless
any such settlement would give rise to a tax claim against Seller, and in such
event such settlement shall be subject to Seller's consent, which shall not be
unreasonably withheld.
(e) With respect to any taxable period of Reserves LLC or the Partnership
beginning before and ending after the Closing Date (a "Straddle Period"), Buyer
shall control, and Seller, at its own expense, shall have the right to
participate in, the defense and settlement of any Tax Claim and each Party shall
cooperate with the other Party and there shall be no settlement or closing or
other agreement with respect thereto without the consent of the other Party,
which consent shall not be unreasonably withheld; provided, that if either Party
shall refuse (the "Refusing Party") to consent to any settlement, closing or
other agreement agreed to by the relevant Taxing Authority with respect to any
such Tax Claim that the other party (the "Accepting Party") proposed to accept
(a "Proposed Settlement"), then (i) the Accepting Party's Liability with respect
to the subject matter of the Proposed Settlement shall be limited to the amount
that such Liability would have been if the Proposed Settlement had been
accepted, and
49
(ii) the Refusing Party shall be responsible for all Liabilities and expenses
incurred or imposed thereafter in connection with the contest of such Tax Claim
to the extent that the final settlement is more than the Proposed Settlement.
16.2 Other Tax Matters.
-----------------
(a) All Tax sharing agreements between Reserves LLC and any other Person,
including without limitation, the Affiliates of Seller, are hereby terminated as
of the Closing Date and all rights and obligations of Reserves LLC with respect
to Taxes shall be as provided herein.
(b) Any Tax allocation agreement or arrangement in effect shall be
extinguished in full as of the Closing Date.
(c) Tax Returns (each a "Pre-Closing Return") which are required to be
filed with respect to Reserves LLC or Reserves LLC's interest in the Partnership
on a consolidated, unitary or other combined basis with the Tesoro Group, or the
appropriate parent for a taxable period which ends on or before the Closing Date
(a "Pre-Closing Period") shall be prepared and filed by (or shall be the
responsibility of) Seller, which shall include the preparation and filing of the
consolidated federal and state income Tax Returns of the Tesoro Group which
includes Reserves LLC's interest in the Partnership for the period up to and
including the Closing Date. In the case of those jurisdictions which require a
short-period Tax Return ending on or before the Closing Date, Seller shall
prepare and file all appropriate returns required to be filed with respect to
Income Taxes attributable to the operations and the Operating Assets for the
pre-Closing periods. All such Pre-Closing Returns shall be filed on a basis
consistent with prior Tax Returns filed with respect to Reserves LLC's interest
in the Partnership. Seller or the appropriate parent of Reserves LLC or the
Partnership shall timely pay or cause to be paid all Taxes shown on such Pre-
Closing Returns. All Tax Returns which (i) are required to be filed with
respect to Reserves LLC's interest in the Partnership on a separate basis
(including the preparation of supporting schedules, Tax Returns and other Tax
information with respect to Reserves LLC's interest in the Partnership necessary
for completion of the Pre-Closing Returns) after the Closing Date for a Pre-
Closing Period (a "Post-Closing Return"), and (ii) are required to be filed or
with respect to Reserves LLC's interest in the Partnership for a taxable period
that ends after the Closing Date, including any Tax Return (a "Straddle Return")
for a Straddle Period, shall be prepared and filed by Buyer; subject to the
rights to indemnification and other rights under 16.1(a) and subsection 16.2(f),
Buyer shall timely pay or cause to be paid all Taxes shown on such Tax Returns.
(d) Seller agrees to provide Buyer and Buyer agrees to provide Seller with
such cooperation and information as the other shall reasonably request in
connection with the preparation or filing of any Tax Return required under this
Agreement.
(e) With respect to any Straddle Period, to the extent permitted by
applicable law, Seller shall elect to treat the Closing Date as the last day of
the taxable period. If applicable law, regulation or Governmental Order will
not permit the Closing Date to be the last day of a period, the Income Tax
attributable to the operations of Reserves LLC and Reserves LLC's interest in
the Partnership for the portion of the period up to and including the Closing
Date shall be (i) in the case of a flat minimum dollar amount Tax, the total
amount of such Taxes multiplied by a fraction, the numerator of which is the
number of days in the partial period through and including
50
the Effective Time and the denominator of which is the total number of days in
such Straddle Period, and (ii) in the case of all Income Taxes, the Tax computed
on the basis of the taxable income or loss attributable to Reserves LLC's
interest in the Partnership for the partial period through and including the
Closing Date as determined from their Books and Records. All Other Taxes arising
with or related to a Straddle Period will be allocated as provided in Section
13.3.
(f) With respect to any Post-Closing Return or Straddle Return, Buyer shall
deliver, at least 30 days prior to the due date for filing such Tax Return
(including any extension) to Seller a statement setting forth the amount of
Income Tax which Seller owes pursuant to subsection 16.1(a), including the
allocation of Taxes under subsection 16.2(e), and copies of such Tax Return.
Seller shall have the right to review such Tax Returns and the allocation of
Taxes and to suggest to Buyer any reasonable changes to such Tax Returns no
later than 15 days prior to the date for the filing of such Tax Returns. Seller
and Buyer agree to consult and to attempt to resolve in good faith any issue
arising as a result of the review of such Tax Returns and allocation of Taxes
and mutually to consent to the filing as promptly as possible of such Tax
Returns. Not later than 15 days before the due date for the payment of Income
Taxes with respect to such Tax Returns, Seller shall pay to Buyer an amount
equal to the Income Taxes as agreed to by Buyer and Seller as being owed by
Seller, pursuant to subsection 16.1(a). In the event that Buyer and Seller
cannot agree on the amount of Income Taxes owed by Seller, with respect to a
Straddle Return or a Post-Closing Return, Seller shall pay to Buyer the amount
of Income Taxes reasonably determined by Buyer to be owed by them pursuant to
subsection 16.1(a). Within ten (10) days following such payment, Seller and
Buyer shall refer the matter to an independent "Big-Five" accounting firm agreed
to by Buyer and Seller to arbitrate the dispute. Seller and Buyer shall equally
share the fees and expenses of such accounting firm, and its determination as to
the amount owing by Seller, pursuant to Section 16.1(a) with respect to a
Straddle Return or Post-Closing Return shall be binding on both parties. Within
five (5) days of the determination by such accounting firm, if necessary, the
appropriate Party shall pay the other Party any amount which is determined by
such accounting firm to be owed. Seller shall be entitled to reduce its
obligation to pay Taxes with respect to a Straddle Return or a Post-Closing
Return by the amount of any estimated Taxes paid with respect to such Taxes by
or on behalf of Reserves LLC on or before the Closing Date.
(g) Seller shall have the right to all refunds of Taxes (including interest
thereon), which relate to Taxes of Reserves LLC or Reserves LLC's interest in
the Partnership for Pre-Closing Periods and Straddle Periods, to the extent
provided in the following sentences. Buyer shall pay over to Seller any such
refunds within ten (10) days of receipt thereof, net of any Taxes imposed on
Buyer or Reserves LLC by reason of the receipt of such refund. To the extent
any refund of Taxes is made with respect to a Pre-Closing Period or a Straddle
Period, such refund shall be apportioned between Buyer and Seller, based on the
appropriate allocation method set forth in Section 16.2(e).
(h) Buyer and Seller agree to consult and resolve in good faith any issues
arising in connection with the preparation or review of any Tax Return or the
calculation of any Tax described in this Section 16.2.
(i) At the Closing, Seller, Reserves LLC and the Partnership each shall
deliver to Buyer certificates signed under penalties of perjury (i) stating that
it is not a foreign corporation,
51
foreign partnership, foreign trust or foreign estate, (ii) providing its U.S.
Employer Identification Number and (iii) providing its address, all pursuant to
Section 1445 of the Code.
16.3 Exclusive Remedy for Taxes. This Article XVI provides the sole and
--------------------------
exclusive remedy for any claim against Seller for indemnification, damages or
breach of any representation or warranty with respect to or relating to Taxes.
ARTICLE XVII.
DEFAULT AND REMEDIES
--------------------
17.1 Liabilities Upon Termination. If Closing does not occur due to
----------------------------
Seller's violation of the terms of this Agreement, then Buyer may seek such
legal or equitable remedies as Buyer may desire including, without limitation,
damages for the breach or failure of any representation, warranty, covenant or
agreement contained herein and the right to enforce specific performance of this
Agreement. If Closing does not occur due to Buyer's violation of the terms of
this Agreement, then Seller may seek such legal or equitable remedies as Seller
may desire, including, without limitation, damages for the breach or failure of
any representation, warranty, covenant or agreement contained herein and the
right to enforce specific performance of this Agreement.
17.2 Recovery of Costs. The prevailing Party in any litigation or
-----------------
alternative dispute resolution proceeding between the Parties in a dispute
arising under this Agreement shall be entitled to recover, from the other Party,
reimbursement for reasonable attorneys fees, expert fees, court costs and costs
of discovery and investigation.
17.3 Waiver of Extraordinary Damages. TO THE FULL EXTENT ALLOWED BY LAW,
-------------------------------
AND EXCEPT AS MAY BE INCLUDED IN THIRD PARTY DAMAGES SUBJECT TO ANY INDEMNITY
OBLIGATION HEREUNDER, THE PARTIES HEREBY WAIVE AND RELEASE ANY RIGHTS OR CLAIMS
TO PUNITIVE OR EXEMPLARY DAMAGES RESULTING FROM A BREACH OF THIS AGREEMENT. THE
PARTIES HEREBY WAIVE THE APPLICATION OF THE TEXAS DECEPTIVE TRADE PRACTICES-
CONSUMER PROTECTION ACT TO THE TRANSACTION.
17.4 Waiver of Jury Trial. SELLER AND BUYER DO HEREBY IRREVOCABLY WAIVE,
--------------------
TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO A TRIAL BY JURY IN
ANY ACTION, SUIT OR OTHER LEGAL PROCEEDING BASED UPON, ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTION.
17.5 Independent Obligations. The express release, indemnity, defense and
-----------------------
hold harmless obligations contained herein shall exist separate and independent
from the representations and warranties in this Agreement, and the limitations
of representations and warranties shall not be construed to limit the scope of
the express releases, indemnities, and defense and hold harmless obligations.
52
17.6 Changes of Law. Sellers do not make any representations and
--------------
warranties and do not assume any responsibilities or liabilities for any Damages
to Buyer arising out of or related to changes in the law or new interpretations
of existing law that may occur after Closing.
17.7 Merger. No representations, warranties, indemnities, covenants or
------
other provisions of this Agreement shall merge with provisions of any other
instrument.
ARTICLE XVIII.
NOTICES
-------
18.1 Notices. All notices authorized or required by any of the provisions
-------
of this Agreement, unless otherwise specifically provided, shall be in writing
and delivered in person or by United States mail, courier service, telegram, or
telephone facsimile, postage or charges prepaid, and addressed to the Parties at
the respective addresses set forth below:
If to Seller: Tesoro Petroleum Corporation.
000 Xxxxxxx Xxxxx Xxxxx
Xxx Xxxxxxx, Xxxxx 00000-0000
Attention: Xxxxx X. Xxxx, Xx.
Fax Number: (000) 000-0000
Phone Number: (000) 000-0000
With a copy to: Fulbright & Xxxxxxxx L.L.P.
0000 XxXxxxxx, Xxxxx 0000
Xxxxxxx, Xxxxx 00000
Attention: Xxxxxxx X. Xxxxxx
Fax Number: (000) 000-0000
Phone Number: (000) 000-0000
If to Buyer: EEX Operating LLC
0000 Xxxx Xxxx Xxxxxxxxx, Xxxxx 0000
Xxxxxxx, Xxxxx 00000
Attention: Xxxxxx X. Xxxxxxxx
Fax Number: (000) 000-0000
Phone Number: (000) 000-0000
53
With a copy to: Akin, Gump, Strauss, Xxxxx & Xxxx, L.L.P.
0000 Xxxxxxx Xxxxxx
Xxxxx 0000
Xxxxxx, Xxxxx 00000
Attention: Xxxxxxx X. Xxxxxxx
Fax Number: (000) 000-0000
Phone Number: (000) 000-0000
Any Party may, by written notice so delivered to the other, change the address
to which delivery shall thereafter be made.
ARTICLE XIX.
CONFIDENTIALITY AND DISCLOSURES
-------------------------------
19.1 Non Disclosure of Data. To the extent Buyer does not acquire all of
----------------------
the Membership Interests for any reason, Buyer shall not directly or indirectly
disclose or use any materials, data or other information provided by or obtained
from Seller, Reserves LLC or the Partnership, and Buyer and its representatives
shall continue to be bound by the terms of the existing Confidentiality
Agreement dated June 17, 1999, between the Parties.
19.2 Public Announcements. The Parties hereto agree that prior to making
--------------------
any public announcement or statement with respect to the Transaction, the Party
desiring to make such public announcement or statement shall consult with the
other Party and exercise reasonable efforts to obtain the consent of the other
Party to the text of such public announcement or statement. If the Parties
cannot agree upon the text of any such public disclosure, a Party may
nevertheless disclose information with respect to the to the extent required by
applicable law or by any applicable rules, regulations or orders of any
governmental or judicial authority or agency having jurisdiction or to the
extent such disclosure is necessary to comply with requirements of the New York
Stock Exchange.
ARTICLE XX.
TERMINATION
-----------
20.1 Termination. Notwithstanding anything herein to the contrary, this
-----------
Agreement and the Transaction may be terminated in the following instances:
(a) At any time by the mutual written agreement of Buyer and Seller;
(b) By Seller, if the Settlement Price Adjustment exceeds fifteen percent
(15%) of the Purchase Price; or by Buyer, if the sum of the Settlement Price
Adjustment and any reductions to the purchase price as a result of the exercise
by third parties of Preferential Rights to Purchase exceeds fifteen percent
(15%) of the Purchase Price;
(c) By Seller or Buyer, if any of the Casualty Price individually exceeds
ten percent (10%) of the Purchase Price; or
54
(d) By Buyer or Seller, if Closing has not taken place before December 31,
1999; provided, however, that the Party seeking to terminate this Agreement
pursuant to Section 20.1(d) shall not have breached in any material respect its
obligations under this Agreement in any manner that shall have proximately
contributed to the failure to consummate the Transaction prior to December 31,
1999.
ARTICLE XXI.
MISCELLANEOUS
-------------
21.1 Entire Agreement. This Agreement, together with the Stock Purchase
----------------
Agreement, embody the entire agreement between the Parties (superseding all
prior agreements, negotiations, representations, discussions, arrangements and
understandings related to the subject matter hereof), and may be supplemented,
altered, amended, modified or revoked only by a written instrument signed by
each of the Parties; provided, however, the Confidentiality Agreement dated June
17, 1999, between the Parties shall remain effective until Closing. If the sale
of the Operating Assets to Buyer is not consummated, then the Confidentiality
Agreement shall remain effective as stated therein.
21.2 No Verbal Modifications or Waivers. Any of the terms, provisions,
----------------------------------
covenants, representations, warranties or conditions hereof may be supplemented,
amended, modified, released or waived only by a written instrument executed by
the Parties. Except as otherwise expressly provided in this Agreement, the
failure of any Party at any time or times to require performance of any
provision hereof shall in no manner affect such Party's right to enforce the
same. No waiver by any Party of any condition, or of the breach of any term,
provision, covenant, representation or warranty contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
to be or construed as a further or continuing waiver of any such condition or
breach or a waiver of any other condition or of the breach of any other term,
provision, covenant, representation or warranty.
21.3 Severability. If any term or provision of this Agreement is held to
------------
be illegal, invalid or unenforceable, the legality, validity and enforceability
of the remaining terms and provisions of this Agreement shall not be affected
thereby, and in lieu of each such illegal, invalid or unenforceable term or
provision, there shall be added automatically to this Agreement a legal, valid
and enforceable term or provision as similar as possible to the term or
provision declared illegal, invalid or unenforceable.
21.4 Interpretation. Words of any gender used in this Agreement shall be
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held and construed to include any other gender, and words in the singular shall
be held to include the plural, unless the context otherwise requires. None of
the terms or conditions of this Agreement, including any Exhibits or Schedules
hereto, shall be construed for or against any Party hereto on the basis that
such Party did or did not author the same. All terms of this Agreement and the
Exhibits shall be harmonized, but in the event of any conflict between the
definition of a term in Article I and a more complete description or limitation
of such term in a subsequent Article, the subsequent Article shall prevail.
This Agreement is being executed in connection with the Stock Purchase
Agreement, as amended by the Amendment, and the two instruments shall be
harmonized, to the extent possible, provided however, that no Party shall be
entitled to receive
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duplicate payments (including, without limitation, duplicate payment of any
purchase price) or other relief regarding the same matters under both this
Agreement and the Stock Purchase Agreement, as amended, and the rights of the
Parties hereunder are subject to the terms of the Stock Purchase Agreement, as
amended by the Amendment. In the event of any conflict, redundancy or
inconsistency between the terms of the Stock Purchase Agreement, as amended, and
this Agreement (including without limitation any conflict, redundancy or
inconsistency with respect to the provisions relating to indemnification,
payment of purchase price, adjustments to the purchase price, transfer of the
Membership Interests, representations, warranties and covenants or any
provisions of the exhibits or schedules), the provisions of the Stock Purchase
Agreement, as amended, shall control and prevail in all respects. The Article
and Section headings are for convenience only and shall have no significance in
the interpretation hereof.
21.5 Counsel. Each Party expressly acknowledges that it was represented by
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counsel of its own selection in negotiation and preparation of the terms of the
Agreement and the attached Exhibits and that it is sophisticated and experienced
in transactions of this type and is aware of all terms and conditions contained
herein. Each Party shall be responsible for the costs and expenses of its own
counsel.
21.6 Governing Law. This Agreement and other documents delivered pursuant
-------------
to this Agreement and the legal relations between the Parties shall be governed
and construed and enforced in accordance with the laws of the State of Texas,
without giving effect to principles of conflict of laws.
21.7 Consents. Except as expressly provided otherwise herein, any consent
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required of a Party with respect to any matters covered by this Agreement shall
not be unreasonably withheld or action with respect thereto unduly delayed.
21.8 Time of Essence. Time is of the essence in all matters provided for
---------------
in this Agreement.
21.9 Binding Effect, Assignment. All the terms, provisions, covenants,
--------------------------
representations, warranties and conditions of this Agreement shall be binding
upon and inure to the benefit of and be enforceable by the Parties and, except
as otherwise prohibited, their respective successors; however, this Agreement
and the rights and obligations hereunder shall not be assignable or delegable by
any Party without the express written consent of the non-assigning or non-
delegating Parties, which consent may be withheld for any or no reason; provided
that Buyer may assign some or all of its rights, duties and obligations under
this Agreement to an Affiliate of EEX Corporation. Any assignment or delegation
without such consent will be void.
21.10 No Relationship. Nothing contained in this Agreement shall be
---------------
deemed to create a joint venture, partnership, agency or other fiduciary
relationship between the Parties, nor is this Agreement intended to create, nor
shall it be construed to create, any rights in any third party, to create any
third party beneficiaries or to ratify, adopt or confirm any other lease,
agreement or other instrument, whether or not affecting Reserves LLC, the
Partnership or the Operating Assets. Notwithstanding the above, the Parties
acknowledge that the Transaction shall be subject to the rights of all third
parties holding Preferential Rights to Purchase and Consents to
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Assignment concerning the Operating Assets, to the extent that they are valid,
in effect and enforceable by reason of the Transaction, and that such third
party rights shall be handled as set forth herein.
21.11 No Recordation. Without limiting any Party's right to file suit to
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enforce its rights under this Agreement, Buyer and Seller expressly covenant and
agree not to record or place of record this Agreement or any copy or memorandum
hereof, unless required under the Securities Exchange Act of 1934.
21.12 Exhibits and Schedules. All Exhibits and Schedules which are
----------------------
referred to herein are hereby made a part hereof and incorporated herein by
reference.
21.13 Counterparts. This Agreement may be executed in any number of
------------
counterparts, and each and every counterpart shall be deemed for all purposes
one agreement.
21.14 No Third Party Beneficiaries. Any agreement contained, expressed or
----------------------------
implied in this Agreement shall be only for the benefit of the Parties hereto
and the Indemnified Parties specified in Article XV and their respective legal
representatives, successors and assigns. Such agreements shall not inure to the
benefit of any employees of Seller, Reserves LLC or the Partnership (except in
their capacity as Indemnified Parties) or the obligees of any indebtedness of
any Party hereto, it being the intention of the Parties hereto that no Person
shall be deemed a third party beneficiary of this Agreement, except to the
extent a third Person is expressly given rights herein.
21.15 Joint and Several Liability. Tesoro Petroleum Corporation and
---------------------------
Tesoro Gas Resources Company, Inc. agree to be jointly and severally liable for
all of the Seller's duties and obligations hereunder.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the date first above written.
SELLER BUYER
------ -----
TESORO PETROLEUM CORPORATION EEX OPERATING LLC
By:______________________________ By: EEX CORPORATION
Name:____________________________ By:______________________________
Title:___________________________ Name:____________________________
Title:___________________________
TESORO GAS RESOURCES COMPANY, INC.
By:_____________________________
Name:___________________________
Title:__________________________
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