TABLE OF CONTENTS

 

ARTICLE I THE MERGER		1
1.1	The Merger	1
1.2	Effective Time of the Merger	1
1.3	Tax Treatment	2
ARTICLE II THE SURVIVING CORPORATION		2
2.1	Certificate of Incorporation	2
2.2	Bylaws	2
2.3	Directors and Officers	2
ARTICLE III CONVERSION OF SHARES		2
3.1	Conversion of Capital Stock	2
3.2	Stock Options; Restricted Stock	4
3.3	Surrender and Payment	5
3.4	No Fractional Shares	7
3.5	Target Dissenting Shares	7
3.6	Closing	8
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF TARGET		8
4.1	Organization and Qualification	8
4.2	Capitalization	10
4.3	Authority	11
4.4	Consents and Approvals; No Violation	11
4.5	Target SEC Reports	12
4.6	Financial Statements	13
4.7	Absence of Undisclosed Liabilities; Liabilities as of Year End	13
4.8	Absence of Certain Changes	14
4.9	Taxes	14
4.10	Litigation	15
4.11	Employee Benefit Plans; ERISA	16
4.12	Environmental Liability	22
4.13	Compliance with Applicable Laws	23
4.14	Insurance	24
4.15	Labor Matters; Employees	24
4.16	Reserve Reports	26
4.17	Permits	26
4.18	Material Contracts	27
4.19	Required Stockholder Vote	28
4.20	Proxy/Prospectus; Registration Statement	28
4.21	Intellectual Property	28
4.22	Hedging	29
4.23	Brokers	29
4.24	Tax-Free Reorganization	29
4.25	Fairness Opinion	29
4.26	Takeover Laws	29

 

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ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB		29
5.1	Organization and Qualification	30
5.2	Capitalization	31
5.3	Authority	32
5.4	Consents and Approvals; No Violation	33
5.5	Parent AIM Reports	34
5.6	Parent Financial Statements	34
5.7	Absence of Undisclosed Liabilities	35
5.8	Absence of Certain Changes	35
5.9	Taxes	35
5.10	Litigation	37
5.11	Employee Benefit Plans; ERISA	37
5.12	Environmental Liability	43
5.13	Compliance with Applicable Laws	44
5.14	Insurance	44
5.15	Labor Matters; Employees	44
5.16	Reserve Reports	46
5.17	Permits	46
5.18	Material Contracts	46
5.19	Required Stockholder Vote	47
5.20	Proxy/Prospectus; Registration Statement	47
5.21	Intellectual Property	48
5.22	Hedging	48
5.23	Brokers	48
5.24	Tax Matters	48
5.25	Takeover Laws	48
ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER		49
6.1	Conduct of Business by Target Pending the Merger	49
6.2	Conduct of Business by Parent Pending the Merger	52
ARTICLE VII ADDITIONAL AGREEMENTS		53
7.1	Access and Information	53
7.2	Target Acquisition Proposals	55
7.3	Parent Acquisition Proposals	59
7.4	Directors’ and Officers’ Indemnification and Insurance	63
7.5	Further Assurances	66
7.6	Expenses	66
7.7	Cooperation	66
7.8	Publicity	66
7.9	Additional Actions	67
7.10	Filings	67
7.11	Consents	67
7.12	Certain Parent Board Approvals	67
7.13	Parent Board of Directors	67
7.14	Stockholders’ Meetings	68

 

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7.15	Preparation of the Proxy/Prospectus and Registration Statement	68
7.16	Stock Exchange Listing	70
7.17	Employee Matters	70
7.18	Notice of Certain Events	72
7.19	Site Inspections	72
7.20	Affiliate Agreements; Tax Treatment	73
7.21	Stockholder Litigation	73
7.22	Parent Restructure	73
ARTICLE VIII CONDITIONS TO CONSUMMATION OF THE MERGER		73
8.1	Conditions to the Obligation of Each Party	73
8.2	Conditions to the Obligations of Parent	74
8.3	Conditions to the Obligations of Target	75
ARTICLE IX SURVIVAL		76
9.1	Survival of Representations and Warranties	76
9.2	Survival of Covenants and Agreements	76
ARTICLE X TERMINATION, AMENDMENT AND WAIVER		76
10.1	Termination	76
10.2	Effect of Termination	79
10.3	Termination Fees	79
ARTICLE XI MISCELLANEOUS		82
11.1	Notices	82
11.2	Severability	83
11.3	Assignment	83
11.4	Interpretation	84
11.5	Counterparts	84
11.6	Entire Agreement	84
11.7	Governing Law	84
11.8	Submission to Jurisdiction	84
11.9	Attorneys’ Fees	84
11.10	No Third Party Beneficiaries	84
11.11	Disclosure Schedules	84
11.12	Amendments and Supplements	85
11.13	Extensions, Waivers, Etc.	85
11.14	Specific Performance	85

 

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INDEX OF DEFINED TERMS

 

Term		Section
Administaff Agreement		4.11(a)
Administaff Plans		4.11(b)
Affiliated Group		4.24
Agreement		Preamble
AIM		3.4
AIM Rules		5.5(b)
Ancillary Agreements		4.3
Assessment		7.19
Audit		4.9(f)
Average Closing Price		3.4
Book-Entry Shares		3.3(a)
Business Day		3.3(b)
Business Employees		7.17(b)
Closing		3.6
Closing Date		3.6
COBRA		4.11(g)
Code		Preamble
Common Conversion Consideration		3.1(b)
Confidentiality Agreement		7.1
Corporate Records		4.1(b)
Customary Post-Closing Consents		4.4(b)
D&O Insurance		7.4(a)(ii)
DGCL		1.1
Director Nominees		7.13(a)
Effective Time		1.2
Enforceability Exception		4.3
Environmental Laws		4.12(a)
ERISA		4.11(b)
Exchange Act		4.4(b)
Exchange Agent		3.3(a)
Exchange Fund		3.3(a)
Exchange Ratio		3.1(b)
Expenses		7.6(b)
Foreign Plan		4.11(k)
GAAP		4.6
Governmental Authority		3.3(c)
Hazardous Substances		4.12(b)
Hein		7.15(b)
HSR Act		4.4(b)
Hydrocarbons		4.16(a)
Inspected Party		7.19
Inspecting Party		7.19
Intellectual Property		4.21
Knowledge of Parent		5.2(c)
Knowledge of Target		4.2(c)
Liens		4.2(b)
Merger		Preamble
Merger Consideration		3.1(b)
Merger Sub		Preamble
Nomad		5.2(c)
Oil and Gas Interests		4.16(a)
Parent		Preamble
Parent Acquisition Agreement		7.3(c)(iii)
Parent Acquisition Proposal		7.3(b)(i)
Parent Acquisition Proposal Recommendation		7.3(c)(ii)
Parent Adverse Recommendation Change		7.3(c)(i)
Parent AIM Reports		5.11(a)
Parent Benefit Plans		5.11(a)
Parent Breach		10.1(c)
Parent Common Shares		3.1(b)
Parent Disclosure Schedule		5.1(a)
Parent Employees		5.11(a)
Parent Engagement Letters		5.23
Parent ERISA Affiliate		5.11(a)
Parent Indemnified Liabilities		7.4(b)(i)
Parent Indemnified Party		7.4(b)(i)
Parent Material Adverse Effect		5.1(f)
Parent Material Contracts		5.18(a)
Parent Meeting		7.14(b)
Parent Options		5.11(a)
Parent Parties		Preamble
Parent Preferred Shares		5.11(a)
Parent Reserve Report		5.16(a)
Parent Revised Offer		7.2(e)(ii)
Parent Restricted Shares		3.2(d)
Parent Series A Shares		5.2(a)
Parent Stockholders’ Approval		5.19
Parent Superior Proposal		7.3(b)(ii)
Parent Takeover		10.3(b)(i)
Parent Termination Fee		10.3(a)(iii)
Parties		Preamble
Party		Preamble
PBGC		4.11(e)(v)
PBCs		4.12(e)
Permits		4.17
Person		3.3(c)
Post-Closing Plans		7.17(c)
Pre-Closing Plans		7.17(d)
Preferred Conversion Consideration		3.1(d)
Proceeding		7.4(a)(i)
Proxy/Prospectus		4.20
Readmission Document		7.15(a)
Registration Statement		4.20
Sarbanes-Oxley Act		4.5(b)
SEC		4.5(a)
Securities Act		4.4(b)
Series D Certificate		4.19
Series D CD Amendment		4.19
Series D Stock		3.1(d)
Stock Certificates		3.3(a)
Subsidiary		4.1(f)

 

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Term		Section
Surviving Corporation		1.1
Target		Preamble
Target Acquisition Agreement		7.2(c)(iii)
Target Acquisition Proposal		7.2(b)(i)
Target Acquisition Proposal Recommendation		7.2(c)(ii)
Target Adverse Recommendation Change		7.2(c)(i)
Target Benefit Plans		4.11(b)
Target Breach		10.1(d)
Target Common Shares		3.1(a)
Target Disclosure Schedule		4.1(a)
Target Dissenting Shareholders		3.5
Target Dissenting Shares		3.5
Target Employees		7.17(a)
Target Engagement Letters		4.23
Target ERISA Affiliate		4.11(b)
Target Financial Statements		4.6
Target Indemnified Liabilities		7.4(a)(i)
Target Indemnified Party		7.4(a)(i)
Target Material Adverse Effect		4.1(f)
Target Material Contracts		4.18(a)
Target Meeting		7.14(a)
Target Option		3.2(a)
Target Permits		4.12(d)
Target Preferred Shares		4.2(a)
Target Reserve Report		4.16(a)
Target Restricted Shares		3.2(b)
Target Revised Offer		7.3(e)(ii)
Target SEC Reports		4.5(a)
Target Shares		4.2(a)
Target Stockholders’ Approval		4.19
Target Stock Plans		3.2(a)
Target Superior Proposal		7.2(b)(ii)
Target Takeover		10.3(a)(ii)
Target Termination Fee		10.3(a)(i)
Tax Authority		4.9(f)
Tax Returns		4.9(f)
Taxes		4.9(f)
TBOC		7.4(b)(i)
Termination Date		10.1(b)
Transactions		3.6
UHY		7.15(c)
WARN Act		4.15(b)

 

 

EXHIBITS

 

 

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AGREEMENT AND PLAN OF MERGER

 

This Agreement and Plan of Merger (this “ Agreement ”), dated September 29, 2009, by and among Resaca Exploitation, Inc., a Texas corporation (“ Parent ”), Resaca Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“ Merger Sub ,” and, together with Parent, the “ Parent Parties ”), and Cano Petroleum, Inc., a Delaware corporation (“ Target ”).  Parent, Merger Sub and Target are each a “ party ” and together are “ parties ” to this Agreement.

 

WHEREAS, the respective Boards of Directors of Parent, Merger Sub and Target deem it advisable and in the best interests of their respective corporations and stockholders that Merger Sub merge with and into Target (the “ Merger ”), upon the terms and subject to the conditions set forth herein; and

 

WHEREAS, for federal income tax purposes, it is intended that the Merger will qualify as a reorganization under the provisions of Section 368(a) of the United States Internal Revenue Code of 1986, as amended (the “ Code ”);

 

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

 

ARTICLE I

 

THE MERGER

 

1.1                       The Merger.  Upon the terms and subject to the conditions hereof, at the Effective Time, Merger Sub shall merge with and into Target, and the separate corporate existence of Merger Sub shall thereupon cease and Target shall be the surviving corporation in the Merger (sometimes referred to herein as the “ Surviving Corporation ”).  The Merger shall have the effects set forth in Section 259 of the General Corporation Law of the State of Delaware (the “ DGCL ”), including the Surviving Corporation’s succession to and assumption of all rights and obligations of Merger Sub.

 

1.2                       Effective Time of the Merger.  The Merger shall become effective (the “ Effective Time ”) upon the later of (i) the date of filing of a properly executed Certificate of Merger relating to the Merger with the Secretary of State of the State of Delaware in accordance with the DGCL, and (ii) at such later time as the parties shall agree and set forth in such Certificate of Merger.  The filing of the Certificate of Merger referred to above shall be made as soon as practicable on the Closing Date set forth in Section 3.6 .

 

 

1.3                       Tax Treatment.  It is intended that the Merger shall constitute a reorganization under Section 368(a) of the Code.

 

ARTICLE II

 

THE SURVIVING CORPORATION

 

2.1                       Certificate of Incorporation.  The Certificate of Incorporation of Target in effect immediately prior to the Effective Time shall be amended to read in its entirety as set forth in the form attached hereto as Exhibit 2.1 , which shall be annexed to the Certificate of Merger at the time of filing of the Certificate of Merger with the Secretary of State of the State of Delaware, until thereafter amended in accordance with the terms thereof and the DGCL.

 

2.2                       Bylaws.  The Bylaws of Target as in effect immediately prior to the Effective Time shall be amended to read in their entirety as set forth in the form attached hereto as Exhibit 2.2 , until thereafter amended in accordance with their terms and as provided by the Surviving Corporation’s Certificate of Incorporation and such Bylaws and the DGCL.

 

2.3                       Directors and Officers .  At and after the Effective Time, the individuals listed on Exhibit 2.3 shall be the directors and officers of the Surviving Corporation until their respective successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation’s Certificate of Incorporation and Bylaws and the DGCL.  This Section 2.3 shall not alter Parent’s obligations under Section 7.13 .

 

ARTICLE III

 

CONVERSION OF SHARES

 

3.1                       Conversion of Capital Stock .  At the Effective Time, by virtue of the Merger and without any action on the part of the holders of any capital stock described below:

 

(a)           All shares of Common Stock of Target, par value $0.0001 per share (“ Target Common Shares ”), that are held by Target as treasury shares shall be canceled and cease to be outstanding and no cash, Parent capital stock or other consideration shall be delivered in exchange therefor.

 

(b)           Subject to Sections 3.2(b) and 3.3(f) , each issued and outstanding Target Common Share (other than Target Common Shares treated in accordance with Section 3.1(a) ) shall be converted into the right to receive 2.100 (the “ Exchange Ratio ”) validly issued, fully paid and nonassessable shares of common stock, par value $0.01 per share, of Parent (the “ Parent Common Shares ”) (the” Common Conversion Consideration ”).  All such Target Common Shares, when so converted, shall be retired, shall cease to be outstanding and shall automatically be cancelled, and each holder of any such Target Common Share shall cease to have any rights with respect thereto, except the right to receive, without interest, upon the surrender of such Target Common Shares in accordance with Section 3.3 : (x) certificates representing whole Parent Common Shares or whole Parent Common Shares represented by book-entry in accordance with Section 3.3(a) , (y) any unpaid dividends and other distributions

 

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under Section 3.3(f) , and (z) cash in lieu of fractional Parent Common Shares under Section 3.4 .  Notwithstanding the foregoing, if between the date hereof and the Effective Time, the Parent Common Shares or Target Common Shares are changed into a different number of shares or a different class, because of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares, the Exchange Ratio above shall be correspondingly adjusted to reflect such stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares.

 

(c)           The Merger shall not affect any Parent Common Shares issued and outstanding immediately prior to the Effective Time.

 

(d)           Subject to Section 3.3(f) , each issued and outstanding share of Target’s Series D Convertible Preferred Stock, no par value per share (the “ Series D Stock ”), shall be converted into the right to receive one (1) validly issued, fully paid and nonassessable Parent Series A Share (the “ Preferred Conversion Consideration ”, and collectively with the Common Conversion Consideration, the “ Merger Consideration ”).  All such shares of Series D Stock, when so converted, shall be retired, shall cease to be outstanding and shall automatically be cancelled, and each holder of any such shares of Series D Stock shall cease to have any rights with respect thereto, except the right to receive, without interest, upon the surrender of such shares of Series D Stock in accordance with Section 3.3 : (x) certificates representing whole Parent Series A Shares or whole Parent Series A Shares represented by book-entry in accordance with Section 3.3(a) and (y) any unpaid dividends and other distributions under Section 3.3(f) .  Notwithstanding the foregoing, if between the date hereof and the Effective Time, the shares of the Series D Stock are changed into a different number of shares or a different class, because of any stock dividend (other than a payment-in-kind distribution in accordance with the Series D Certificate), subdivision, reclassification, recapitalization, split, combination or exchange of shares, the exchange ratio related to the Preferred Conversion Consideration above shall be correspondingly adjusted to reflect such stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares.

 

(e)           All Parent Common Shares issued upon the surrender of Target Common Shares in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such Target Common Shares, and from and after the Effective Time there shall be no further registration of transfers effected on the stock transfer books of the Surviving Corporation of Target Common Shares which were outstanding immediately prior to the Effective Time.  If, after the Effective Time, Target Common Shares are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article III .

 

(f)            All Parent Series A Shares issued upon the surrender of shares of Series D Stock in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Series D Stock, and from and after the Effective Time there shall be no further registration of transfers effected on the stock transfer books of the Surviving Corporation of shares of Series D Stock which were outstanding immediately prior to the Effective Time.  If, after the Effective Time, shares of Series D Stock are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article III .

 

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3.2                      Stock Options; Restricted Stock .

 

(a)           Each option to purchase Target Common Shares (each, a “ Target Option ”) granted under the employee and director stock plans and agreements of Target (the “ Target Stock Plans ”), whether vested or unvested, that is outstanding immediately prior to the Effective Time shall, as of the Effective Time and in accordance with its terms, automatically and without any action on the part of the holders thereof, be converted into a vested Parent Option, on the same terms and conditions (except as provided in this Section 3.2 ) as were applicable under such Target Option immediately prior to the Effective Time, to purchase that number of Parent Common Shares equal to the product of (i) the total number of Target Common Shares subject to such Target Option and (ii) the Exchange Ratio, rounded down to the nearest whole number of Parent Common Shares; provided that, in the event of rounding down of any fractional Parent Common Shares, Parent shall pay an amount in cash (without interest) in accordance with Section 3.2(a) .  The per-share exercise price for the Parent Common Shares issuable upon exercise of such Parent Options will be equal to the quotient determined by dividing (A) the exercise price per share of the Target Common Shares at which the Target Options were exercisable immediately prior to the Effective Time by (B) the Exchange Ratio, and rounding to the resulting per-share exercise price up to the nearest whole cent.  Notwithstanding the foregoing, (x) in no event shall the per-share exercise price be less than the par value of Parent Common Shares, and (y) in any event the exercise price, the number of Parent Common Shares purchasable pursuant to such Target Option and the terms and conditions of exercise of such Target Option shall be determined in accordance with the requirements of Section 424(a) of the Code and in a manner that does not cause any Target Option to be deferred compensation subject to Section 409A of the Code.  Prior to Closing, (1) Parent will take all corporate actions necessary to reserve for issuance a sufficient number of Parent Common Shares for delivery upon exercise of Target Options assumed by Parent under this Section 3.2(a) and (2) Target shall pass such resolutions as necessary to approve the terms of this Section 3.2(a) .

 

(b)           Each award of restricted Target Common Shares granted under a Target Stock Plan that is outstanding immediately prior to the Effective Time (the “ Target Restricted Shares ”) shall, as of the Effective Time and in accordance with its terms, automatically and without any action on the part of the holders thereof, vest and be converted, on the same terms and conditions (except as provided in this Section 3.2(b) ) as were applicable under such Target Restricted Shares immediately prior to the Effective Time, into a number of Parent Common Shares equal to the product of (i) the total number of Target Common Shares subject to such grant of Target Restricted Shares and (ii) the Exchange Ratio; provided that, in lieu of any fractional Parent Common Shares, Parent shall pay an amount in cash (without interest) in accordance with Section 3.4 .  Prior to the Closing Date, Target shall take all action necessary to ensure that each holder of Target Restricted Shares that will be converted into the right to receive Parent Common Shares executes an Orderly Marketing Deed, substantially in the form attached hereto as Exhibit 3.2(b) .

 

(c)           As soon as practicable after the Effective Time, Parent will file with the Securities and Exchange Commission a registration statement on Form S-8 (or any successor or other appropriate forms) with respect to the Parent Common Shares subject to stock options and the restricted Parent Common Shares and will use its reasonable efforts to maintain the

 

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effectiveness of such registration statement (and maintain the current status of the prospectus or prospectuses contained therein) for as long as such options remain outstanding.

 

(d)           Prior to the Closing Date, Parent’s Board of Directors shall take all action necessary to declare that the Transactions shall not constitute a “change in control” with respect to (i) the options to purchase Parent Common Shares (the “ Parent Options ”) and (ii) the outstanding awards of restricted stock issued by Parent pursuant to Parent’s stock incentive or other equity award plans (the “ Parent Restricted Shares ”).  In connection with the Transactions, Parent’s Board of Directors shall not exercise any suspension or other remedial measures that may be available to it under Section 8 of the Bylaws of Parent.

 

3.3                      Surrender and Payment .

 

(a)           Prior to the Effective Time, Parent shall authorize one (1) or more transfer agent(s) reasonably acceptable to Target to act as Exchange Agent hereunder (the “ Exchange Agent ”) with respect to the Merger.  At or prior to the Effective Time, Parent shall deposit with the Exchange Agent in trust for the benefit of the holders of Target Shares, for exchange in accordance with this Section 3.3 through the Exchange Agent, (i) certificates representing the Parent Common Shares and Parent Series A Shares issuable pursuant to Section 3.1 in exchange for outstanding Target Common Shares and shares of Series D Stock, respectively; (ii) cash, Parent Common Shares and Parent Series A Shares sufficient to pay any unpaid dividends and other distributions due under Section 3.3(f) ; and (iii) cash funds sufficient to pay cash in lieu of fractional Parent Common Shares in accordance with Section 3.4 (such Parent Common Shares, Parent Series A Shares, together with any dividends or distributions with respect thereto and such cash in lieu of fractional Parent Common Shares, being hereinafter referred to as the “ Exchange Fund ”).  The Exchange Agent shall, pursuant to irrevocable instructions, deliver the appropriate Merger Consideration in exchange for surrendered certificates that immediately prior to the Effective Time represented Target Common Shares and shares of Series D Stock (the “ Stock Certificates ”) or Target Common Shares and shares of Series D Stock represented by book-entry (“ Book-Entry Shares ”) pursuant to Section 3.1 out of the Exchange Fund.  Except as contemplated by Section 3.3(d) , the Exchange Fund shall not be used for any other purpose.

 

(b)           Promptly but in any event within five (5) Business Days after the Effective Time, Parent shall cause the Exchange Agent to send to each holder of record of Stock Certificates or Book-Entry Shares a letter of transmittal for use in such exchange (which shall specify that the delivery shall be effected, and risk of loss and title with respect to the Stock Certificates shall pass, only upon proper delivery of the Stock Certificates to the Exchange Agent or, in the case of Book-Entry Shares, upon adherence to the procedures set forth therein, and which shall be in a form reasonably acceptable to Target), and instructions for use in effecting the surrender of Stock Certificates or, in the case of Book-Entry Shares, the surrender of such shares, for payment therefor in accordance herewith.  The Exchange Agent shall also provide for holders of Stock Certificates to procure in person immediately after the Effective Time a letter of transmittal and instructions and to deliver in person immediately after the Effective Time such letter of transmittal and Stock Certificates in exchange for the applicable Merger Consideration.  No interest shall accrue or be paid on the Merger Consideration payable upon the surrender of any Stock Certificate or Book-Entry Shares for the benefit of the holder of such Stock Certificate

 

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or Book-Entry Shares.  “ Business Day ” means any day other than a Saturday, Sunday or legal holiday under the laws of the United States or the State of Texas.

 

(c)           If any portion of the Merger Consideration is to be issued or paid to a Person other than the registered holder of Target Common Shares or shares of Series D Stock represented by the Stock Certificate(s) surrendered in exchange therefor, no such issuance or payment shall be made unless (i) the Stock Certificate(s) so surrendered have been properly endorsed or otherwise be in proper form for transfer and (ii) the Person requesting such issuance has paid to the Exchange Agent any transfer or other taxes required as a result of such issuance to a Person other than the registered holder or establish to the Exchange Agent’s satisfaction that such tax has been paid or is not applicable.  For purposes of this Agreement, “ Person ” means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including any governmental or regulatory authority or agency (a “ Governmental Authority ”).

 

(d)           Any portion of the Exchange Fund that remains unclaimed by the holders of Target Common Shares and Series D Stock one (1) year after the Effective Time shall be returned to Parent and any such holder who has not exchanged such holder’s Stock Certificates or Book-Entry Shares in accordance with this Section 3.3 prior to that time shall thereafter look only to Parent (subject to abandoned property, escheat and other similar laws), as a general creditor thereof, to exchange such Stock Certificates or Book-Entry Shares or to pay amounts to which such holder is entitled pursuant to Section 3.1 .  Notwithstanding the foregoing, none of Parent, Target or the Surviving Corporation shall be liable to any holder of Stock Certificates or Book-Entry Shares for any amount paid, or Merger Consideration delivered, to a public official pursuant to applicable abandoned property, escheat or similar laws.

 

(e)           If any Stock Certificate is lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Stock Certificate is lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such Person of a bond in such reasonable amount as Parent may direct as indemnity against any claim that may be made against it with respect to such Stock Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Stock Certificate the Merger Consideration in respect thereof pursuant to this Agreement.

 

(f)            No dividends or other distributions declared or made after the Effective Time with respect to Parent Common Shares or Parent Series A Shares with a record date after the Effective Time shall be paid to the holder of any unsurrendered Stock Certificate or Book-Entry Shares with respect to the Parent Common Shares or Parent Series A Shares that such holder has the right to receive and no cash payment in lieu of fractional shares shall be paid to a holder pursuant to Section 3.4 until the holder of record of such Stock Certificate or Book-Entry Shares has surrendered such Stock Certificate or Book-Entry Shares in accordance with Section 3.3 .  Subject to the effect of applicable laws (including escheat and abandoned property laws), following surrender of any such Stock Certificate or Book-Entry Shares, the record holder of the certificate or certificates representing the Parent Common Shares or Parent Series A Shares issued in exchange therefor shall be paid, without interest, (i) the amount of dividends or other distributions with a record date after the Effective Time theretofore payable with respect to Parent Common Shares or Parent Series A Shares; and (ii) if the payment date for any dividend

 

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or distribution with a record date after the Effective Time with respect to Parent Common Shares or Parent Series A Shares has not occurred prior to the surrender of such Stock Certificate or Book-Entry Shares, at the appropriate payment date therefor, the amount of dividends or other distributions with respect to Parent Common Shares or Parent Series A Shares with a record date after the Effective Time but prior to the surrender of such Stock Certificate or Book-Entry Shares and a payment date subsequent to the surrender of such Stock Certificate or Book-Entry Shares.

 

3.4                       No Fractional Shares.  No fractional Parent Common Shares shall be issued in the Merger and fractional share interests shall not entitle the owner thereof to vote or to any rights of a stockholder of Parent.  In lieu of any fractional interest, each holder of Target Common Shares immediately prior to the Effective Time who would otherwise have been entitled to a fraction of a Parent Common Share upon surrender of Stock Certificates or Book-Entry Shares for exchange pursuant to Section 3.3 shall be paid an amount in cash (without interest) equal to the product obtained by multiplying (A) the fractional share interest to which such former holder (after taking into account all Target Common Shares held at the Effective Time by such holder) would otherwise be entitled by (B) the Average Closing Price.  The “ Average Closing Price ” shall mean the average (rounded to the nearest second decimal place) of the daily closing prices for the Parent Common Shares for the fifteen (15) consecutive full trading days on which such shares are actually traded on the AIM Market of the London Stock Exchange (the “ AIM ”) (as reported in The Wall Street Journal or, if not reported thereby, any other authoritative source selected by Parent) ending at the close of trading on the trading day prior to the Closing Date.

 

3.5                       Target Dissenting Shares.  Target Dissenting Shares shall not be converted into or represent the right to receive any Merger Consideration, but instead shall represent only the right to receive the amount determined pursuant to the provisions of Section 262 of the DGCL.  At the Effective Time, any Target Dissenting Stockholder shall not thereafter be entitled to vote or exercise any other rights of a stockholder except the right to receive payment for such Target Dissenting Stockholder’s Target Dissenting Shares in accordance with Section 262 of the DGCL.  If a Target Dissenting Stockholder has so failed to perfect or lost his right to receive, or has effectively withdrawn his demand for, the amount determined under Section 262 of the DGCL, the Target Common Shares and/or shares of Series D Stock held by such holder shall cease to be Target Dissenting Shares and shall entitle such holder to receive the Merger Consideration in respect of such shares as provided in Section 3.1(b) , and promptly following the occurrence of such event and upon the surrender of the Stock Certificate(s) representing such shares or as proper for Book Entry Shares, the Exchange Agent and the Surviving Corporation (as applicable) shall deliver to such holder the Merger Consideration in respect of such shares.  Target shall comply with those provisions of Section 262 of the DGCL which are required to be performed by Target prior to the Effective Time to the reasonable satisfaction of Parent.  Target shall give Parent (i) prompt notice of any written demands to exercise dissenter’s rights and (ii) an opportunity to participate at its own expense in all negotiations and proceedings with respect to demands for fair value under the DGCL.  Target shall not, except with the prior written consent of Parent (such consent not to be unreasonably withheld or delayed), voluntarily make any payment with respect to demands for fair value under the DGCL or offer to settle or settle any such claims.  For purposes of this Agreement, (i) “ Target Dissenting Shares ” means any Target Common Shares and shares of Series D Stock held by a Target Dissenting Stockholder as of the Effective Time and (ii) “ Target Dissenting Stockholders ” means any holder of Target

 

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Common Shares and/or shares of Series D Stock who does not vote in favor of the Merger (or consent thereto in writing) and who is entitled to demand and properly demands a judicial appraisal of the fair value of such stockholder’s shares pursuant to, and otherwise complies in all respects with, the provisions of Section 262 of the DGCL.

 

3.6                       Closing.  The closing (the “ Closing ”) of the transactions contemplated by this Agreement (the “ Transactions ”) shall take place at 12:00 noon, local time, on the second Business Day following the date on which all of the conditions set forth in Article VIII are satisfied or waived, at the offices of Haynes and Boone, LLP, located at One Houston Center, 1221 McKinney Street, Suite 2100, Houston, Texas 77010, or at such other date and time as Parent and Target shall agree (the “ Closing Date ”).

 

ARTICLE IV

 

REPRESENTATIONS AND WARRANTIES OF TARGET

 

Target represents and warrants to the Parent Parties as follows:

 

4.1                      Organization and Qualification .

 

(a)           Target is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, is duly qualified to do business as a foreign corporation and is in good standing in the jurisdictions set forth in Section 4.1(a) of the disclosure schedule delivered by Target to Parent contemporaneously with the execution hereof (the “ Target Disclosure Schedule ”), which include each jurisdiction in which the character of Target’s properties or the nature of its business makes such qualification necessary, except in jurisdictions, if any, where the failure to be so qualified would not result in a Target Material Adverse Effect (as defined below).  Target has all requisite corporate power and authority to own, use or lease its properties and to carry on its business as it is now being conducted.  Target has made available to Parent a complete and correct copy of its Certificate of Incorporation and Bylaws, each as amended to date, and Target’s Certificate of Incorporation and Bylaws as made available are in full force and effect.  Target is not in default in any respect in the performance, observation or fulfillment of any provision of its Certificate of Incorporation or Bylaws.

 

(b)           The minute books of Target contain true, complete and accurate records of all meetings and consents in lieu of meetings of its Board of Directors (and any committees thereof) and stockholders (“ Corporate Records ”).  Copies of such Corporate Records of Target have been heretofore made available to Parent or Parent’s counsel.

 

(c)           The stock, warrant and option ownership and transfer records of Target contain true, complete and accurate records of the securities ownership as of the date of such records and the transfers involving the capital stock and other securities of Target.  Copies of such records of Target have been heretofore made available to Parent or Parent’s counsel.

 

(d)           Section 4.1(d) of the Target Disclosure Schedule lists the name and jurisdiction of organization of each Subsidiary of Target and the jurisdictions in which each such Subsidiary is qualified or holds licenses to do business as a foreign corporation or other organization as of the date hereof.  Except for Target’s Subsidiaries, Target does not own,

 

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directly or indirectly, any ownership, equity, profits or voting interest in any Person, other than equity interests held for investment that are not, in the aggregate, material to Target (other than joint operating and other ownership arrangements and tax partnerships entered into in the ordinary course of business that, individually or in the aggregate, are not material to the operations or business of Target and Target’s Subsidiaries, taken as a whole, and that do not entail any material liabilities).  Each of Target’s Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, is duly qualified to do business as a foreign corporation and is in good standing in the jurisdictions listed in Section 4.1(d) of the Target Disclosure Schedule, which includes each jurisdiction in which the character of such Subsidiary’s properties or the nature of its business makes such qualification necessary, except in jurisdictions, if any, where the failure to be so qualified would not result in a Target Material Adverse Effect.  Each of Target’s Subsidiaries has the requisite corporate power and authority to own, use or lease its properties and to carry on its business as it is now being conducted and as it is now proposed to be conducted.  Target has made available to Parent a complete and correct copy of the Certificate of Incorporation and Bylaws (or similar organizational documents) of each of Target’s Subsidiaries, each as amended to date, and the Certificate of Incorporation and Bylaws (or similar organizational documents) as made available are in full force and effect.  No Subsidiary of Target is in default in any respect in the performance, observation or fulfillment of any provision of its certificate of incorporation or bylaws (or similar organizational documents).  Other than Target’s Subsidiaries, Target does not beneficially own or control, directly or indirectly, five percent (5%) or more of any class of equity or similar securities of any corporation or other organization, whether incorporated or unincorporated.

 

(e)           Complete and correct copies of the corporate, partnership or limited liability company records of each of Target’s Subsidiaries have been heretofore made available to Parent or Parent’s counsel.

 

(f)            For purposes of this Agreement, (i) a “ Target Material Adverse Effect ” means any event, circumstance, condition, development or occurrence causing, resulting in or having (or with the passage of time likely to cause, result in or have) a material adverse effect on the financial condition, business, assets, properties or results of operations of Target and its Subsidiaries, taken as a whole; provided that, in no event shall any of the following alone or in combination be deemed, in and of itself, to constitute or be taken into account in determining a Target Material Adverse Effect:  any event, circumstance, change or effect that results from (a) changes affecting the national or regional economy generally or the oil and gas industry generally (provided that Target is not disproportionately affected by such changes), (b) changes in the market price of oil or natural gas, (c) the public announcement or pending nature of the Transactions, (d) compliance with the terms of, or taking any action required by, this Agreement, (e) change in the price or trading volume of the Target Common Shares or the Parent Common Shares, (f) the outbreak or escalation of hostilities involving the United States, the declaration by the United States of a national emergency or war or the occurrence of any other calamity or crisis, including acts of terrorism or (g) any change in the accounting requirements or principles imposed on Target or its business by GAAP or any change in applicable law after the date hereof; and (ii) “ Subsidiary ” means, with respect to any party, any corporation or other organization, whether incorporated or unincorporated, of which (x) at least a majority of the securities or other interests having by their terms voting power to elect a majority of the Board of

 

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Directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly beneficially owned or controlled by such party or by any one (1) or more of its subsidiaries, or by such party and one (1) or more of its subsidiaries, or (y) such party or any Subsidiary of such party is a general partner of a partnership or a manager of a limited liability company.

 

4.2                      Capitalization .

 

(a)           The authorized capital stock of Target consists of 100,000,000 Target Common Shares, and 5,000,000 preferred shares (the “ Target Preferred Shares ” and together with the Target Common Shares, the “ Target Shares ”) of which (i) 600 shares have been designated as Target Series A Convertible Preferred Stock, no par value per share; (b) 8,000 shares have been designated as Target Series B Convertible Preferred Stock, no par value per share; (c) 8,000 shares have been designated as Target Series C Convertible Preferred Stock, no par value per share; and (d) 49,116 have been designated as the Series D Stock.  As of the date hereof, Target has (i) 47,273,224 Target Common Shares issued (of which 45,570,147 are outstanding and 1,703,077 are held by Target in treasury), (ii) 23,849 shares of the Series D Stock issued and outstanding (which number does not include 3,416 additional shares of Series D Stock to be issued as of September 28, 2009 in accordance with the terms of the Series D Certificate as a paid-in-kind distribution), (iii) 386,669 Target Restricted Shares issued and outstanding, and (iv) outstanding Target Options to acquire 1,395,463 Target Common Shares under stock option plans or agreements of Target (of which Target Options to purchase an aggregate of 1,020,372 shares of Target Common Shares are exercisable).  There are no bonds, debentures, notes or other indebtedness issued or outstanding having the right to vote with Target’s stockholders, whether together or as a separate class, on any matters on which Target’s stockholders may vote.  All the outstanding Target Common Shares are validly issued, fully paid and nonassessable, and free of preemptive rights.  Except as set forth above or in Section 4.2(a) of the Target Disclosure Schedule, and other than this Agreement, there are no outstanding subscriptions, options, rights, warrants, convertible securities, stock appreciation rights, phantom equity, or other agreements or commitments (including “rights plans” or “poison pills”) obligating Target to issue, transfer, sell, redeem, repurchase or otherwise acquire any shares of its capital stock of any class.  There are no registration rights, and there is no voting trust, proxy, rights plan, antitakeover plan or other agreement, arrangement or other understanding to which Target is a party or by which Target is bound with respect to any equity security of any class of Target.

 

(b)           Except as set forth in Section 4.2(b) of the Target Disclosure Schedule, Target is, directly or indirectly, the record and beneficial owner of all of the outstanding shares of capital stock of each Target Subsidiary, there are no irrevocable proxies with respect to any such shares, and no equity securities of any Target Subsidiary are or may become required to be issued because of any options, warrants, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable or exercisable for, shares of any capital stock of any Target Subsidiary, and there are no contracts, commitments, understandings or arrangements by which Target or any Target Subsidiary is or may be bound to issue additional shares of capital stock of any Target Subsidiary or securities convertible into or exchangeable or exercisable for any such shares.  Except as set forth in Section 4.2(b) of the Target Disclosure Schedule, all of such shares Target owns are validly

 

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issued, fully paid and nonassessable and are owned by it free and clear of all liens, mortgages, pledges, security interests, encumbrances, claims or charges of any kind (collectively, “ Liens ”).

 

(c)           Target Common Shares are listed on the NYSE Amex under the symbol “CFW.”  No action or proceeding is pending or, to the knowledge of Target, threatened against Target by the NYSE Amex or any other Governmental Authority regulating issuers on NYSE Amex with respect to Target or Target Common Shares.  For purposes of this Agreement, phrases such as “ knowledge of Target ” and similar terms mean the current knowledge, after due inquiry, of any Vice President (including the corporate officer with responsibility for human resources and employee benefits) or the President, Chief Executive Officer or Chairman of Target.

 

4.3                       Authority. Target has full corporate power and authority to execute and deliver this Agreement and any ancillary agreements (the “ Ancillary Agreements ”) to which Target is or will be a party and, subject to obtaining the Target Stockholders’ Approval, to consummate the Transactions.  The execution, delivery and performance of this Agreement and the Ancillary Agreements to which Target is or will be a party and the consummation of the Transactions have been duly and validly authorized by Target’s Board of Directors, and no other corporate proceedings on the part of Target are necessary to authorize this Agreement and the Ancillary Agreements to which Target is or will be a party or to consummate the Transactions, other than the Target Stockholders’ Approval.  This Agreement has been, and the Ancillary Agreements to which Target is or will be a party are, or upon execution will be, duly and validly executed and delivered by Target and, assuming the due authorization, execution and delivery hereof and thereof by the other parties hereto and thereto, constitutes, or upon execution will constitute, valid and binding obligations of Target enforceable against Target in accordance with their respective terms, except as such enforceability may be subject to the effects of bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting the rights of creditors and of general principles of equity (the “ Enforceability Exception ”).

 

4.4                       Consents and Approvals; No Violation.  The execution and delivery of this Agreement, the consummation of the Transactions and the performance by Target of its obligations hereunder will not:

 

(a)           subject to receipt of the Target Stockholders’ Approval, conflict with any provision of Target’s Certificate of Incorporation or Bylaws, as amended, or the Certificate of Incorporation or Bylaws (or other similar organizational documents) of any of Target’s Subsidiaries;

 

(b)           subject to obtaining the Target Stockholders’ Approval and the filing of the Certificate of Merger with the Secretary of State of Delaware, require any consent, waiver, approval, order, authorization or permit of, or registration, filing with or notification to, (i) any Governmental Authority, except for applicable requirements of the Hart Scott Rodino Antitrust Improvements Act of 1976, as amended (the “ HSR Act ”), the Securities Act of 1933, as amended (the “ Securities Act ”), the Securities Exchange Act of 1934 (the “ Exchange Act ”), state laws relating to takeovers, if applicable, state securities or blue sky laws, except for approvals that are ministerial in nature and are customarily obtained from Governmental Authorities after the Effective Time in connection with transactions of the same nature as are contemplated hereby

 

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(“ Customary Post-Closing Consents ”) or (ii) except as set forth in Section 4.4(b) of the Target Disclosure Schedule, any third party other than a Governmental Authority, other than such non-Governmental Authority third party consents, waivers, approvals, orders, authorizations and permits that would not (i) result in a Target Material Adverse Effect, (ii) materially impair the ability of Target or any of its Subsidiaries, as the case may be, to perform its obligations under this Agreement or any Ancillary Agreement or (iii) prevent the consummation of any of the Transactions;

 

(c)           except as set forth in Section 4.4(c) of the Target Disclosure Schedule, result in any violation of or the breach of or constitute a default (with notice or lapse of time or both) under, or give rise to any right of termination, cancellation or acceleration or guaranteed payments or a loss of a material benefit under, any of the terms, conditions or provisions of any note, lease, mortgage, license, agreement or other instrument or obligation to which Target, or any of its Subsidiaries, is a party or by which Target or any of its Subsidiaries or any of their respective properties or assets may be bound, except for such violations, breaches, defaults, or rights of termination, cancellation or acceleration, or losses as to which requisite waivers or consents have been obtained or which, individually or in the aggregate, would not (A) result in a Target Material Adverse Effect, (B) materially impair the ability of Target or any of its Subsidiaries to perform their obligations under this Agreement or any Ancillary Agreement or (C) prevent the consummation of any of the Transactions;

 

(d)           except as set forth in Section 4.4(d) of the Target Disclosure Schedule,   violate the provisions of any order, writ, injunction, judgment, decree, statute, rule or regulation applicable to Target or any of its Subsidiaries;

 

(e)           except as set forth in Section 4.4(e) of the Target Disclosure Schedule, result in the creation of any Liens upon any shares of capital stock or material properties or assets of Target or any of its Subsidiaries under any agreement or instrument to which Target or any of its Subsidiaries is a party or by which Target or any of its Subsidiaries or any of their properties or assets is bound; or

 

(f)            except as set forth in Section 4.4(f) of the Target Disclosure Schedule, result in any holder of any securities of Target being entitled to appraisal, dissenters’ or similar rights.

 

4.5                      Target SEC Reports .

 

(a)           Target has filed with the Securities and Exchange Commission (the “ SEC ”), and has heretofore made available to Parent, true and complete copies of, each form, registration statement, report, schedule, proxy, announcement or information statement and other document (including exhibits and amendments thereto), including its annual reports to stockholders incorporated by reference in certain of such reports, required to be filed by it with the SEC since January 1, 2004 under the Securities Act or the Exchange Act (collectively, the “ Target SEC Reports ”).  As of the respective dates the Target SEC Reports were filed or, if any Target SEC Reports were amended, as of the date such amendment was filed, each Target SEC Report, including any financial statements or schedules included therein, (a) complied in all material respects with all applicable requirements of the Securities Act and the Exchange Act, as

 

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the case may be, and the applicable rules and regulations promulgated thereunder, and (b) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.  No event since the date of the last Target SEC Report has occurred that would require Target to file a Current Report on Form 8-K other than the execution of this Agreement.

 

(b)           The Chief Executive Officer and Chief Financial Officer of Target have made all certifications (without qualification or exceptions to the matters certified) required by, and would be able to make such certifications (without qualification or exception to the matters certified) as of the date hereof and as of the Closing Date as if required to be made as of such dates pursuant to, the Sarbanes-Oxley Act of 2002 (the “ Sarbanes-Oxley Act ”), as amended, and any related rules and regulations promulgated by the SEC, and the statements contained in any such certifications are complete and correct; neither Target nor its officers has received notice from any Governmental Entity questioning or challenging the accuracy, completeness, form or manner of filing or submission of such certification.  Except as set forth in Section 4.6 of the Target Disclosure Schedule, Target maintains “disclosure controls and procedures” (as defined in Rule 13a-14(c) under the Exchange Act); such disclosure controls and procedures are effective to ensure that all material information concerning Target and its Subsidiaries is made known on a timely basis to the individuals responsible for preparing Target’s SEC filings and other public disclosures, and Target is otherwise in substantial compliance with all applicable provisions of the Sarbanes-Oxley Act and the applicable listing standards of the NYSE Amex.

 

4.6                       Financial Statements.  Each of the audited consolidated financial statements and unaudited consolidated interim financial statements of Target (including any related notes and schedules) included (or incorporated by reference) in its Annual Reports on Form 10-K for each of the three (3) fiscal years ended June 30, 2007, 2008 and 2009 and its Quarterly Reports on Form 10-Q for its fiscal quarters ended September 30, 2008, December 31, 2008 and March 31, 2009 (collectively, the “ Target Financial Statements ”) have been prepared from, and are in accordance with, the books and records of Target and its consolidated Subsidiaries, comply in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles (“GAAP”) applied on a consistent basis (except as may be indicated in the notes thereto and subject, in the case of quarterly financial statements, to normal and recurring year-end adjustments) and fairly present, in conformity with GAAP applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of Target and its Subsidiaries as of the date thereof and the consolidated results of operations and cash flows (and changes in financial position, if any) of Target and its Subsidiaries for the periods presented therein (subject to normal year-end adjustments and the absence of financial footnotes in the case of any unaudited interim financial statements).

 

4.7                       Absence of Undisclosed Liabilities; Liabilities as of Year End.  Except (a) as set forth in Section 4.7 of the Target Disclosure Schedule and (b) for liabilities and obligations incurred in the ordinary course of business and consistent with past practice since June 30, 2009, neither Target nor any of its Subsidiaries has incurred any liabilities or obligations of any nature (contingent or otherwise) that would have a Target Material Adverse Effect or would be required

 

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by GAAP to be reflected on a consolidated balance sheet of Target and its Subsidiaries or the notes thereto which are not reflected.

 

4.8                       Absence of Certain Changes.  Except as set forth in Section 4.8 of the Target Disclosure Schedule or as contemplated by this Agreement, since June 30, 2009 (a) Target and its Subsidiaries have conducted their respective businesses only in the ordinary course of business consistent with past practices, (b) there has not been any change or development, or combination of changes or developments that, individually or in the aggregate, would have a Target Material Adverse Effect, (c) there has not been any declaration, setting aside for payment of any dividend or other distribution with respect to any shares of capital stock of Target, or any repurchase, redemption or other acquisition by Target or any of its Subsidiaries of any outstanding shares of capital stock or other securities of, or other ownership interests in, Target or any of its Subsidiaries, (d) there has not been any amendment of any term of any outstanding security of Target or any of its Subsidiaries, and (e) there has not been any change in any method of accounting or accounting practice by Target or any of its Subsidiaries, except for any such change required because of a concurrent change in GAAP or to conform a Subsidiary’s accounting policies and practices to those of Target.

 

4.9                       Taxes.          Except as otherwise disclosed in Section 4.9 of the Target Disclosure Schedule and for matters that would not have a Target Material Adverse Effect:

 

(a)           Target and each of its Subsidiaries have timely filed (or have had timely filed on their behalf) or will file or cause to be timely filed, all material Tax Returns (as defined below) required by applicable law to be filed by any of them prior to or as of the Closing Date.  As of the time of filing, the foregoing Tax Returns correctly reflected the material facts regarding the income, business, assets, operations, activities, status, or other matters of Target or any other information required to be shown thereon.  In particular, the foregoing tax returns are not subject to penalties under Section 6662 of the Code, relating to accuracy related penalties (or any corresponding provision of the state, local or foregoing Tax law) or any predecessor provision of law.  An extension of time within which to file a Tax Return has not been requested or granted.

 

(b)           Target and each of its Subsidiaries have paid (or have had paid on their behalf), or where payment is not yet due, have established (or have had established on their behalf and for their sole benefit and recourse), or will establish or cause to be established on or before the Closing Date, an adequate accrual for the payment of all material Taxes (as defined below) due with respect to any period ending prior to or as of the Closing Date.  Target and each of its Subsidiaries have withheld and paid all Taxes required to have been withheld and paid in connection with any amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party.

 

(c)           No Audit (as defined below) by a Tax Authority (as defined below) is pending or to the knowledge of Target, threatened, with respect to any Tax Returns filed by, or Taxes due from, Target or any Subsidiary.  No issue has been raised by any Tax Authority in any Audit of Target or any of its Subsidiaries that if raised with respect to any other period not so audited could be expected to result in a material proposed deficiency for any period not so audited.  No material deficiency or adjustment for any Taxes has been proposed, asserted, assessed or, to the knowledge of Target, threatened, against Target or any of its Subsidiaries.

 

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There are no liens for Taxes upon the assets of Target or any of its Subsidiaries, except liens for current Taxes not yet delinquent.

 

(d)           Neither Target nor any of its Subsidiaries has given or been requested to give any waiver of statutes of limitations relating to the payment of Taxes or have executed powers of attorney with respect to Tax matters, which will be outstanding as of the Closing Date.

 

(e)           Prior to the date hereof, Target and its Subsidiaries have disclosed and provided or made available to Parent true and complete copies of, all material Tax sharing, Tax indemnity, or similar agreements to which Target or any of its Subsidiaries is a party to, is bound by, or has any obligation or liability for Taxes.

 

(f)            In this Agreement, (i) “ Audit ” means any audit, assessment of Taxes, other examination by any Tax Authority, proceeding or appeal of such proceeding relating to Taxes; (ii) “ Taxes ” means all Federal, state, local and foreign taxes, and other assessments of a similar nature (whether imposed directly or through withholding), including any interest, additions to tax, or penalties applicable thereto; (iii) “ Tax Authority ” means the Internal Revenue Service and any other domestic or foreign Governmental Authority responsible for the administration of any Taxes; and (iv) “ Tax Returns ” means all Federal, state, local and foreign tax returns, declarations, statements, reports, schedules, forms and information returns and any amended Tax Return relating to Taxes.

 

(g)           Except for the group of which Target is currently a member, Target has never been a member of an affiliated group of corporations, within the meaning of Section 1504 of the Code.

 

(h)           Target has not agreed to make nor is it required to make any adjustment under Section 481(a) of the Code by reason of change in accounting method or otherwise.

 

(i)            None of the Target or any of its Subsidiaries has a liability for Taxes of any Person (other than Target and its Subsidiaries) under Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract or otherwise.

 

(j)            Neither Target nor any of its subsidiaries has distributed stock of another Person, or has had its stock distributed by another Person in a transaction that was purported or intended to be governed in whole or in part by Code Section 355 or 361.

 

4.10                     Litigation.  Except as disclosed in Section 4.10 of the Target Disclosure Schedule, there is no suit, claim, action, proceeding or investigation pending or, to Target’s knowledge, threatened against or directly affecting Target, any Subsidiaries of Target or any of the directors or officers of Target or any of its Subsidiaries in their capacity as such, nor is there any reasonable basis therefor that could reasonably be expected to have a Target Material Adverse Effect, if adversely determined.  Except as disclosed in Section 4.10 of the Target Disclosure Schedule, neither Target nor any of its Subsidiaries, nor any officer, director or employee of Target or any of its Subsidiaries has been permanently or temporarily enjoined by any order, judgment or decree of any court or any other Governmental Authority from engaging in or continuing any conduct or practice in connection with the business, assets or properties of

 

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Target or such Subsidiary nor, to the knowledge of Target, is Target, any Subsidiary or any officer, director or employee of Target or any of its Subsidiaries under investigation by any Governmental Authority.  Except as disclosed in Section 4.10 of the Target Disclosure Schedule, there is no order, judgment or decree of any court or other tribunal or other agency extant enjoining or requiring Target or any of its Subsidiaries to take any action of any kind with respect to its business, assets, properties, employees or former employees.  Notwithstanding the foregoing, no representation or warranty in this Section 4.10 is made with respect to Environmental Laws, which are covered exclusively by the provisions set forth in Section 4.12 .

 

4.11                    Employee Benefit Plans; ERISA .

 

(a)         Target has entered into a Client Service Agreement with Administaff Companies II, L.P. or its affiliate (the “ Administaff Agreement ”) under which Administaff Companies II, L.P. (or its affiliate) and Target are co-employers of the individuals performing services for Target and its Subsidiaries. Pursuant to the Administaff Agreement, Administaff Companies II, L.P. or its affiliate is responsible for, among other things, paying salaries and wages, complying with reporting and payment of federal and state payroll taxes, and providing benefits to the individuals performing services for Target and its Subsidiaries.  Target has complied in all material respects with its responsibilities under the Administaff Agreement.

 

(b)        Section 4.11(b) of the Target Disclosure Schedule lists as of the date of this Agreement all “employee benefit plans,” as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”), and all other material employee compensation and benefit plans, agreements, programs, policies or other arrangements, including, without limitation, any employment or service agreements (except for offer letters providing for at will employment that do not provide for severance, acceleration or post termination benefits and other at will arrangements that may be terminated without notice by and at no expense or liability to Target, any Target Subsidiary, or any Target ERISA Affiliate), severance, short-term and long-term disability, paid leave, vacation pay, consulting or other compensation agreements, deferred compensation, bonus, long-term incentive programs in the form of restricted stock grants, stock option grants or other equity or phantom equity, supplemental unemployment, medical insurance including medical, dental, vision, and prescription coverage, life and accidental death and dismemberment insurance, tuition aid reimbursement, relocation assistance, employee or former employee loans in excess of $10,000, expatriate benefits, retiree medical and life insurance (1) maintained or sponsored by Administaff Companies II, L.P. or an affiliate thereof for the benefit of one (1) or more employees (or their eligible dependents) of Target, any of its Subsidiaries or any Target ERISA Affiliate (the “ Administaff Plans ”) or (2) maintained or sponsored by Target or any of its Subsidiaries or any Target ERISA Affiliate or to which Target or any of its Subsidiaries or any Target ERISA Affiliate contributes or is obligated to contribute, other than the Administaff Plans (the “ Target Benefit Plans ”).  A “ Target ERISA Affiliate ” is any trade or business, whether or not incorporated, which together with Target would be deemed a “single employer” within the meaning of Section 414(b), (c) or (m) of the Code or Section 4001(b)(1) of ERISA.

 

(c)         Target has not, since July 30, 2002, extended credit, arranged for the extension of credit, or renewed, modified or forgiven an extension of credit made prior to such

 

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date, in the form of a personal loan to or for any Person who was, at any time since such date, an officer or director of the Target.

 

(d)        Prior to the date of this Agreement, Target has made available to Parent a true, correct and complete copy of each of the Target Benefit Plans (and all amendments thereto) and any related plan documents (including adoption agreements, vendor Contracts and administrative services agreements, trust documents, insurance policies or contracts including policies relating to fiduciary liability insurance, bonds required by ERISA, other authorizing documents, employee booklets, summary plan descriptions, registration statements and prospectuses, investment policy statements, and summaries of material modifications and any material employee communications relating thereto) and has, with respect to each Target Benefit Plan that is subject to ERISA reporting requirements, made available to Parent true, correct and complete copies of the Form 5500 reports filed for the last three (3) plan years (including all audits, financial statements, schedules and attachments thereto) and all notices that were given to Target or a Target Benefit Plan by the Internal Revenue Service, Department of Labor, or other Governmental Authority or entity concerning any Target Benefit Plan.

 

Each of Target and each Target Subsidiary has made available to Parent a true, correct and complete list of the names of all current officers, directors, and consultants of Target and each Target Subsidiary showing each such Person’s name, position, location, and rate of annual remuneration.

 

Each of Target and each Target Subsidiary has made available to Parent true, correct and complete copies of each of the following:

 

(i)            all forms of employment offer letters,

 

(ii)           all forms of employment agreements and severance agreements,

 

(iii)          all forms of services agreements and forms of agreements with current and former consultants and/or advisory board members,

 

(iv)          all forms of confidentiality, non-competition, non-solicitation and/or invention or similar agreements by and between current and former employees, consultants and/or others (and a true, correct and complete list of employees, consultants and/or others not subject thereto),

 

(v)           all management organization chart(s),

 

(vi)          all agreements and/or insurance policies providing for the indemnification of any officers or directors,

 

(vii)         Target’s standard severance policy,

 

(viii)        a summary of outstanding liability for termination payments and benefits to current and former directors, officers, employees and consultants,

 

(ix)           a schedule of bonus commitments made to employees, and

 

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(x)            all written personnel policies.

 

(e)         With respect to each Target Benefit Plan and, and to the knowledge of Target, with respect to each Administaff Plan:

 

(i)            if intended to qualify under Section 401(a) or 401(k) of the Code, such plan satisfies the requirements of such sections, has received a favorable determination letter from the Internal Revenue Service with respect to its qualification (or has been established under a standardized master and prototype or volume submitter plan for which a current favorable Internal Revenue Service advisory letter or opinion letter has been obtained by the plan sponsor and is valid as to the adopting employer), and its related trust has been determined to be exempt from tax under Section 501(a) of the Code and, to the knowledge of Target, nothing has occurred since the date of such letter to adversely affect such qualification or exemption;

 

(ii)           each such plan has been administered in all material respects in compliance with its terms and applicable law (including ERISA and the Code);

 

(iii)          neither Target nor any Target ERISA Affiliate has engaged in, and Target and each Target ERISA Affiliate do not have any knowledge of any Person that has engaged in, any transaction or acted or failed to act in any manner that would subject Target or any Target ERISA Affiliate to any liability for a breach of fiduciary duty under ERISA;

 

(iv)          no suit, administrative proceeding, action or other litigation is pending or, to the knowledge of Target or any Target ERISA Affiliate, threatened against Target or any Target ERISA Affiliate, including any audit or inquiry by the Internal Revenue Service or United States Department of Labor;

 

(v)           there have been no “reportable events” within the meaning of Section 4043 of ERISA for which the thirty (30) day notice requirement of ERISA has not been waived by the Pension Benefit Guaranty Corporation (the “ PBGC ”);

 

(vi)          all contributions due have been made on a timely basis (within, where applicable, the time limit established under Section 302 of ERISA or Section 412 of the Code) with respect to individuals performing services for Target and its Subsidiaries and, to the extent required by GAAP, all amounts have been accrued for the current plan year and no further contributions will be due or will have accrued thereunder as of the Closing Date, other than contributions accrued in the ordinary course of business, consistent with past practice;

 

(vii)         no notice of intent to terminate any Target Benefit Plan, or any Administaff Plan, has been given under Section 4041 of ERISA and no proceeding has been instituted under Section 4042 of ERISA to terminate any Target Benefit Plan or any Administaff Plan;

 

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(viii)        Target has made available to Parent a true, correct and complete copy of the most recent Internal Revenue Service determination letter, advisory letter or opinion letter issued with respect to each Target Benefit Plan and Administaff Plan;

 

(ix)           Target, each Target Subsidiary and each Target ERISA Affiliate have performed all obligations required to be performed by them under, are not in any material respect in default under or in violation of, and have no knowledge of any material default or in violation by any other party to, such plan;

 

(x)            with respect to each such plan intended to include a Code Section 401(k) arrangement, Target and each Target Subsidiary and Target ERISA Affiliate have at all times made timely deposits of employee salary reduction contributions and participant loan repayments, as determined pursuant to regulations issued by the United States Department of Labor;

 

(xi)           each Target Benefit Plan may be terminated on a prospective basis with any notice required by such plan without any continuing liability for benefits other than benefits accrued to the date of such termination and each Administaff Plan may be terminated with respect to individuals performing services for Target and its Subsidiaries on a prospective basis with any notice required by such plan without any continuing liability for benefits other than benefits accrued to the date of such termination;

 

(xii)          all contributions made or required to be made by Target or any Target ERISA Affiliate under any Target Benefit Plan or any Administaff Plan, meet the requirements (if any) for deductibility under the Code; and

 

(xiii)         all individuals (i) who, pursuant to the terms of any Target Benefit Plan, are entitled to participate in any Target Benefit Plan, are currently participating in such Target Benefit Plan or have been offered an opportunity to do so; and (ii) performing services for Target and its Subsidiaries who, pursuant to the terms of any Administaff Plan, are entitled to participate in any Administaff Plan, are currently participating in such Administaff Plan or have been offered an opportunity to do so.

 

With respect to the Target Benefit Plans and the Administaff Plans, neither Target nor any Target ERISA Affiliate has engaged in, and Target and each Target ERISA Affiliate do not have any knowledge of any Person that has engaged in, any “prohibited transaction” (within the meaning of Section 406 of ERISA and Section 4975 of the Code) for which no exemption exists under Section 408 of ERISA or Section 4975(c) of the Code or Section 4975(d) of the Code.

 

(f)            Neither Target nor any Target Subsidiary or Target ERISA Affiliate is a party to, or has ever made any contribution to or otherwise incurred any obligation under, any “multiemployer plan” as such term is defined in Section 3(37) of ERISA or any “multiple employer plan” as such term is defined in Section 413(c) of the Code.  There has been no termination or partial termination of any Target Benefit Plan within the meaning of

 

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Section 411(d)(3) of the Code.  Neither Target nor any Target ERISA Affiliate has ever established, maintained or contributed to, or had an obligation to maintain or contribute to, any “employee benefit plan” within the meaning of Section 3(3) of ERISA that is subject to Title IV of ERISA or Section 412 of the Code.

 

No event has occurred with respect to Target or a Target ERISA Affiliate in connection with which Target or any Target Subsidiary could be subject to any liability, lien or encumbrance with respect to any Target Benefit Plan or, to the knowledge of Target, any Administaff Plan or any employee benefit plan described in Section 3(3) of ERISA maintained, sponsored or contributed to by a Target ERISA Affiliate under ERISA or the Code, except for regular contributions and benefit payments in the ordinary course of plan business.

 

Except as provided in Section 4.11(f) of the Target Disclosure Schedule, neither Target nor any Target Subsidiary nor any Target ERISA Affiliate sponsors or maintains any self-funded employee benefit plan, including any plan to which a stop-loss policy applies.

 

(g)           Except as set forth in Section 4.11(g) of the Target Disclosure Schedule, no present or former employees of Target or any Target Subsidiary are covered by any agreements or plans that provide or will provide severance pay, post-termination health or life insurance benefits (other than as required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”) or applicable state law) or any similar benefits.

 

(h)           Except as set forth in Section 4.11(h) of the Target Disclosure Schedule, the consummation of the Transactions shall not cause any payments or benefits to any employee to be either subject to an excise tax under Sections 4999 of the Code or non-deductible to Target under Section 280G or 162(m) of the Code.  Section 4.11(h) of the Target Disclosure Schedule lists each Person who Target reasonably believes is, with respect to Target, any Target Subsidiary and/or any Target ERISA Affiliate, a “disqualified individual” (within the meaning of Section 280G of the Code and the regulations promulgated thereunder) determined as of the date hereof.

 

(i)            Except as disclosed in Section 4.11(i) of the Target Disclosure Schedule, none of the execution and delivery of this Agreement, the consummation of the Merger or any other transaction contemplated hereby or any termination of employment or service in connection therewith or subsequent thereto will:

 

(i)            result in any payment (including severance, supplemental unemployment compensation, golden parachute, bonus or otherwise) becoming due to any current or former employee, officer, director, independent contractor, or consultant of Target or any Target Subsidiary other than accrued payments;

 

(ii)           materially increase or otherwise enhance any benefits otherwise payable to any current or former employee, officer, director, independent contractor, or consultant of Target or any Target Subsidiary by Target or any Target Subsidiary;

 

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(iii)          result in the acceleration of the time of payment or vesting of any such benefits, except as required under Section 411(d)(3) of the Code;

 

(iv)          increase the amount of compensation due to any current or former employee, officer, director, independent contractor, or consultant of Target or any Target Subsidiary; or

 

(v)           result in the forgiveness in whole or in part of any outstanding loans made by Target or any Target Subsidiary to any current or former employee, officer, director, independent contractor, or consultant of Target or any Target Subsidiary.

 

(j)            With respect to each Target Benefit Plan subject to ERISA as either an “employee pension benefit plan” within the meaning of Section 3(2) of ERISA or an “employee welfare benefit plan” within the meaning of Section 3(1) of ERISA, Target has prepared in good faith and timely filed all requisite governmental reports (which were true, correct and complete as of the date filed), including any required audit reports, and has properly and timely filed and distributed or posted all notices and reports to employees required to be filed, distributed or posted with respect to each such Target Benefit Plan and, with respect to each Administaff Plan subject to ERISA as either an “employee pension benefit plan” within the meaning of Section 3(2) of ERISA or an “employee welfare benefit plan” within the meaning of Section 3(1) of ERISA, to the knowledge of Target, there has been prepared in good faith and timely filed all requisite governmental reports (which were true, correct and complete as of the date filed), including any required audit reports, and there has been properly and timely filed and distributed or posted all notices and reports to employees required to be filed, distributed or posted with respect to each such Administaff Plan.

 

(k)           Each compensation and benefit plan required to be maintained or contributed to by the law or applicable custom or rule of the relevant jurisdiction outside of the United States (each such plan, a “ Foreign Plan ”) is listed in Section 4.11(k)  of the Target Disclosure Schedule except for plans maintained by Governmental Authorities.  As regards each Foreign Plan: (i) such Foreign Plan is in compliance with the provisions of the laws of each jurisdiction in which such Foreign Plan is maintained, to the extent those laws are applicable to such Foreign Plan; (ii) the Target, each Target Subsidiary, and each Target ERISA Affiliate has complied with all applicable reporting and notice requirements, and such Foreign Plan has obtained from the Governmental Authority having jurisdiction with respect to such Foreign Plan any required determinations, if any, that such Foreign Plan is in compliance with the laws of the relevant jurisdiction if such determinations are required in order to give effect to such Foreign Plan; and (iii) such Foreign Plan has been administered in accordance with its terms and applicable law and regulations.

 

(l)            Section 4.11(l)  of the Company Disclosure Schedule lists as of the date of this Agreement each employee of Target or any Target Subsidiary who is absent from work or not fully available to perform work according to his or her regular schedule because of a physical or mental impairment or other approved leave and also lists, with respect to each such employee, the basis of such leave and the anticipated date of return to full service.  Section 4.11(l)  of the Company Disclosure Schedule also lists as of the date of this Agreement each employee or

 

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former employee of Target or any Target Subsidiary who has applied for within the previous six (6) months or who is receiving short-term-disability, long-term-disability or similar benefits.

 

(m)          Each Target Benefit Plan and, to the knowledge of Target, each Administaff Plan that is a “nonqualified deferred compensation plan” (as defined in Section 409A(d)(1) of the Code) (i) was operated from January 1, 2005 through December 31, 2008 in good faith compliance with Section 409A of the Code, IRS Notice 2005-1, and the Treasury Regulations issued pursuant to Section 409A of the Code, (ii) has been operated since January 1, 2009 in compliance with Section 409A of the Code and the final Treasury Regulations issued pursuant to Section 409A of the Code, and (iii) no nonqualified deferred compensation plan that is grandfathered pursuant to Section 409A of the Code has been “materially modified” (within the meaning of the applicable guidance issued pursuant to Section 409A of the Code) at any time after October 3, 2004.

 

(n)           Attached as Section 4.11(n)  of the Target Disclosure Schedule is (i) a summary or copy of Target’s severance policy, (ii) a severance package table which lists the maximum amount of all cash amounts that may be paid to Target’s employees as a result of or in connection with a severance from employment, and (iii) a list of employees of Target with written employment agreements, written letter agreements or agreements covered by resolution of the Target’s Board of Directors addressing specific employees.

 

(o)           Except as set forth in Section 4.11(o)  of the Target Disclosure Schedule, no employee, independent contractor, or director of Target, any Target Subsidiary, or any Target ERISA Affiliate is eligible to receive, based on the actions of Target, any Target Subsidiary, or any Target ERISA Affiliate prior to the Effective Time, any bonus or other payment that is calculated by reference to, or otherwise based upon, the financial results or performance of Target, any Target Subsidiary, or any Target ERISA Affiliate for all or any portion of the fiscal year ending June 30, 2010.

 

4.12                    Environmental Liability. Except as set forth in Section 4.12 of the Target Disclosure Schedule or as could not reasonably be expected to result in liabilities that have a Target Material Adverse Effect:

 

(a)           The businesses of Target and its Subsidiaries have been and are operated in material compliance with all applicable federal, state and local statutes, ordinances, restrictions, licenses, rules, orders, regulations, permit conditions, injunctive obligations, standards, and legal requirements relating to the protection of the environment and human health, including the common law and the Federal Clean Water Act, Safe Drinking Water Act, Resource Conservation & Recovery Act, Clean Air Act, Outer Continental Shelf Lands Act, Comprehensive Environmental Response, Compensation and Liability Act, and Emergency Planning and Community Right to Know Act, and their respective state statute counterparts each as amended and currently in effect (together, “ Environmental Laws ”).

 

(b)           Neither Target nor any of its Subsidiaries has caused or allowed the generation, treatment, manufacture, processing, distribution, use, storage, discharge, release, disposal, transport or handling of any chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum, petroleum products or any substance regulated

 

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under any Environmental Law (together, “ Hazardous Substances ”), except in material compliance with all Environmental Laws, and, to Target’s knowledge, no generation, treatment, manufacture, processing, distribution, use, storage, discharge, release, disposal, transport or handling of any Hazardous Substances has occurred at any property or facility owned, leased or operated by Target for any of its Subsidiaries except in material compliance with all Environmental Laws.

 

(c)           Neither Target nor any of its Subsidiaries has received any written notice from any Governmental Authority or third party or, to the knowledge of Target, any other communication alleging or concerning any material violation by Target or any of its Subsidiaries of, or responsibility or liability of Target or any of its Subsidiaries under any Environmental Law.  There are no pending, or to the knowledge of Target, threatened, claims, suits, actions, proceedings or investigations with respect to the businesses or operations of Target or any of its Subsidiaries alleging or concerning any material violation of, or responsibility or liability under, any Environmental Law, nor does Target have any knowledge of any fact or condition that could give rise to such a claim, suit, action, proceeding or investigation.

 

(d)           Target and its Subsidiaries have obtained and are in compliance with all material approvals, permits, licenses, registrations and similar authorizations from all Governmental Authorities under all Environmental Laws required for the operation of the businesses of Target and its Subsidiaries as currently conducted (“ Target Permits ”); there are no pending or, to the knowledge of Target, threatened, actions, proceedings or investigations alleging violations of or seeking to modify, revoke or deny renewal of any of such approvals, permits, licenses, registrations and authorizations; and Target does not have knowledge of any fact or condition that is reasonably likely to give rise to any action, proceeding or investigation regarding the violation of or seeking to modify, revoke or deny renewal of any of such approvals, permits, licenses, registrations and authorizations.

 

(e)           Without in any way limiting the generality of the foregoing, (i) to Target’s knowledge, all offsite locations where Target or any of its Subsidiaries has transported, released, discharged, stored, disposed or arranged for the disposal of Hazardous Substances are licensed and operating as required by law and (ii) to Target’s knowledge, no polychlorinated biphenyls (“ PCBs ”), PCB-containing items, asbestos-containing materials, or radioactive materials are used or stored at any property owned, leased or operated by Target or any of its Subsidiaries except in material compliance with Environmental Laws.

 

(f)            No claims have been asserted or, to Target’s knowledge, threatened to be asserted against Target or its Subsidiaries for any personal injury (including wrongful death) or property damage (real or personal) arising out of alleged exposure or otherwise related to Hazardous Substances used, handled, generated, transported or disposed by Target or its Subsidiaries.

 

4.13                    Compliance with Applicable Laws .

 

(a)           Target and each of its Subsidiaries hold all material approvals, licenses, permits, registrations and similar authorizations necessary for the lawful conduct of their respective businesses, as now conducted, and such businesses are not being, and neither Target

 

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nor any of its Subsidiaries have received any notice from any Person that any such business has been or is being, conducted in violation of any law, ordinance or regulation, including any law, ordinance or regulation relating to occupational health and safety, except for possible violations that either individually or in the aggregate have not resulted and would not result in a Target Material Adverse Effect; provided, however, no representation or warranty in this Section 4.13 is made with respect to Environmental Laws, which are covered exclusively in Section 4.12 .

 

(b)           Neither Target, any Subsidiary of Target, nor, to the knowledge of Target, any director, officer, agent, employee or other person acting on behalf of Target or any of its Subsidiaries, has used any corporate or other funds for unlawful contributions, payments, gifts, or entertainment, or made any unlawful expenditures relating to political activity to government officials or others, or established or maintained any unlawful or unrecorded funds in violation of the Foreign Corrupt Practices Act of 1977, as amended, or any other domestic or foreign law.

 

4.14                     Insurance. Section 4.14 of the Target Disclosure Schedule lists each insurance policy of Target and its Subsidiaries currently in effect.  Target has made available to Parent a true, complete and correct copy of each such policy and the binder therefor.  With respect to each such insurance policy or binder none of Target, any of its Subsidiaries or, to Target’s knowledge, any other party to the policy is in breach or default thereunder (including with respect to the payment of premiums or the giving of notices), and Target does not know of any occurrence or any event which (with notice or the lapse of time or both) would constitute such a breach or default or permit termination, modification or acceleration under the policy, except for such breaches or defaults which, individually or in the aggregate, would not result in a Target Material Adverse Effect.  Section 4.14 of the Target Disclosure Schedule describes any self-insurance arrangements affecting Target or its Subsidiaries.  To Target’s knowledge, the insurance policies listed in Section 4.14 of the Target Disclosure Schedule include all policies which are required in connection with the operation of the businesses of Target and its Subsidiaries as currently conducted by applicable laws and all agreements relating to Target and its Subsidiaries.

 

4.15                    Labor Matters; Employees.

 

(a)           Except as set forth in Section 4.15 of the Target Disclosure Schedule, (i) there is no labor strike, dispute, slowdown, work stoppage, lockout or other similar labor controversy actually pending or, to the knowledge of Target, threatened against or affecting Target or any of its Subsidiaries and, during the past five (5) years, there has not been any such action, (ii) none of Target or any of its Subsidiaries is a party to, bound by, or negotiating any collective bargaining or similar agreement with any labor organization (as that term is defined in the National Labor Relations Act, as amended), or work rules or practices with any labor organization or employee association applicable to employees of Target or any of its Subsidiaries, (iii) none of the employees of Target or any of its Subsidiaries are represented by any labor organization, none of Target or any of its Subsidiaries have any knowledge of any current union organizing activities among the employees of Target or any of its Subsidiaries nor does any question concerning representation exist concerning such employees, and neither Target nor any of its Subsidiaries have experienced any union organizational campaigns, petitions, or other unionization activities within the past three (3) years, (iv) Target and its Subsidiaries have each at all times within the past three (3) years been in material compliance

 

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with all applicable laws respecting employment and employment practices, equal employment opportunity, wages, labor relations, hours of work and overtime, worker classification, employment-related immigration and authorization to work in the United States, occupational safety and health, and privacy of health information, and are not engaged in any unfair labor practices as defined in the National Labor Relations Act or other applicable law, ordinance or regulation, (v) there is no unfair labor practice charge or complaint or any union representation question or certification petition against Target or any of its Subsidiaries pending or, to the knowledge of Target, threatened before the National Labor Relations Board or any similar state or foreign agency and there have been no such charges, complaints, questions or petitions within the past three (3) years, (vi) there are no pending or, to the knowledge of Target, threatened legal, arbitral or administrative suits, actions, investigations, charges, complaints, demands or other proceedings of any kind and in any forum by or on behalf of any current or former employee of Target or any of its Subsidiaries, applicant, person claiming to be an employee, or any classes of the foregoing, alleging or concerning a violation of, or compliance with, any applicable law respecting employment and employment practices, equal employment opportunity, wages, labor relations, hours of work and overtime, worker classification, employment-related immigration and authorization to work in the United States, occupational safety and health, and privacy of health information, there have been no such proceedings within the past three (3) years, nor are there any grievance or arbitration proceeding arising out of any collective bargaining agreement or other grievance procedure concerning Target or any of its Subsidiaries, (vii) there is no current or, to the knowledge of Target, threatened legal, arbitral or administrative suits, actions, investigations or other proceedings of any kind and in any forum in which any current or former director, officer, employee or agent of Target or any of its Subsidiaries is or may be entitled to indemnification, (viii) Target and all of its Subsidiaries have timely paid or made provision for payment of, and has properly accrued for in its or their financial statements, all accrued salaries, wages, commissions, bonuses, severance pay, vacation, sick, and other paid leave with respect to any current or former employee or on account of employment, (ix) no current or former employee or person claiming to be or have been an employee of Target or any of its Subsidiaries has a right to be recalled, reinstated, or restored to employment under any agreement, law, or policy or practice of Target or any of its Subsidiaries, (x) neither Target nor any of its Subsidiaries is a party to, or otherwise bound by, any order, judgment, decree or settlement with respect to any current or former employee, the terms and conditions of employment, or the working conditions of any employee, (xi) neither Target nor any of its Subsidiaries has, and none are required by applicable law to have, an affirmative action plan, (xii) Target and its Subsidiaries have complied with the Older Workers’ Benefit Protection Act with respect to any waivers of liability under the Age Discrimination in Employment Act obtained by it in the last 300 days, (xiii) neither the Occupational Safety and Health Administration nor any other federal or state agency has threatened to file any citation, and there are no pending citations, relating to Target or any of its Subsidiaries, and (xiv) there is no employee or governmental claim or investigation, including any charges to the Equal Employment Opportunity Commission or state employment practice agency, investigations regarding Fair Labor Standards Act compliance, audits by the Office of Federal Contractor Compliance Programs, Workers’ Compensation claims, sexual or other workplace harassment complaints or demand letters or threatened claims.

 

(b)           Within the past four (4) years, under the Worker Adjustment and Retraining Notification Act of 1988, as amended (“ WARN Act ”), none of Target or any of its

 

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Subsidiaries has effectuated or experienced (i) a “plant closing” (as defined in the WARN Act), or (ii) a “mass layoff” (as defined in the WARN Act), nor has Target or any of its Subsidiaries been affected by any transaction or engaged in layoffs or employment terminations sufficient in number to trigger application of any state or local law similar to the WARN Act.

 

4.16                    Reserve Reports .

 

(a)           All information (including the statement of the percentage of reserves from the oil and gas wells and other interests evaluated therein to which Target or its Subsidiaries are entitled and the percentage of the costs and expenses related to such wells or interests to be borne by Target or its Subsidiaries) supplied to Miller and Lents, Ltd. by or on behalf of Target and its Subsidiaries that was material to such firm’s estimates of proved oil and gas reserves attributable to the Oil and Gas Interests (as hereinafter defined) of Target in connection with the preparation of the proved oil and gas reserve reports concerning the Oil and Gas Interests of Target and its Subsidiaries as of July 1, 2009 and prepared by such engineering firms (the “ Target Reserve Report ”) was (at the time supplied or as modified or amended prior to the issuance of the Target Reserve Report) true and correct in all material respects and Target has no knowledge of any material errors in such information that existed at the time of such issuance, except as set forth in Section 4.16(a)  of the Target Disclosure Schedule.  For this Agreement “ Oil and Gas Interests ” means direct and indirect interests in and rights with respect to oil, gas, mineral, and related properties and assets of any kind and nature, direct or indirect, including working, leasehold and mineral interests and operating rights and royalties, overriding royalties, production payments, net profit interests and other non-working interests and non-operating interests; all interests in rights with respect to oil, condensate, gas, casinghead gas and other liquid or gaseous hydrocarbons (collectively, “ Hydrocarbons ”) and other minerals or revenues therefrom, all contracts in connection therewith and claims and rights thereto (including all oil and gas leases, operating agreements, unitization and pooling agreements and orders, division orders, transfer orders, mineral deeds, royalty deeds, oil and gas sales, exchange and processing contracts and agreements, and in each case, interests thereunder), surface interests, fee interests, reversionary interests, reservations, and concessions; all easements, rights of way, licenses, permits, leases, and other interests associated with, appurtenant to, or necessary for the operation of any of the foregoing; and all interests in equipment and machinery (including wells, well equipment and machinery), oil and gas production, gathering, transmission, treating, processing, and storage facilities (including tanks, tank batteries, pipelines, and gathering systems), pumps, water plants, electric plants, gasoline and gas processing plants, refineries, and other tangible personal property and fixtures associated with, appurtenant to, or necessary for the operation of any of the foregoing.  Except for changes generally affecting the oil and gas industry (including changes in commodity prices), there has been no change in respect of the matters addressed in the Target Reserve Report that would have a Target Material Adverse Effect.

 

(b)           Set forth in Section 4.16(b)  of the Target Disclosure Schedule is a list of all material Oil and Gas Interests that were included in the Target Reserve Report that have been disposed of prior to the date hereof.

 

4.17                    Permits. Target and its Subsidiaries hold all of the permits, licenses, certificates, consents, approvals, entitlements, plans, surveys, relocation plans, environmental impact reports and other authorizations of Governmental Authorities (“ Permits ”) required or

 

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necessary to construct, own, operate, use and/or maintain their respective properties and conduct their operations as presently conducted, except for such Permits, the lack of which, individually or in the aggregate, would not have a Target Material Adverse Effect; provided, however, that no representation or warranty in this Section 4.17 is made with respect to Permits issued pursuant to Environmental Laws, which are covered exclusively in Section 4.12(a) .

 

4.18                    Material Contracts .

 

(a)           Set forth in Section 4.18(a)  of the Target Disclosure Schedule or the Target SEC Reports filed and publicly available prior to the date hereof is a list of each contract, lease, indenture, agreement, arrangement or understanding to which Target or any of its Subsidiaries is subject that is currently in effect and is of a type that would be required to be included as an exhibit to a Form S-1 Registration Statement pursuant to the rules and regulations of the SEC if such a registration statement were filed by Target (collectively, the “ Target Material Contracts ”).

 

(b)           Except as set forth in Section 4.18(a)  or 4.18(b)  of the Target Disclosure Schedule or the Target SEC Reports, the Oil and Gas Interests of Target and its Subsidiaries are not subject to (i) any instrument or agreement evidencing or related to indebtedness for borrowed money, whether directly or indirectly, or (ii) any agreement not entered into in the ordinary course of business in which the amount involved is in excess of $200,000 in the aggregate.  In addition, (A) all Target Material Contracts are the valid and legally binding obligations of Target and, to the knowledge of Target, each of the other parties thereto and are enforceable in accordance with their respective terms; (B) Target is not in material breach or default with respect to, and to the knowledge of Target, no other party to any Target Material Contract is in material breach or default with respect to, its obligations thereunder, including with respect to payments or otherwise; (C) no party to any Target Material Contract has given notice of any action to terminate, cancel, rescind or procure a judicial reformation thereof; and (D) no Target Material Contract contains any provision that prevents Target or any of its Subsidiaries from owning, managing and operating the Oil and Gas Interests of Target and its Subsidiaries in accordance with historical practices.

 

(c)           As of the date hereof, except as set forth in Section 4.18(c)  of the Target Disclosure Schedule, with respect to authorizations for expenditure executed after December 31, 2008, (i) there are no outstanding calls for payments in excess of $200,000 that are due or that Target or its Subsidiaries are committed to make that have not been made; (ii) there are no material operations with respect to which Target or its Subsidiaries have become a non-consenting party; and (iii) there are no commitments for the material expenditure 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.

 

(d)           Except as set forth in Section 4.18(d)  of the Target Disclosure Schedule, (i) there are no provisions applicable to the Oil and Gas Interests of Target and its Subsidiaries which increase the royalty percentage of the lessor thereunder; and (ii) none of the Oil and Gas Interests of Target and its Subsidiaries are limited by terms fixed by a certain number of years (other than primary terms under oil and gas leases).

 

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(e)           Except as set forth in Section 4.18(e)  of the Target Disclosure Schedule, neither Target nor any of its Subsidiaries is a party to any contract or agreement of employment or to provide consulting, contractor or personal services that cannot be terminated at will without notice by and at no expense or liability to the Target and its Subsidiaries.

 

4.19                    Required Stockholder Vote .  The only votes of the holders of any class or series of Target’s capital stock that shall be necessary to consummate the Transactions are the affirmative vote (in person or by proxy, or, in the case of the Target Preferred Shares, by written consent) of (a) the holders of a majority of the Target Preferred Shares, voting as a single class, in favor of an amendment (the “ Series D CD Amendment ”) to the Certificate of Designations, Rights and Preferences of the Series D Convertible Preferred Stock of Cano Petroleum, Inc., dated August 31, 2006, as amended (the “ Series D Certificate ”), in form and substance reasonably satisfactory to Parent and Target (which approval of the Series D CD Amendment shall not be unreasonably withheld by either Parent or Target) and in favor of the adoption of the Agreement; and (b) the holders of a majority of the Target Common Shares, voting as a single class, in favor of the Series D CD Amendment and in favor of the adoption of this Agreement (collectively, the “ Target Stockholders’ Approval ”).

 

4.20                    Proxy/Prospectus; Registration Statement.  None of the information to be supplied by Target for inclusion in (a) the joint proxy statement relating to the Target Meeting and the Parent Meeting (in each case, as defined below) (also constituting the prospectus in respect of Parent Common Shares into which Target Common Shares will be converted) (the “ Proxy/Prospectus ”) to be filed by Target and Parent with the SEC, and any amendments or supplements thereto, or (b) the Registration Statement on Form S-4 (the “ Registration Statement ”)  to be filed by Parent with the SEC in connection with the Merger, and any amendments or supplements thereto, will, at the respective times such documents are filed, and, in the case of the Proxy/Prospectus, at the time the Proxy/Prospectus or any amendment or supplement thereto is first mailed to the Target and Parent stockholders, at the time of the Target Meeting and the Parent Meeting and at the Effective Time, and, in the case of the Registration Statement, when it becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be made therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading.

 

4.21                    Intellectual Property. Target or its Subsidiaries own, or are licensed or otherwise have the right to use, all patents, patent rights, trademarks, rights, trade names, trade name rights, service marks, service mark rights, copyrights, technology, know-how, processes and other proprietary intellectual property rights and computer programs (“ Intellectual Property ”) currently used in the conduct of the business of Target and its Subsidiaries, except where the failure to so own or otherwise have the right to use such Intellectual Property would not, individually or in the aggregate, have a Target Material Adverse Effect.  No Person has notified either Target or any of its Subsidiaries in writing and Target does not have any knowledge that their use of the Intellectual Property infringes on the rights of any Person, subject to such claims and infringements as do not, individually or in the aggregate, give rise to any liability on the part of Target and its Subsidiaries that could have a Target Material Adverse Effect, and, to Target’s knowledge, no Person is infringing on any right of Target or any of its Subsidiaries with respect to any such Intellectual Property.  No claims are pending or, to Target’s

 

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knowledge, threatened that Target or any of its Subsidiaries is infringing or otherwise adversely affecting the rights of any Person with regard to any Intellectual Property.

 

4.22                    Hedging. Section 4.22 of the Target Disclosure Schedule sets forth for the periods shown obligations of Target and each of its Subsidiaries (and their respective counterparties) for the delivery of Hydrocarbons attributable to any of the properties of Target or any of its Subsidiaries in the future on account of prepayment, advance payment, take-or-pay or similar obligations without then or thereafter being entitled to receive full value therefor.  Except as set forth in Section 4.22 of the Target Disclosure Schedule, as of the date hereof, neither Target nor any of its Subsidiaries is bound by futures, hedge, swap, collar, put, call, floor, cap, option or other contracts that are intended to benefit from, relate to or reduce or eliminate the risk of fluctuations in the price of commodities, including Hydrocarbons, or securities.

 

4.23                    Brokers. No broker, finder or investment banker (other than RBC Capital Markets Corporation, the fees and expenses of which will be paid by Target) is entitled to any brokerage, finder’s fee or other fee or commission payable by Target or any of its Subsidiaries in connection with the Transactions based upon arrangements made by and on behalf of Target or any of its Subsidiaries.  True and correct copies of all agreements and engagement letters currently in effect with RBC Capital Markets Corporation (the “ Target Engagement Letters ”) have been provided to Target.

 

4.24                    Tax-Free Reorganization. Neither Target nor, to the knowledge of Target, any of its affiliates has taken or agreed to take any action that would prevent the Merger from constituting a reorganization within the meaning of Section 368(a) of the Code.

 

4.25                    Fairness Opinion. Target’s Board of Directors has received an opinion from RBC Capital Markets Corporation to the effect that, as of the date of such opinion, the Exchange Ratio is fair, from a financial point of view, to the holders of Target Common Shares.

 

4.26                    Takeover Laws. No “fair price”, “moratorium”, “control share acquisition” or other similar antitakeover statute or regulation enacted under state or federal laws in the United States (with the exception of Section 203 of the DGCL) applicable to Target is applicable to the Merger or the other transactions contemplated hereby.  The action of the Board of Directors of Target in approving this Agreement (and the Transactions provided for herein) is sufficient to render inapplicable to this Agreement (and the Transactions provided for herein) the restrictions on “business combinations” (as defined in Section 203 of the DGCL) as set forth in Section 203 of the DGCL.

 

ARTICLE V

 

REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

 

Parent and Merger Sub hereby jointly and severally represent and warrant to Target as follows:

 

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5.1                      Organization and Qualification .

 

(a)           Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas, is duly qualified to do business as a foreign corporation and is in good standing in the jurisdictions set forth in Section 5.1(a)  of the disclosure letter delivered by Parent to Target contemporaneously with the execution hereof (the “ Parent Disclosure Schedule ”), which include each jurisdiction in which the character of Parent’s properties or the nature of its business makes such qualification necessary, except in jurisdictions, if any, where the failure to be so qualified would not result in a Parent Material Adverse Effect (as defined below).  Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, is duly qualified to do business as a foreign corporation and is in good standing in the jurisdictions set forth in Section 5.1(a)  of the Parent Disclosure Schedule, which include each jurisdiction in which the character of Merger Sub’s properties or the nature of its business makes such qualification necessary, except in jurisdictions, if any, where the failure to be so qualified would not result in a Parent Material Adverse Effect (as defined below).  Each Parent Party has all requisite corporate power and authority to own, use or lease its properties and to carry on its business as it is now being conducted.  Each Parent Party has made available to Target a complete and correct copy of its Certificate of Incorporation and Bylaws (or other similar organizational documents), each as amended to date, and Parent’s and Merger Sub’s Certificate of Incorporation and Bylaws (or other similar organizational documents) as made available are in full force and effect.  Neither Parent nor Merger Sub is in default in any respect in the performance, observation or fulfillment of any provision of its Certificate of Incorporation or Bylaws (or other similar organizational documents).  Merger Sub is a direct, wholly owned subsidiary of Parent formed solely for the purpose of effecting the Merger and has conducted no activity and has incurred no liability or obligation other than as contemplated by this Agreement.

 

(b)           The minute books of Parent and Merger Sub contain true, complete and accurate Corporate Records.  Copies of such Corporate Records of Parent and Merger Sub have been heretofore made available to Target or Target’s counsel.

 

(c)           The stock, warrant and option ownership and transfer records of Parent and Merger Sub contain true, complete and accurate records of the securities ownership as of the date of such records and the transfers involving the capital stock and other securities of Parent and Merger Sub.  Copies of such records of Parent and Merger Sub have been heretofore made available to Target or Target’s counsel.

 

(d)           Section 5.1(d)  of the Parent Disclosure Schedule lists the name and jurisdiction of organization of each Subsidiary of Parent (other than Merger Sub) and the jurisdictions in which each such Subsidiary is qualified or holds licenses to do business as a foreign corporation or other organization as of the date hereof.  Except for Parent’s Subsidiaries, Parent does not own, directly or indirectly, any ownership, equity, profits or voting interest in any Person, other than equity interests held for investment that are not, in the aggregate, material to Parent (other than joint operating and other ownership arrangements and tax partnerships entered into in the ordinary course of business that, individually or in the aggregate, are not material to the operations or business of Parent and Parent’s Subsidiaries, taken as a whole, and that do not entail any material liabilities). Each of Parent’s Subsidiaries is a corporation duly

 

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organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, is duly qualified to do business as a foreign corporation and is in good standing in the jurisdictions listed in Section 5.1(d)  of the Parent Disclosure Schedule, which includes each jurisdiction in which the character of such Subsidiary’s properties or the nature of its business makes such qualification necessary, except in jurisdictions, if any, where the failure to be so qualified would not result in a Parent Material Adverse Effect.  Each of Parent’s Subsidiaries has the requisite corporate power and authority to own, use or lease its properties and to carry on its business as it is now being conducted and as it is now proposed to be conducted.  Parent has made available to Target a complete and correct copy of the Certificate of Incorporation and Bylaws (or similar organizational documents) of each of Parent’s Subsidiaries, each as amended to date, and the Certificate of Incorporation and Bylaws (or similar organizational documents) as made available are in full force and effect.  No Subsidiary of Parent is in default in any respect in the performance, observation or fulfillment of any provision of its Certificate of Incorporation or Bylaws (or similar organizational documents).  Other than Parent’s Subsidiaries, Parent does not beneficially own or control, directly or indirectly, five percent (5%) or more of any class of equity or similar securities of any corporation or other organization, whether incorporated or unincorporated.

 

(e)           Complete and correct copies of the corporate, partnership or limited liability company records of each of Parent’s Subsidiaries have been heretofore made available to Target or Target’s counsel.

 

(f)            For purposes of this Agreement, a “ Parent Material Adverse Effect ” means any event, circumstance, condition, development or occurrence causing, resulting in or having (or with the passage of time likely to cause, result in or have) a material adverse effect on the financial condition, business, assets, properties or results of operations of Parent and its Subsidiaries, taken as a whole; provided that, in no event shall any of the following alone or in combination be deemed, in and of itself, to constitute or be taken into account in determining a Parent Material Adverse Effect:  any event, circumstance, change or effect that results from (i) changes affecting the national or regional economy generally or the oil and gas industry generally (provided that Parent is not disproportionately affected by such changes), (ii) changes in the market price of oil or natural gas, (iii) the public announcement or pending nature of the Transactions, (iv) compliance with the terms of, or taking any action required by, this Agreement, (v) change in the price or trading volume of the Target Common Shares or the Parent Common Shares, (vi) the outbreak or escalation of hostilities involving the United States, the declaration by the United States of a national emergency or war or the occurrence of any other calamity or crisis, including acts of terrorism or (vii) any change in the accounting requirements or principles imposed on Parent or its business by GAAP or any change in applicable law after the date hereof.

 

5.2                      Capitalization .

 

(a)           The authorized capital stock of Parent consists of 230,000,000 Parent Common Shares, and 20,000,000 shares of preferred stock of Parent, par value $0.01 per share (“ Parent Preferred Shares ”).  A Certificate of Designations, Rights and Preferences of the Series A Convertible Preferred Stock, par value $0.01 per share, of Parent (the “ Parent Series A Shares ”) will be filed with the Secretary of State of the State of Texas prior to the Closing and

 

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will be substantially in the form attached as Exhibit 5.2 unless otherwise agreed by the Parent and Target.  As of the date hereof, Parent has (i) 96,947,494 Parent Common Shares issued and outstanding, (ii) no Parent Common Shares in treasury, (iii) no Parent Preferred Shares outstanding, (iv) outstanding Parent Options to acquire 2,151,787 Parent Common Shares under stock option plans or agreements of Parent (of which Parent Options to purchase an aggregate of 568,929 shares of Parent Common Shares are exercisable as of the date hereof) and (v) 2,737,010 Parent Restricted Shares issued and outstanding.  There are no bonds, debentures, notes or other indebtedness issued or outstanding having the right to vote with Parent’s stockholders, whether together or as a separate class, on any matters on which Parent’s stockholders may vote.  All of the outstanding Parent Common Shares are validly issued, fully paid and nonassessable, and free of preemptive rights.  Except as set forth above or in Section 5.2(a)(i)  of the Parent Disclosure Schedule, and other than this Agreement, there are no outstanding subscriptions, options, rights, warrants, convertible securities, stock appreciation rights, phantom equity, or other agreements or commitments (including “rights plans” or “poison pills”) obligating Parent to issue, transfer, sell, redeem, repurchase or otherwise acquire any shares of its capital stock of any class.  Except as set forth in Section 5.2(a)(ii)  of the Parent Disclosure Schedule there are no registration rights, and there is no voting trust, proxy, rights plan, antitakeover plan or other agreement, arrangement or other understanding to which Parent is a party or by which Parent is bound with respect to any equity security of any class of Parent.

 

(b)           Except as set forth in Section 5.2(b)  of the Parent Disclosure Schedule, Parent is, directly or indirectly, the record and beneficial owner of all of the outstanding shares of capital stock of each Parent Subsidiary, there are no irrevocable proxies with respect to any such shares, and no equity securities of any Parent Subsidiary are or may become required to be issued because of any options, warrants, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable or exercisable for, shares of any capital stock of any Parent Subsidiary, and there are no contracts, commitments, understandings or arrangements by which Parent or any Parent Subsidiary is or may be bound to issue additional shares of capital stock of any Parent Subsidiary or securities convertible into or exchangeable or exercisable for any such shares.  Except as set forth in Section 5.2(b)  of the Parent Disclosure Schedule, all of such shares Parent owns are validly issued, fully paid and nonassessable and are owned by it free and clear of all Liens.

 

(c)           Parent Common Shares are listed on the AIM under the symbols “RSOX” and “RSX.”  No action or proceeding is pending or, to the knowledge of Parent, threatened against Parent by the AIM or any other Governmental Authority regulating issuers on AIM with respect to Parent, the Parent Common Shares or, solely with respect to the Nomad’s engagement with Parent as its nominated advisor, the Nomad.  For purposes of this Agreement, phrases such as “ knowledge of Parent ” and similar terms mean the current knowledge, after due inquiry, of any Vice President (including the corporate officer with responsibility for human resources and employee benefits) or the President, Chief Executive Officer or Chairman of Parent.  For purposes of this Agreement, the “ Nomad ” means the Parent’s nominated advisor Seymour Pierce Limited.

 

5.3                      Authority .  Each of Parent and, solely with respect to this Agreement, Merger Sub, has full corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements to which it is or will be a party, subject to obtaining the Parent

 

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Stockholders’ Approval to consummate the Transactions.  The execution, delivery and performance of this Agreement and the Ancillary Agreements to which it is or will be a party and the consummation of the Transactions have been duly and validly authorized by each Parent Party’s Board of Directors, and no other corporate proceedings on the part of either Parent Party are necessary to authorize this Agreement or the Ancillary Agreements to which any of them are or will be a party or to consummate the Transactions, other than the Parent Stockholders’ Approval and approval of the sole stockholder of Merger Sub.  This Agreement has been, and the Ancillary Agreements to which Parent or Merger Sub is or will be a party are, or upon execution will be, duly and validly executed and delivered by each Parent Party and, assuming the due authorization, execution and delivery hereof and thereof by the other parties hereto and thereto, constitutes or upon execution will constitute, valid and binding obligations of each Parent Party enforceable against such Persons in accordance with their respective terms, except for the Enforceability Exception.

 

5.4                      Consents and Approvals; No Violation .  The execution and delivery of this Agreement, the consummation of the Transactions and the performance by each Parent Party of its obligations hereunder will not:

 

(a)           subject to receipt of the Parent Stockholders’ Approval, conflict with any provision of the Certificate of Formation or Bylaws, as amended, of Parent or the Certificates of Incorporation or Bylaws (or other similar organizational documents) of any of Parent’s Subsidiaries;

 

(b)           subject to obtaining the Parent Stockholders’ Approval and the filing of the Certificate of Merger with the Secretary of State of Delaware, require any consent, waiver, approval, order, authorization or permit of, or registration, filing with or notification to, (i) any Governmental Authority, except for applicable requirements of the HSR Act, the Securities Act, the Exchange Act, state laws relating to takeovers, if applicable, state securities or blue sky laws, the publication of the Readmission Document to be compiled in accordance with the provisions of the AIM Rules and the notification of the Merger in accordance with the AIM Rules and Customary Post-Closing Consents or (ii) except as set forth in Section 5.4(b)  of the Parent Disclosure Schedule, any third party other than a Governmental Authority, other than such non-Governmental Authority third party consents, waivers, approvals, orders, authorizations and permits that would not (i) result in a Parent Material Adverse Effect, (ii) materially impair the ability of Parent or any of its Subsidiaries to perform its obligations under this Agreement or any Ancillary Agreement or (iii) prevent the consummation of any of the Transactions;

 

(c)           except as set forth in Section 5.4(c)  of the Parent Disclosure Schedule, result in any violation of or the breach of or constitute a default (with notice or lapse of time or both) under, or give rise to any right of termination, cancellation or acceleration or guaranteed payments or a loss of a material benefit under, any of the terms, conditions or provisions of any note, lease, mortgage, license, agreement or other instrument or obligation to which Parent or any of its Subsidiaries is a party or by which Parent or any of its Subsidiaries or any of their respective properties or assets may be bound, except for such violations, breaches, defaults, or rights of termination, cancellation or acceleration, or losses as to which requisite waivers or consents have been obtained or which, individually or in the aggregate, would not (A) result in a Parent Material Adverse Effect, (B) materially impair the ability of Parent or any of its

 

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Subsidiaries to perform its obligations under this Agreement or any Ancillary Agreement or (C) prevent the consummation of any of the Transactions;

 

(d)           violate the provisions of any order, writ, injunction, judgment, decree, statute, rule or regulation applicable to Parent or any of its Subsidiaries;

 

(e)           result in the creation of any Lien upon any material properties or assets or on any shares of capital stock of Parent or its Subsidiaries (other than Target and its Subsidiaries after the Effective Time) under any agreement or instrument to which Parent or any of its Subsidiaries is a party or by which Parent or any of its Subsidiaries or any of their properties or assets is bound; or

 

(f)            result in any holder of any securities of Parent being entitled to appraisal, dissenters’ or similar rights.

 

5.5                      Parent AIM Reports .

 

(a)           Parent has filed with the AIM, and has heretofore made available to Target, true and complete copies of, each form, admission document, report, schedule, proxy, announcement or information statement and other document (including exhibits and amendments thereto), including its annual reports to stockholders incorporated by reference in certain of such reports, required to be filed by it or publicly announced with the AIM in connection with and since its admission to the AIM on July 17, 2008 (collectively, the “ Parent AIM Reports ”).  As of the respective dates the Parent AIM Reports were filed or, if any such Parent AIM Reports were amended, as of the date such amendment was filed, each Parent AIM Report, including any financial statements or schedules included therein, (i) complied in all material respects with the applicable rules and regulations of the AIM, and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.  No event since the date of the last Parent AIM Report has occurred that would require Parent to file a report with the AIM other than the execution of this Agreement.

 

(b)           The Chief Executive Officer and Chief Financial Officer of Parent will make in the Registration Statement to be filed by Parent with the SEC in connection with Merger, all certifications (without qualification or exceptions to the matters certified) required by, and will be able to make such certifications (without qualification or exception to the matters certified) as of the Closing Date as if required to be made as of such date pursuant to, the Sarbanes Oxley Act and any related rules and regulations promulgated by the SEC, and the statements contained in any such certifications are complete and correct.  Parent has in place sufficient procedures, resources and controls to enable it to comply with the AIM Rules.  Parent seeks the advice and guidance from the Nomad regarding the compliance by Parent with the AIM Rules whenever it considers it appropriate and it takes any such advice and guidance into account.  As used herein, “ AIM Rules ” means the rules issued by the London Stock Exchange governing companies applying for or with a class of shares admitted to AIM.

 

5.6                      Parent Financial Statements .  Each of the audited consolidated financial statements for Parent for the years ended June 30, 2007 and 2008, and when issued the audited

 

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consolidated financial statements for Parent for the year ended June 30, 2009, and the unaudited consolidated interim financial statements of Parent (including any related notes and schedules) included (or incorporated by reference) for the six (6) month period ended December 31, 2008 have been prepared from, and are in accordance with, the books and records of Parent and its consolidated Subsidiaries, comply in all material respects with applicable accounting requirements have been prepared in accordance with GAAP applied on a consistent basis (except as may be indicated in the notes thereto and subject, in the case of quarterly financial statements, to normal and recurring year-end adjustments) and fairly present, in conformity with GAAP applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of Parent and its Subsidiaries as of the date thereof and the consolidated results of operations and cash flows (and changes in financial position, if any) of Parent and its Subsidiaries for the periods presented therein (subject to normal year-end adjustments and the absence of financial footnotes in the case of any unaudited interim financial statements).

 

5.7                      Absence of Undisclosed Liabilities .  Except (a) as set forth in Section 5.7 of the Parent Disclosure Schedule and (b) for liabilities and obligations incurred in the ordinary course of business and consistent with past practice since June 30, 2009, neither Parent nor any of its Subsidiaries has incurred any liabilities or obligations of any nature (contingent or otherwise) that would have a Parent Material Adverse Effect or would be required by GAAP to be reflected on a consolidated balance sheet of Parent and its Subsidiaries or the notes thereto which are not reflected.

 

5.8                      Absence of Certain Changes .  Except as set forth in Section 5.8 of the Parent Disclosure Schedule or as contemplated by this Agreement, since June 30, 2009 (a) Parent and its Subsidiaries have conducted their respective businesses only in the ordinary course of business consistent with past practices, (b) there has not been any change or development, or combination of changes or developments that, individually or in the aggregate, would have a Parent Material Adverse Effect, (c) there has not been any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of Parent, or any repurchase, redemption or other acquisition by Parent or any of its Subsidiaries of any outstanding shares of capital stock or other securities of, or other ownership interests in, Parent or any of its Subsidiaries, (d) there has not been any amendment of any term of any outstanding security of Parent or any of its Subsidiaries, and (e) there has not been any change in any method of accounting or accounting practice by Parent or any of its Subsidiaries, except for any such change required because of a concurrent change in GAAP or to conform a Subsidiary’s accounting policies and practices to those of Parent.

 

5.9                      Taxes .  Except as otherwise disclosed in Section 5.9 of the Parent Disclosure Schedule and for matters that would not have a Parent Material Adverse Effect:

 

(a)           Parent and each of its Subsidiaries have timely filed (or have had timely filed on their behalf) or will file or cause to be timely filed, all material Tax Returns required by applicable law to be filed by any of them prior to or as of the Closing Date.  As of the time of filing, the foregoing Tax Returns correctly reflected the material facts regarding the income, business, assets, operations, activities, status, or other matters of Parent or any other information required to be shown thereon.  In particular, the foregoing tax returns are not subject to penalties under Section 6662 of the Code, relating to accuracy related penalties (or any corresponding

 

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provision of the state, local or foregoing Tax law) or any predecessor provision of law.  An extension of time within which to file a Tax Return has not been requested or granted.

 

(b)           Parent and each of its Subsidiaries have paid (or have had paid on their behalf), or where payment is not yet due, have established (or have had established on their behalf and for their sole benefit and recourse), or will establish or cause to be established on or before the Closing Date, an adequate accrual for the payment of all material Taxes (as defined below) due with respect to any period ending prior to or as of the Closing Date.  Parent and each of its Subsidiaries have withheld and paid all Taxes required to have been withheld and paid in connection with any amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party.

 

(c)           No Audit by a Tax Authority is pending or, to the knowledge of Parent, threatened with respect to any Tax Returns filed by, or Taxes due from, Parent or any Subsidiary.  No issue has been raised by any Tax Authority in any Audit of Parent or any of its Subsidiaries that if raised with respect to any other period not so audited could be expected to result in a material proposed deficiency for any period not so audited.  No material deficiency or adjustment for any Taxes has been proposed, asserted, assessed or, to the knowledge of Parent, threatened against Parent or any of its Subsidiaries.  There are no liens for Taxes upon the assets of Parent or any of its Subsidiaries, except liens for current Taxes not yet delinquent.

 

(d)           Neither Parent nor any of its Subsidiaries has given or been requested to give any waiver of statutes of limitations relating to the payment of Taxes or have executed powers of attorney with respect to Tax matters, which will be outstanding as of the Closing Date.

 

(e)           Prior to the date hereof, Parent and its Subsidiaries have disclosed, and provided or made available to Target true and complete copies of, all material Tax sharing, Tax indemnity, or similar agreements to which Parent or any of its Subsidiaries are a party to, is bound by, or has any obligation or liability for Taxes.

 

(f)            Except as set forth in Section 5.9 of the Parent Disclosure Schedule, and except for the group of which Parent is currently a member and any group affiliated with Resaca Exploitation, Inc., Parent has never been a member of an affiliated group of corporations, within the meaning of Section 1504 of the Code.

 

(g)           Parent has not agreed to make nor is it required to make any adjustment under Section 481(a) of the Code by reason of change in accounting method or otherwise.

 

(h)           None of the Parent or any of its Subsidiaries has a liability for Taxes of any Person under Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract or otherwise.

 

(i)            None of the Parent or any of its Subsidiaries has a liability for Taxes of any Person (other than Parent or any of its Subsidiaries) under Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law) as a transferee or successor, by control or otherwise.

 

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(j)            Neither Parent nor any of its subsidiaries has distributed stock of another person, or has had its stock distributed by another Person, in a transaction that also purported or intended to be governed in whole or in part by Code Sections 355 and 361.  Any transaction described in Section 5.9 of the Parent Disclosure Schedule that were purported or intended to be governed by Code Section 355 and 361 will not result in the recognition of a gain by the Parent as a result of the Merger.

 

5.10                    Litigation .  Except as otherwise disclosed in Section 5.10 of the Parent Disclosure Schedule, there is no suit, claim, action, proceeding or investigation pending or, to Parent’s knowledge, threatened against or directly affecting Parent, any Subsidiaries of Parent or any of the directors or officers of Parent or any of its Subsidiaries in their capacity as such, nor is there any reasonable basis therefor that could reasonably be expected to have a Parent Material Adverse Effect, if adversely determined.  Neither Parent nor any of its Subsidiaries, nor any officer, director or employee of Parent or any of its Subsidiaries, has been permanently or temporarily enjoined by any order, judgment or decree of any court or any other Governmental Authority from engaging in or continuing any conduct or practice in connection with the business, assets or properties of Parent or such Subsidiary, nor, to the knowledge of Parent, is Parent, any Subsidiary or any officer, director or employee of Parent or any of its Subsidiaries under investigation by any Governmental Authority.  Except as disclosed in Section 5.10 of the Parent Disclosure Schedule, there is no order, judgment or decree of any court or other tribunal or other agency extant enjoining or requiring Parent or any of its Subsidiaries to take any action of any kind with respect to its business, assets, properties, employees or former employees.  Notwithstanding the foregoing, no representation or warranty in this Section 5.10 is made with respect to Environmental Laws, which are covered exclusively by the provisions set forth in Section 5.12 .

 

5.11                    Employee Benefit Plans; ERISA .

 

(a)           Section 5.11(a)  of the Parent Disclosure Schedule lists as of the date of this Agreement all “employee benefit plans,” as defined in Section 3(3) ERISA, and all other material employee compensation and benefit plans, agreements, programs, policies or other arrangements, including, without limitation, any employment or service agreements (except for offer letters providing for at will employment that do not provide for severance, acceleration or post termination benefits and other at will arrangements that may be terminated without notice by and at no expense or liability to Parent, any Parent Subsidiary, or any Parent ERISA Affiliate), severance, short-term and long-term disability, paid leave, vacation pay, consulting or other compensation agreements, deferred compensation, bonus, long-term incentive programs in the form of restricted stock grants, stock option grants or other equity or phantom equity, supplemental unemployment, medical insurance including medical, dental, vision, and prescription coverage, life and accidental death and dismemberment insurance, tuition aid reimbursement, relocation assistance, employee or former employee loans in excess of $10,000, expatriate benefits, retiree medical and life insurance maintained by Parent or any of its Subsidiaries or any Parent ERISA Affiliate or to which Parent or any of its Subsidiaries or any Parent ERISA Affiliate contributes or is obligated to contribute (all of the foregoing described, collectively, but exclusive of any Foreign Plan, the “ Parent Benefit Plans ”). A “ Parent ERISA Affiliate ” is any trade or business, whether or not incorporated, which together with Parent

 

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would be deemed a “single employer” within the meaning of Section 414(b), (c) or (m) of the Code or Section 4001(b)(1) of ERISA.

 

(b)           Parent has not, since July 30, 2002, extended credit, arranged for the extension of credit, or renewed, modified or forgiven an extension of credit made prior to such date, in the form of a personal loan to or for any Person who was, at any time since such date, an officer or director of the Parent.

 

(c)           Prior to the date of this Agreement, Parent has made available to Target a true, correct and complete copy of each of the Parent Benefit Plans (and all amendments thereto) and any related plan documents (including adoption agreements, vendor Contracts and administrative services agreements, trust documents, insurance policies or contracts including policies relating to fiduciary liability insurance, bonds required by ERISA, other authorizing documents, employee booklets, summary plan descriptions, registration statements and prospectuses, investment policy statements, and summaries of material modifications and any material employee communications relating thereto) and has, with respect to each Parent Benefit Plan that is subject to ERISA reporting requirements, made available to Target true, correct and complete copies of the Form 5500 reports filed for the last three (3) plan years (including all audits, financial statements, schedules and attachments thereto) and all notices that were given to Parent or a Parent Benefit Plan by the Internal Revenue Service, Department of Labor, or other Governmental Authority concerning any Parent Benefit Plan.

 

Each of Parent and each Parent Subsidiary has made available to Target a true, correct and complete list of the names of all current officers, directors and consultants of Parent and each Parent Subsidiary showing each such Person’s name, position, location and rate of annual remuneration.

 

Each of Parent and each Parent Subsidiary has made available to Target true, correct and complete copies of each of the following:

 

(i)            all forms of employment offer letters,

 

(ii)           all forms of employment agreements and severance agreements,

 

(iii)          all forms of services agreements and forms of agreements with current and former consultants and/or advisory board members,

 

(iv)          all forms of confidentiality, non-competition, non-solicitation and/or invention or similar agreements by and between current and former employees, consultants and/or others (and a true, correct and complete list of employees, consultants and/or others not subject thereto),

 

(v)           all management organization chart(s),

 

(vi)          all agreements and/or insurance policies providing for the indemnification of any officers or directors,

 

(vii)         Parent’s standard severance policy,

 

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(viii)        a summary of outstanding liability for termination payments and benefits to current and former directors, officers, employees and consultants,

 

(ix)           a schedule of bonus commitments made to employees, and

 

(x)            all written personnel policies.

 

(d)        With respect to each Parent Benefit Plan:

 

(i)            if intended to qualify under Section 401(a) or 401(k) of the Code, such plan satisfies the requirements of such sections, has received a favorable determination letter from the Internal Revenue Service with respect to its qualification (or has been established under a standardized master and prototype or volume submitter plan for which a current favorable Internal Revenue Service advisory letter or opinion letter has been obtained by the plan sponsor and is valid as to the adopting employer), and its related trust has been determined to be exempt from tax under Section 501(a) of the Code and, to the knowledge of Parent, nothing has occurred since the date of such letter to adversely affect such qualification or exemption;

 

(ii)           each such plan has been administered in all material respects in compliance with its terms and applicable law (including ERISA and the Code);

 

(iii)          neither Parent nor any Parent ERISA Affiliate has engaged in, and Parent and each Parent ERISA Affiliate do not have knowledge of any Person that has engaged in, any transaction or acted or failed to act in any manner that would subject Parent or any Parent ERISA Affiliate to any liability for a breach of fiduciary duty under ERISA;

 

(iv)          no suit, administrative proceeding, action or other litigation is pending or, to the knowledge of Parent or any Parent ERISA Affiliate, threatened against Parent or any Parent ERISA Affiliate, including any audit or inquiry by the Internal Revenue Service or United States Department of Labor;

 

(v)           there have been no “reportable events” within the meaning of Section 4043 of ERISA for which the thirty (30) day notice requirement of ERISA has not been waived by the PBGC;

 

(vi)          all contributions due have been made on a timely basis (within, where applicable, the time limit established under Section 302 of ERISA or Section 412 of the Code) and, to the extent required by GAAP, all amounts have been accrued for the current plan year and no further contributions will be due or will have accrued thereunder as of the Closing Date, other than contributions accrued in the ordinary course of business, consistent with past practice;

 

(vii)         no notice of intent to terminate such plan has been given under Section 4041 of ERISA and no proceeding has been instituted under Section 4042 of ERISA to terminate such plan;

 

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(viii)        Parent has made available to Target a true, correct and complete copy of the most recent Internal Revenue Service determination letter, advisory letter or opinion letter issued with respect to such Parent Benefit Plan;

 

(ix)           Parent, each Parent Subsidiary and each Parent ERISA Affiliate have performed all obligations required to be performed by them under, are not in any material respect in default under or in violation of, and have no knowledge of any material default or in violation by any other party to, such Parent Benefit Plan;

 

(x)            with respect to each such plan intended to include a Code Section 401(k) arrangement, Parent and each Parent Subsidiary and Parent ERISA Affiliate have at all times made timely deposits of employee salary reduction contributions and participant loan repayments, as determined pursuant to regulations issued by the United States Department of Labor;

 

(xi)           such plan may be terminated on a prospective basis with any notice required by such plan without any continuing liability for benefits other than benefits accrued to the date of such termination;

 

(xii)          all contributions made or required to be made under any Parent Benefit Plan meet the requirements (if any) for deductibility under the Code; and

 

(xiii)         all individuals who, pursuant to the terms of any Parent Benefit Plan, are entitled to participate in any Parent Benefit Plan, are currently participating in such Parent Benefit Plan or have been offered an opportunity to do so.

 

With respect to the Parent Benefit Plans, neither Parent nor any Parent ERISA Affiliate has engaged in, and Parent and each Parent ERISA Affiliate do not have any knowledge of any Person that has engaged in, any “prohibited transaction” (within the meaning of Section 406 of ERISA and Section 4975 of the Code) for which no exemption exists under Section 408 of ERISA or Section 4975(c) of the Code or Section 4975(d) of the Code.

 

(e)           Neither Parent nor any Parent Subsidiary or Parent ERISA Affiliate is a party to, or has ever made any contribution to or otherwise incurred any obligation under, any “multiemployer plan” as such term is defined in Section 3(37) of ERISA or any “multiple employer plan” as such term is defined in Section 413(c) of the Code.  There has been no termination or partial termination of any Parent Benefit Plan within the meaning of Section 411(d)(3) of the Code.  Neither Parent nor any Parent ERISA Affiliate has ever established, maintained or contributed to, or had an obligation to maintain or contribute to, any “employee benefit plan” within the meaning of Section 3(3) of ERISA that is subject to Title IV of ERISA or Section 412 of the Code.

 

No event has occurred with respect to Parent or a Parent ERISA Affiliate in connection with which Parent or any Parent Subsidiary could be subject to any liability, lien or encumbrance with respect to any Parent Benefit Plan or any employee benefit plan described in Section 3(3) of ERISA maintained, sponsored or contributed to by a Parent ERISA Affiliate under ERISA or the

 

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Code, except for regular contributions and benefit payments in the ordinary course of plan business.

 

Except as provided in Section 5.11(e)  of the Parent Disclosure Schedule, neither Parent nor any Parent Subsidiary nor any Parent ERISA Affiliate sponsors or maintains any self-funded employee benefit plan, including any plan to which a stop-loss policy applies.

 

(f)            Except as set forth in Section 5.11(f)  of the Parent Disclosure Schedule, no present or former employees of Parent or any Parent Subsidiary are covered by any agreements or plans that provide or will provide severance pay, post-termination health or life insurance benefits (other than as required under COBRA or applicable state law) or any similar benefits.

 

(g)           Except as set forth in Section 5.11(g)  of the Parent Disclosure Schedule, the consummation of the Transactions shall not cause any payments or benefits to any employee to be either subject to an excise tax under Sections 4999 of the Code or non-deductible to Parent under Section 280G or 162(m) of the Code.  Section 5.11(g)  of the Parent Disclosure Schedule lists each Person who Parent reasonably believes is, with respect to Parent, any Parent Subsidiary and/or any Parent ERISA Affiliate, a “disqualified individual” (within the meaning of Section 280G of the Code and the regulations promulgated thereunder) determined as of the date hereof.

 

(h)           Except as disclosed in Section 5.11(h)  of the Parent Disclosure Schedule, none of the execution and delivery of this Agreement, the consummation of the Merger or any other transaction contemplated hereby or any termination of employment or service in connection therewith or subsequent thereto will:

 

(i)            result in any payment (including severance, supplemental unemployment compensation, golden parachute, bonus or otherwise) becoming due to any current or former employee, officer, director, independent contractor, or consultant of Parent or any Parent Subsidiary other than accrued payments;

 

(ii)           materially increase or otherwise enhance any benefits otherwise payable to any current or former employee, officer, director, independent contractor, or consultant of Parent or any Parent Subsidiary by Parent or any Parent Subsidiary;

 

(iii)          result in the acceleration of the time of payment or vesting of any such benefits, except as required under Section 411(d)(3) of the Code;

 

(iv)          increase the amount of compensation due to any current or former employee, officer, director, independent contractor, or consultant of Parent or any Parent Subsidiary; or

 

(v)           result in the forgiveness in whole or in part of any outstanding loans made by Parent or any Parent Subsidiary to any current or former employee, officer, director, independent contractor, or consultant of Parent or any Parent Subsidiary.

 

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(i)            With respect to each Parent Benefit Plan subject to ERISA as either an “employee pension benefit plan” within the meaning of Section 3(2) of ERISA or an “employee welfare benefit plan” within the meaning of Section 3(1) of ERISA, Parent has prepared in good faith and timely filed all requisite governmental reports (which were true, correct and complete as of the date filed), including any required audit reports, and has properly and timely filed and distributed or posted all notices and reports to employees required to be filed, distributed or posted with respect to each such Parent Benefit Plan.

 

(j)            Each Foreign Plan is listed in Section 5.11(j)  of the Parent Disclosure Schedule except for plans maintained by Governmental Authorities.  As regards each Foreign Plan: (i) such Foreign Plan is in compliance with the provisions of the laws of each jurisdiction in which such Foreign Plan is maintained, to the extent those laws are applicable to such Foreign Plan; (ii) the Parent, each Parent Subsidiary, and each Parent ERISA Affiliate has complied with all applicable reporting and notice requirements, and such Foreign Plan has obtained from the Governmental Authority having jurisdiction with respect to such Foreign Plan any required determinations, if any, that such Foreign Plan is in compliance with the laws of the relevant jurisdiction if such determinations are required in order to give effect to such Foreign Plan; and (iii) such Foreign Plan has been administered in accordance with its terms and applicable law and regulations.

 

(k)           Section 5.11(k)  of the Parent Disclosure Schedule lists as of the date of this Agreement each employee of Parent or any Parent Subsidiary who is absent from work or not fully available to perform work according to his or her regular schedule because of a physical or mental impairment or other approved leave and also lists, with respect to each such employee, the basis of such leave and the anticipated date of return to full service.  Section 5.11(k)  of the Parent Disclosure Schedule also lists as of the date of this Agreement each employee or former employee of Parent or any Parent Subsidiary who has applied for within the previous six (6) months, who has indicated an intent to apply for, or who is receiving short-term-disability, long-term-disability, or similar benefits.

 

(l)            Each Parent Benefit Plan that is a “nonqualified deferred compensation plan” (as defined in Section 409A(d)(1) of the Code) (i) was operated from January 1, 2005 through December 31, 2008 in good faith compliance with Section 409A of the Code, IRS Notice 2005-1, and the Treasury Regulations issued pursuant to Section 409A of the Code, (ii) has been operated since January 1, 2009 in compliance with Section 409A of the Code and the final Treasury Regulations issued pursuant to Section 409A of the Code, and (iii) no nonqualified deferred compensation plan that is grandfathered pursuant to Section 409A of the Code has been “materially modified” (within the meaning of the applicable guidance issued pursuant to Section 409A of the Code) at any time after October 3, 2004.

 

(m)          Attached as Section 5.11(m)  of the Parent Disclosure Schedule is (i)  a summary or copy of Parent’s severance policy, (ii) a severance package table which lists the maximum amount of all cash amounts that may be paid to Parent’s employees as a result of or in connection with a severance from employment, and (iii) a list of employees of Parent with written employment agreements, written letter agreements or agreements covered by resolution of the Parent’s Board of Directors addressing specific employees.

 

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5.12                    Environmental Liability .  Except as set forth in Section 5.12 of the Parent Disclosure Schedule or as could not reasonably be expected to result in liabilities that have a Parent Material Adverse Effect:

 

(a)           The businesses of Parent and its Subsidiaries have been and are operated in material compliance with all Environmental Laws.

 

(b)           Neither Parent nor any of its Subsidiaries has caused or allowed the generation, treatment, manufacture, processing, distribution, use, storage, discharge, release, disposal, transport or handling of any Hazardous Substances, except in material compliance with all Environmental Laws, and, to Parent’s knowledge, no generation, treatment, manufacture, processing, distribution, use, storage, discharge, release, disposal, transport or handling of any Hazardous Substances has occurred at any property or facility owned, leased or operated by Parent for any of its Subsidiaries except in material compliance with all Environmental Laws.

 

(c)           Neither Parent nor any of its Subsidiaries has received any written notice from any Governmental Authority or third party or, to the knowledge of Parent, any other communication alleging or concerning any material violation by Parent or any of its Subsidiaries of, or responsibility or liability of Parent or any of its Subsidiaries under any Environmental Law.  There are no pending, or to the knowledge of Parent, threatened, claims, suits, actions, proceedings or investigations with respect to the businesses or operations of Parent or any of its Subsidiaries alleging or concerning any material violation of, or responsibility or liability under, any Environmental Law, nor does Parent have any knowledge of any fact or condition that could give rise to such a claim, suit, action, proceeding or investigation.

 

(d)           Parent and its Subsidiaries have obtained and are in compliance with all material approvals, permits, licenses, registrations and similar authorizations from all Governmental Authorities under all Environmental Laws required for the operation of the businesses of Parent and its Subsidiaries as currently conducted; there are no pending or, to the knowledge of Parent, threatened, actions, proceedings or investigations alleging violations of or seeking to modify, revoke or deny renewal of any of such approvals, permits, licenses, registrations and authorizations; and Parent does not have knowledge of any fact or condition that is reasonably likely to give rise to any action, proceeding or investigation regarding the violation of or seeking to modify, revoke or deny renewal of any of such approvals, permits, licenses, registrations and authorizations.

 

(e)           Without in any way limiting the generality of the foregoing, (i) to Parent’s knowledge, all offsite locations where Parent or any of its Subsidiaries has transported, released, discharged, stored, disposed or arranged for the disposal of Hazardous Substances are licensed and operating as required by law and (ii) to Parent’s knowledge, no PCBs, PCB-containing items, asbestos-containing materials, or radioactive materials are used or stored at any property owned, leased or operated by Parent or any of its Subsidiaries except in material compliance with Environmental Laws.

 

(f)            No claims have been asserted or, to Parent’s knowledge, threatened to be asserted against Parent or its Subsidiaries for any personal injury (including wrongful death) or property damage (real or personal) arising out of alleged exposure or otherwise related to

 

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Hazardous Substances used, handled, generated, transported or disposed by Parent or its Subsidiaries.

 

5.13                    Compliance with Applicable Laws .

 

(a)           Parent and each of its Subsidiaries hold all material approvals, licenses, permits, registrations and similar authorizations necessary for the lawful conduct of their respective businesses, as now conducted, and such businesses are not being, and neither Parent nor any of its Subsidiaries have received any notice from any Person that any such business has been or is being, conducted in violation of any law, ordinance or regulation, including any law, ordinance or regulation relating to occupational health and safety, except for possible violations that either individually or in the aggregate have not resulted and would not result in a Parent Material Adverse Effect; provided, however, no representation or warranty in this Section 5.13 is made with respect to Environmental Laws, which are covered exclusively in Section 5.12 .

 

(b)           Neither Parent, any Subsidiary of Parent, nor, to the knowledge of Parent, any director, officer, agent, employee or other person acting on behalf of Parent or any of its Subsidiaries, has used any corporate or other funds for unlawful contributions, payments, gifts, or entertainment, or made any unlawful expenditures relating to political activity to government officials or others, or established or maintained any unlawful or unrecorded funds in violation of the Foreign Corrupt Practices Act of 1977, as amended, or any other domestic or foreign law.

 

5.14                    Insurance .  Section 5.14 of the Parent Disclosure Schedule lists each insurance policy of Parent and its Subsidiaries currently in effect.  Parent has made available to Target a true, complete and correct copy of each such policy or the binder therefor.  With respect to each such insurance policy or binder none of Parent, any of its Subsidiaries or, to Parent’s knowledge, any other party to the policy is in breach or default thereunder (including with respect to the payment of premiums or the giving of notices), and Parent does not know of any occurrence or any event which (with notice or the lapse of time or both) would constitute such a breach or default or permit termination, modification or acceleration under the policy, except for such breaches or defaults which, individually or in the aggregate, would not result in a Parent Material Adverse Effect.  Section 5.14 of the Parent Disclosure Schedule describes any self-insurance arrangements affecting Parent or its Subsidiaries.  To Parent’s knowledge, the insurance policies listed in Section 5.14 of the Parent Disclosure Schedule include all policies which are required in connection with the operation of the businesses of Parent and its Subsidiaries as currently conducted by applicable laws and all agreements relating to Parent and its Subsidiaries.

 

5.15                    Labor Matters; Employees .

 

(a)           Except as set forth in Section 5.15 of the Parent Disclosure Schedule, (i) there is no labor strike, dispute, slowdown, work stoppage, lockout or other similar labor controversy actually pending or, to the knowledge of Parent, threatened against or affecting Parent or any of its Subsidiaries and, during the past five (5) years, there has not been any such action, (ii) none of Parent or any of its Subsidiaries is a party to, bound by, or negotiating any collective bargaining or similar agreement with any labor organization (as that term is defined in the National Labor Relations Act, as amended), or work rules or practices with any labor

 

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organization or employee association applicable to employees of Parent or any of its Subsidiaries, (iii) none of the employees of Parent or any of its Subsidiaries are represented by any labor organization, none of Parent or any of its Subsidiaries have any knowledge of any current union organizing activities among the employees of Parent or any of its Subsidiaries nor does any question concerning representation exist concerning such employees, and neither Parent nor any of its Subsidiaries have experienced any union organizational campaigns, petitions, or other unionization activities within the past three (3) years, (iv) Parent and its Subsidiaries have each at all times within the past three (3) years been in material compliance with all applicable laws respecting employment and employment practices, equal employment opportunity, wages, labor relations, hours of work and overtime, worker classification, employment-related immigration and authorization to work in the United States, occupational safety and health, and privacy of health information, and are not engaged in any unfair labor practices as defined in the National Labor Relations Act or other applicable law, ordinance or regulation, (v) there is no unfair labor practice charge or complaint or any union representation question or certification petition against Parent or any of its Subsidiaries pending or, to the knowledge of Parent, threatened before the National Labor Relations Board or any similar state or foreign agency and there have been no such charges, complaints, questions or petitions within the past three (3) years, (vi) there are no pending or, to the knowledge of Parent, threatened legal, arbitral or administrative suits, actions, investigations, charges, complaints, demands or other proceedings of any kind and in any forum by or on behalf of any current or former employee of Parent or any of its Subsidiaries, applicant, person claiming to be an employee, or any classes of the foregoing, alleging or concerning a violation of, or compliance with, any applicable law respecting employment and employment practices, equal employment opportunity, wages, labor relations, hours of work and overtime, worker classification, employment-related immigration and authorization to work in the United States, occupational safety and health, and privacy of health information, there have been no such proceedings within the past three (3) years, nor are there any grievance or arbitration proceeding arising out of any collective bargaining agreement or other grievance procedure concerning Parent or any of its Subsidiaries, (vii) there is no current or, to the knowledge of Parent, threatened legal, arbitral or administrative suits, actions, investigations or other proceedings of any kind and in any forum in which any current or former director, officer, employee or agent of Parent or any of its Subsidiaries is or may be entitled to indemnification, (viii) Parent and all of its Subsidiaries have timely paid or made provision for payment of, and has properly accrued for in its or their financial statements, all accrued salaries, wages, commissions, bonuses, severance pay, vacation, sick, and other paid leave with respect to any current or former employee or on account of employment, (ix) no current or former employee or person claiming to be or have been an employee of Parent or any of its Subsidiaries has a right to be recalled, reinstated, or restored to employment under any agreement, law, or policy or practice of Parent or any of its Subsidiaries, (x) neither Parent nor any of its Subsidiaries is a party to, or otherwise bound by, any order, judgment, decree or settlement with respect to any current or former employee, the terms and conditions of employment, or the working conditions of any employee, (xi) neither Parent nor any of its Subsidiaries has, and none are required by applicable law to have, an affirmative action plan, (xii) Parent and its Subsidiaries have complied with the Older Workers’ Benefit Protection Act with respect to any waivers of liability under the Age Discrimination in Employment Act obtained by it in the last 300 days, (xiii) neither the Occupational Safety and Health Administration nor any other federal or state agency has threatened to file any citation, and there are no pending citations, relating to

 

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Parent or any of its Subsidiaries, and (xiv) there is no employee or governmental claim or investigation, including any charges to the Equal Employment Opportunity Commission or state employment practice agency, investigations regarding Fair Labor Standards Act compliance, audits by the Office of Federal Contractor Compliance Programs, Workers’ Compensation claims, sexual or other workplace harassment complaints or demand letters or threatened claims.

 

(b)           Within the past four (4) years, under the WARN Act, none of Parent or any of its Subsidiaries has effectuated or experienced (i) a “plant closing” (as defined in the WARN Act), or (ii) a “mass layoff” (as defined in the WARN Act), nor has Parent or any of its Subsidiaries been affected by any transaction or engaged in layoffs or employment terminations sufficient in number to trigger application of any state or local law similar to the WARN Act.

 

5.16                    Reserve Reports .

 

(a)           All information (including the statement of the percentage of reserves from the oil and gas wells and other interests evaluated therein to which Parent or its Subsidiaries are entitled and the percentage of the costs and expenses related to such wells or interests to be borne by Parent or its Subsidiaries) supplied to Williamson Petroleum Consultants, Inc. and Haas Petroleum Engineering Services, Inc. by or on behalf of Parent and its Subsidiaries that was material to such firm’s estimates of proved oil and gas reserves attributable to the Oil and Gas Interests (as hereinafter defined) of Parent in connection with the preparation of the proved oil and gas reserve reports concerning the Oil and Gas Interests of Parent and its Subsidiaries as of July 1, 2009 and prepared by such engineering firm (the “ Parent Reserve Report ”) was (at the time supplied or as modified or amended prior to the issuance of the Parent Reserve Report) true and correct in all material respects and Parent has no knowledge of any material errors in such information that existed at the time of such issuance except as set forth in Section 5.16(a)  of the Parent Disclosure Schedule.  Except for changes generally affecting the oil and gas industry (including changes in commodity prices), there has been no change in respect of the matters addressed in the Parent Reserve Report that would have a Parent Material Adverse Effect.

 

(b)           Set forth in Section 5.16(b)  of the Parent Disclosure Schedule or the Parent AIM Reports is a list of all material Oil and Gas Interests that were included in the Parent Reserve Report that have been disposed of prior to the date hereof.

 

5.17                    Permits .  Parent and its Subsidiaries hold all of the Permits required or necessary to construct, own, operate, use and/or maintain their respective properties and conduct their operations as presently conducted, except for such Permits, the lack of which, individually or in the aggregate, would not have a Parent Material Adverse Effect; provided, however, that no representation or warranty in this Section 5.17 is made with respect to Permits issued pursuant to Environmental Laws, which are covered exclusively in Section 5.11(a) .

 

5.18                    Material Contracts .

 

(a)           Set forth in Section 5.18(a)  of the Parent Disclosure Schedule or the Parent AIM Reports is a list of each contract, lease, indenture, agreement, arrangement or understanding to which Parent or any of its Subsidiaries is subject that is currently in effect and is of a type that would be required to be included as an exhibit to a Form S-1 Registration

 

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Statement pursuant to the rules and regulations of the SEC if such a registration statement were filed by Parent (collectively, the “ Parent Material Contracts ”).

 

(b)           Except as set forth in Section 5.18(a)  or 5.18(b)  of the Parent Disclosure Schedule or the Parent AIM Reports filed and publicly available prior to the date hereof, the Oil and Gas Interests of Parent and its Subsidiaries are not subject to (i) any instrument or agreement evidencing or related to indebtedness for borrowed money, whether directly or indirectly, or (ii) any agreement not entered into in the ordinary course of business in which the amount involved is in excess of $200,000 in the aggregate.  In addition, (A) all Parent Material Contracts are the valid and legally binding obligations of Parent and, to the knowledge of Parent, each of the other parties thereto and are enforceable in accordance with their respective terms; (B) Parent is not in material breach or default with respect to, and to the knowledge of Parent, no other party to any Parent Material Contract is in material breach or default with respect to, its obligations thereunder, including with respect to payments or otherwise; (C) no party to any Parent Material Contract has given notice of any action to terminate, cancel, rescind or procure a judicial reformation thereof; and (D) except as set forth in the Parent AIM Reports filed and publicly available prior to the date hereof no Parent Material Contract contains any provision that prevents Parent or any of its Subsidiaries from owning, managing and operating the Oil and Gas Interests of Parent and its Subsidiaries in accordance with historical practices.

 

(c)           As of the date hereof, except as set forth in Section 5.18(c)  of the Parent Disclosure Schedule, with respect to authorizations for expenditure executed after December 31, 2008, (i) there are no outstanding calls for payments in excess of $200,000 that are due or that Parent or its Subsidiaries are committed to make that have not been made; (ii) there are no material operations with respect to which Parent or its Subsidiaries have become a non-consenting party; and (iii) there are no commitments for the material expenditure 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.

 

(d)           Except as set forth in Section 5.18(d)  of the Parent Disclosure Schedule, (i) there are no provisions applicable to the Oil and Gas Interests of Parent and its Subsidiaries which increase the royalty percentage of the lessor thereunder; and (ii) none of the Oil and Gas Interests of Parent and its Subsidiaries are limited by terms fixed by a certain number of years (other than primary terms under oil and gas leases or unit agreements).

 

5.19                    Required Stockholder Vote.  The only vote of the holders of any class or series of Parent’s capital stock that shall be necessary to consummate the Transactions is the approval by a majority of the votes cast by the holders of the Parent Common Shares (the “ Parent Stockholders’ Approval ”).

 

5.20                    Proxy/Prospectus; Registration Statement .  None of the information to be supplied by Parent and, with respect to clause (c) only, its directors for inclusion in (a) the Proxy/Prospectus to be filed by Target and Parent with the SEC, and any amendments or supplements thereto, (b) the Registration Statement to be filed by Parent with the SEC in connection with the Merger, or (c) the Readmission Document to be compiled in accordance with the AIM Rules, and any amendments or supplements thereto, will, at the respective times such documents are filed, and, in the case of the Proxy/Prospectus, at the time the

 

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Proxy/Prospectus or any amendment or supplement thereto is first mailed to the Target and Parent stockholders, at the time of the Target Meeting and the Parent Meeting and at the Effective Time, and, in the case of the Registration Statement, when it becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be made therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading.

 

5.21                    Intellectual Property .  Parent or its Subsidiaries own, or are licensed or otherwise have the right to use, all Intellectual Property currently used in the conduct of the business of Parent and its Subsidiaries, except where the failure to so own or otherwise have the right to use such Intellectual Property would not, individually or in the aggregate, have a Parent Material Adverse Effect.  No Person has notified either Parent or any of its Subsidiaries in writing and Parent does not have any knowledge that their use of the Intellectual Property infringes on the rights of any Person, subject to such claims and infringements as do not, individually or in the aggregate, give rise to any liability on the part of Parent and its Subsidiaries that could have a Parent Material Adverse Effect, and, to Parent’s knowledge, no Person is infringing on any right of Parent or any of its Subsidiaries with respect to any such Intellectual Property.  No claims are pending or, to Parent’s knowledge, threatened that Parent or any of its Subsidiaries is infringing or otherwise adversely affecting the rights of any Person with regard to any Intellectual Property.

 

5.22                    Hedging .  Section 5.22 of the Parent Disclosure Schedule sets forth for the periods shown obligations of Parent and each of its Subsidiaries (and their respective counterparties) for the delivery of Hydrocarbons attributable to any of the properties of Parent or any of its Subsidiaries in the future on account of prepayment, advance payment, take-or-pay or similar obligations without then or thereafter being entitled to receive full value therefor.  Except as set forth in Section 5.22 of the Parent Disclosure Schedule, as of the date hereof, neither Parent nor any of its Subsidiaries is bound by futures, hedge, swap, collar, put, call, floor, cap, option or other contracts that are intended to benefit from, relate to or reduce or eliminate the risk of fluctuations in the price of commodities, including Hydrocarbons, or securities.

 

5.23                    Brokers .  No broker, finder or investment banker (other than SMH Capital, the fees and expenses of which will be paid by Parent) is entitled to any brokerage, finder’s fee or other fee or commission payable by Parent or any of its Subsidiaries in connection with the Transactions based upon arrangements made by and on behalf of Parent or any of its Subsidiaries.  True and correct copies of all agreements and engagement letters currently in effect with SMH Capital (the “ Parent Engagement Letters ”) have been provided to Target.

 

5.24                    Tax Matters .  Neither Parent nor, to the knowledge of Parent, any of its affiliates has taken or agreed to take any action that would prevent the Merger from constituting a reorganization within the meaning of Section 368(a) of the Code.

 

5.25                    Takeover Laws .  No “fair price”, “moratorium”, “control share acquisition” or other similar antitakeover statute or regulation enacted under state or federal laws in the United States (with the exception of Section 203 of the DGCL) applicable to Parent is applicable to the Merger or the other transactions contemplated hereby.  The action of the Board of Directors of Parent in approving this Agreement (and the Transactions provided for herein) is

 

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sufficient to render inapplicable to this Agreement (and the Transactions provided for herein) the restrictions on “business combinations” (as defined in Section 203 of the DGCL) as set forth in Section 203 of the DGCL.

 

ARTICLE VI

 

CONDUCT OF BUSINESS PENDING THE MERGER

 

6.1                      Conduct of Business by Target Pending the Merger.  From the date hereof until the Effective Time, except as Parent otherwise agrees in writing, as set forth in Section 6.1 of the Target Disclosure Schedule, or as otherwise contemplated by this Agreement, Target shall conduct its business in the ordinary course consistent with past practice and shall use all commercially reasonable efforts to preserve intact its business organizations and relationships with third parties and to keep available the services of its present officers and key employees, subject to the terms of this Agreement.  Except as otherwise provided in this Agreement, and without limiting the generality of the foregoing, from the date hereof until the Effective Time, without Parent’s prior written consent (which consent shall not be unreasonably withheld, delayed or conditioned):

 

(a)           Target shall not adopt or propose any change to its Certificate of Incorporation or Bylaws (or similar organizational documents);

 

(b)           Target shall not, and shall not permit any of its Subsidiaries to, (i) declare, set aside or pay any dividend or other distribution with respect to any shares of capital stock of Target or its Subsidiaries (except for intercompany dividends from direct or indirect wholly owned Subsidiaries and regular quarterly dividends with respect to the Series D Stock) or (ii) repurchase, redeem or otherwise acquire any outstanding shares of capital stock or other securities of, or other ownership interests in, Target or any of its Subsidiaries, other than intercompany acquisitions of stock;

 

(c)           Target shall not, and shall not permit any of its Subsidiaries to, merge or consolidate with any other Person or acquire assets of any other Person for aggregate consideration in excess of $2,500,000 in any single transaction (or series of related transactions) or $5,000,000 in the aggregate, or enter a new line of business or commence business operations in any country in which Target is not operating as of the date hereof;

 

(d)           Except as set forth in Section 6.1(d)  of the Target Disclosure Schedule, Target shall not, and shall not permit any of its Subsidiaries to, sell, lease, license or otherwise surrender, relinquish or dispose of any assets or properties (other than to Parent and its direct and indirect wholly owned Subsidiaries) with an aggregate fair market value exceeding $2,500,000 in any single transaction (or series of related transactions) or $5,000,000 in the aggregate (other than sales of Hydrocarbons in the ordinary course of business);

 

(e)           Target shall not settle any material Audit, make or change any material Tax election or file any material amended Tax Return except as set forth in Section 4.9 of the Target Disclosure Schedule;

 

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(f)            Except as otherwise permitted by this Agreement and the terms of any refinancing of indebtedness in connection with the Transactions, or as set forth in Section 6.1(f)  of the Target Disclosure Schedule, Target shall not, and shall not permit any of its Subsidiaries to, (i) issue any securities (whether through the issuance or granting of options, warrants, rights or otherwise and except pursuant to existing obligations disclosed in the Target Disclosure Schedule), (ii) enter into any amendment of any term of any outstanding security of Target or of any of its Subsidiaries, (iii) incur any indebtedness except trade debt in the ordinary course of business and debt pursuant to existing credit facilities or arrangements or any refinancing thereof (except as set forth in Section 6.1(f)  of the Target Disclosure Schedule), (iv) fail to make any required contribution to any Target Benefit Plan, (v) increase compensation or bonuses (except for compensation or bonuses as set forth in Section 6.1(f)  of the Target Disclosure Schedule) or increase other benefits payable to (except for payments pursuant to 401(k) plans), or, except as required by applicable law, modify or amend any employment agreements or severance agreements with, any executive officer or former employee or (vi) enter into any settlement or consent with respect to any pending litigation other than settlements in the ordinary course of business;

 

(g)           Target shall not, and shall not permit any of its Subsidiaries to, change any method of accounting or accounting practice by Target or any of its Subsidiaries except for any such change required by GAAP;

 

(h)           Target shall not, and shall not permit any of its Subsidiaries to, take any action that would give rise to a claim under the WARN Act or any similar state law or regulation because of a “plant closing” or “mass layoff” (each as defined in the WARN Act) or other layoff without in good faith attempting to comply with the WARN Act and any similar state law or regulation requiring notice to employees before layoffs;

 

(i)            Target shall not amend or otherwise change the terms of the Target Engagement Letters, except to the extent that any such amendment or change would result in terms more favorable to Target;

 

(j)            Except for expenditures set forth in Section 6.1(j)  of the Target Disclosure Schedule, neither Target nor any of its Subsidiaries shall become bound or obligated to participate in any operation, or consent to participate in any operation, with respect to any Oil and Gas Interests that will, in the aggregate, cost in excess of $1,000,000 in any single transaction (or series of related transactions) or $5,