PRE-ACQUISITION AGREEMENT

 

ROCKY MOUNTAIN GAS, INC.

 

PRE-ACQUISITION AGREEMENT

 

 

Dated February 22, 2005

 

 

 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

Page

 

 

 

 

 

SCHEDULE "A" CONDITIONS OF COMPLETION OF THE OFFER

SCHEDULE "A" EXHIBIT 1 ALLOCATION OF CONSIDERATION

SCHEDULE "B" REPRESENTATIONS AND WARRANTIES OF RMG, USE AND CRESTED

SCHEDULE "C" REPRESENTATIONS AND WARRANTIES OF ENTERRA

SCHEDULE "D" ROCKY MOUNTAIN GAS, INC. AUDITED ANNUAL FINANCIAL STATEMENTS DECEMBER 31, 2004

SCHEDULE "E" INDEMNITY AGREEMENT

 

 

 

 

PRE-ACQUISITION AGREEMENT

 

THIS PRE-ACQUISITION AGREEMENT is made effective as of the 22nd day of February, 2005;

 

AMONG :

 

ENTERRA ENERGY TRUST , an open-ended unincorporated trust governed by the laws of the Province of Alberta and having an office in the City of Calgary, Alberta (hereinafter called “ Enterra ”)

 

- and -

 

ROCKY MOUNTAIN GAS, INC. , a body corporate incorporated under the laws of the State of Wyoming and having an office in the City of Riverton, Wyoming (hereinafter called “ RMG ”)

 

- and -

 

U.S. ENERGY CORP. , a body corporate incorporated under the laws of the State of Wyoming and having an office in the City of Riverton, Wyoming (hereinafter called “ USE ”)

 

- and -

 

CRESTED CORP. , a body corporate incorporated under the laws of the State of Colorado and having an office in the City of Riverton, Wyoming (hereinafter called “ Crested ”)

 

WHEREAS :

 

A.	the board of directors of RMG wishes to have Enterra make an offer to the Shareholders of RMG to purchase all of the issued and outstanding shares of RMG by way of a Plan and Agreement of Share Exchange under Wyoming law (the “ Share Exchange Plan ”);

 

B.

as at the date hereof, RMG has issued outstanding common shares (the “ RMG Shares ”); as well as outstanding warrants and options to purchase common shares and Class A preferred shares convertible to common shares, (collectively the “ RMG Share Rights ”)and an option by Geddes and Company to convert an outstanding liability owing by USE (the “ Geddes Loan ”) to common shares of RMG (the “ Geddes Conversion Option ”);

 

C.	the board of directors of RMG has determined that it would be in the best interest of RMG and the holders of RMG Shares (“ the Shareholders ”) to (i) recommend approval of the Plan of Share Exchange; and (ii) cooperate with Enterra and take all reasonable action to support Enterra’s offer;

 

 

 

 

D.	the board of directors of RMG has determined that it would be in the best interests of RMG and its Shareholders for RMG to enter into this Agreement;

 

E.	Enterra has determined to offer to purchase all of the RMG Shares subject to the terms and conditions of this Agreement;

 

F.	USE and Crested have determined to vote their RMG Shares in favor of the Plan of Share Exchange subject to the terms and conditions of this Agreement, and to support the offer of Enterra by making indemnities, representations and warranties to Enterra respecting RMG; and

 

G.	Enterra has paid an earnest money deposit in the amount of $500,000 (the “ Deposit ”) to USE, which is being held by USE in a segregated escrow account.

 

NOW THEREFORE IN CONSIDERATION of the mutual covenants hereinafter set out, the parties hereby agree as follows.

 

ARTICLE 1    THE OFFER

 

1.1

General .

 

1.1.1    Subject to the terms and conditions set forth in this Agreement (including those set out in Schedule “A” hereto), Enterra offers to purchase all of the RMG Shares, on a fully diluted basis, for total aggregate consideration of $20,000,000. (The foregoing offer, as amended from time to time as permitted under this Agreement, is hereinafter referred to as the “ Offer ”.) RMG agrees to call a meeting of the Shareholders (the “ Meeting ”) to consider approval of the Offer and Share Exchange Plan, and to prepare and send to the Shareholders a proxy statement (the “ Circular ”), recommending approval of the Share Exchange Plan. Enterra agrees to cooperate with RMG to provide all information respecting Enterra required for the Circular. The Offer will be deemed made as of the date the Circular is sent to the Shareholders.

 

1.1.2    Subject to Section 1.1.6, the consideration payable for the RMG Shares shall be the issuance of 736,842 exchangeable shares (the “ Exchangeable Shares ”) at a stated value of $19.00 per Exchangeable Share and payment of cash in the amount of $6,000,002 (including the Deposit). Provided, that if, before or as of the date of completion of the Share Exchange Plan, all of the overriding royalty interests held by the secured lenders of outstanding debt owed by RMG I, LLC (approximately $3.539 million) are not purchased by USE for $266,000 and immediately completely extinguished, the cash consideration to be paid to the Shareholders shall be reduced by $266,000, pro rata for each Shareholder, which $266,000 (for purposes of this Section 1.1.2) is the agreed value of the overriding royalty interests. If the purchase price for all the interests is more than $266,000, Enterra shall pay the excess and shall not be entitled to a credit under this Agreement. If all or less than all the interests are purchased, for less than $266,000, then USE shall pay that amount and the difference between the amount paid and $266,000 shall be deducted, pro rata, from the cash consideration to be paid by Enterra to the Shareholders.

 

 

 

 

1.1.3    The form of documents for such extinguishment shall be subject to the prior approval of Enterra. USE shall be solely responsible for payment to the holders of the overriding royalty interests, and for recording their extinguishments.

 

1.1.4    Each Exchangeable Share shall be exchanged automatically on the first anniversary of the Effective Date (as hereinafter defined) for one trust unit (a “ Trust Unit ”) of Enterra.

 

1.1.5    If the Share Exchange Plan is approved, each Shareholder who does not perfect his or her rights under Wyoming law to dissent from the Share Exchange Plan shall receive the allocation of consideration between Exchangeable Shares and cash as set out on Exhibit 1 to Schedule “A,” to be provided to Enterra prior to the completion of the Share Exchange Plan. Each Shareholder’s right to receive the consideration shall be conditioned on Enterra’s receipt of his or her certificate(s) for the RMG Shares, with the Shareholder’s signature Medallion guaranteed. The aggregate amount of consideration was determined by approximately two-thirds of the consideration payable in Exchangeable Shares and approximately one-third in cash, adjusted as necessary for the receipt by each Shareholder of a whole number of Exchangeable Shares after aggregating all of the shareholdings of each Shareholder.

 

1.1.6    The parties hereto understand that as a trust, Enterra cannot issue shares and agree that the Exchangeable Shares shall be issued by one or more direct or indirect wholly owned subsidiaries, or any combination thereof (which, for the purposes hereof, may include a partnership, all of the partners of which are direct or indirect subsidiaries of Enterra), and, the parties further agree that all or any part of the cash component of the consideration may be provided by parties other than Enterra. The term “Enterra” as used herein will include Enterra Energy Trust, the issuer(s) of the Exchangeable Shares and all parties providing the cash component of the consideration, but Enterra will continue to be liable to RMG for any default in the performance of any obligations hereunder by any such entity, as more fully provided in this Agreement.

 

1.1.7    If a more effective alternative from the aspect of taxation other than the issuance of Exchangeable Shares is mutually agreed upon by the Parties prior to the mailing of the Circular, the Parties may agree upon a substitute mechanism for the issuance and distribution to the Shareholders of 736,842 Trust Units at a stated value of $19.00 per Trust Unit on the first anniversary of the Effective Date.

 

1.1.8    The Offer will expire on the earlier of (i) the completion of the Share Exchange Plan; (ii) the termination of this Agreement, or (iii) June 30, 2005 (or, if any such date is not a business day, on the next following business day), provided that the Offer may be extended, at the sole discretion of Enterra, if any of the conditions thereto set forth in Schedule “A” hereto is not satisfied on the expiry date of the Offer. Subject to the satisfaction or waiver of the conditions set forth in Schedule “A” hereto, Enterra will, within seven (7) calendar days following the Meeting, take up and pay for all RMG Shares. Enterra will use its best efforts to consummate the Offer, subject only to satisfaction of the terms and conditions set forth in this Agreement (including those set out in Schedule “A”).

 

 

 

 

1.1.9    Subject to completion of the Share Exchange Plan, it is agreed that payment of all of RMG’s general and administrative expenses up to the date of completion of the Share Exchange Plan (the date when Enterra pays for the RMG Shares) shall be the sole responsibility of USE. Payment of such expenses thereafter shall be the responsibility of RMG, or otherwise governed by the Transition Services Agreement. Subject to completion of the Share Exchange Plan, it is agreed that all other expenses of RMG (including, without limitation, lease operating and field expenses), beginning April 1, 2005, shall the sole responsibility of RMG.

 

1.1.10    Enterra expressly reserves the right to amend, extend, vary or waive any term or condition of the Offer, except that, without the prior written consent of RMG, Enterra will not: (i) reduce the consideration payable by Enterra pursuant to the Offer, as provided for herein; (ii) change the form of consideration payable under the Offer; or (iii) add to, amend or change any of the terms of the Offer in any manner adverse to the Shareholders (it being understood that an extension of the Offer or waiver of any condition thereto will not be considered to be a change adverse to the Shareholders). Enterra agrees to provide RMG with not less than two days prior written notice of any waiver or amendment of any term or condition of the Offer.

 

1.2	RMG Approval of the Offer and Share Exchange Plan

 

RMG hereby represents that its board of directors has determined unanimously (i) that the Offer and the Share Exchange Plan is fair to the Shareholders and is in the best interests of RMG and the Shareholders; (ii) the board of directors will unanimously recommend approval of the Share Exchange Plan by the Shareholders subject to Section 1.3, and (iii) the RMG officers and directors will vote their RMG Shares in favor of the Share Exchange Plan, provided that the Offer is not amended except in accordance with the terms of this Agreement. Such recommendation (and agreement by the RMG officers and directors to so vote) will be stated in the Circular.

 

1.3	RMG Covenants .

 

1.3.1    Subject to the fiduciary obligations of its board of directors, RMG hereby covenants to cooperate with Enterra and to take all reasonable action to support the Offer and ensure that the Share Exchange Plan is accepted by the Shareholders.

 

1.3.2    As soon as practicable following the date hereof and in any event prior to the completion of the Share Exchange Plan, RMG will cause to be delivered to Enterra a list (in paper and electronic form, if available) as Exhibit 1 to Schedule A, made up to a date as of completion of the Share Exchange Plan, setting out the registered names of the Shareholders, their municipalities of residence, and the number of RMG Shares held by each. RMG will immediately give written notice to Enterra if RMG Shares are issued between February 22, 2005 and the completion of the Share Exchange Plan to Shareholder(s) resident in a state where no Shareholders were resident on February 22, 2005. RMG will also make such of its executive officers available for meetings with Shareholders as Enterra may reasonably request.

 

1.3.3    RMG will, on a confidential basis, provide Enterra with a draft copy of the Circular (and any amendments thereto), prior to the mailing thereof and will provide Enterra

 

 

 

with a reasonable opportunity to review and provide comments thereon. The Circular will set forth (among other things) the recommendation of the board of directors referred to in Paragraph 1.2(i) hereof and the agreement of the directors and officers referred to in Paragraph 1.2(ii) hereof. It is understood that the content of the Circular will be determined by the board of directors of RMG, acting reasonably, provided that such Circular will not contain any information or statements inconsistent with matters that are specifically addressed or provided for in this Agreement, and provided further that the information about Enterra which is contained in the Circular (as such information is approved by Enterra after review) will be the responsibility of Enterra as to its accuracy and completeness.

 

1.4	Enterra Cooperation .

 

1.4.1    Enterra hereby covenants to cooperate with RMG and to take all reasonable action to support the Meeting and ensure that the Share Exchange Plan is accepted by the Shareholders.

 

1.4.2    Enterra will make such of its executive officers available for meetings with Shareholders as RMG may reasonably request.

 

1.4.3    Enterra will provide RMG with all information concerning Enterra that is required or reasonably desired to be provided in the Circular.

 

1.5	Public Disclosure .

 

The parties will consult each other with respect to any public disclosures respecting this Agreement, the Offer and any matter related thereto prior to making any public disclosure.

 

1.6	Outstanding RMG Share Rights .

 

Prior to completion of the Share Exchange Plan, all of the RMG Share Rights shall have been terminated.

 

1.7	Outstanding Geddes Loan and Geddes Conversion Option .

 

Prior to or simultaneously with the completion of the Share Exchange Plan, USE shall have obtained the agreement of Geddes and Company that the collateral security for the Geddes Loan consisting of 4,000,000 RMG Shares held by USE and security in RMG’s interests in the Castle Rock area mineral leases shall be released and the Geddes Conversion Option shall have been either terminated or exercised in full or in part for additional RMG Shares (and if in part, the balance shall have been terminated), which additional shares (if any) will be issued and outstanding as of the date the Circular is sent to the Shareholders.

 

1.8	No Registration of the Exchangeable Shares or the Underlying Trust Units .

 

RMG, USE and Crested acknowledge and agree that (i) neither the issuance of the Exchangeable Shares nor the underlying Trust Units into which the Exchangeable Shares may be exchanged have been or will be registered under the U.S. Securities Act or the securities laws of any state of the United States (and resale of the Trust Units by the Shareholders will not be so

 

 

 

registered, unless Enterra ceases to be listed on the Toronto Stock Exchange, as provided in Section 5.2) ; (ii) neither the Exchangeable Shares nor the underlying Trust Units into which the Exchangeable Shares may be exchanged may be offered or sold in the United States without registration under the U.S. Securities Act or compliance with requirements of an exemption from registration under the U.S. Securities Act and all applicable state laws, and (iii) Enterra is not obligated to file and has no present intention of filing with the U.S. Securities and Exchange Commission or with any state securities administrator any registration statement in respect of resale of the Common Shares in the United States.

 

ARTICLE 2    COVENANTS OF RMG

 

2.1	Ordinary Course of Business .

 

RMG covenants and agrees that, prior to completion of the Share Exchange Plan, or the termination of this Agreement pursuant to its terms, unless Enterra otherwise agrees in writing or as otherwise expressly contemplated or permitted by this Agreement:

 

2.1.1    RMG will not, directly or indirectly, do or permit to occur any of the following:

 

(a)    pledge, lease, dispose of or encumber, or agree to pledge, lease, dispose of or encumber;

 

(b)    except in the usual, ordinary and regular course of business and consistent with past practice, any assets of RMG, except for the disposition of its equity holdings in Pinnacle Gas Resources Inc.;

 

(c)    amend or propose to amend its articles or by laws;

 

(d)    split, combine or reclassify any outstanding RMG Shares, or declare, set aside or pay any dividend or other distribution payable in cash, stock, property or otherwise with respect to the RMG Shares;

 

(e)    reorganize or merge RMG with any other person, corporation, partnership or other business organization whatsoever; or

 

(f)    incur or commit to incur any indebtedness for borrowed money or issue any debt securities except for the borrowing of working capital in the ordinary course of business and consistent with past practice other than renewals of existing credit facilities;

 

2.1.2    RMG shall promptly notify Enterra in writing of:

 

(a)    any material change (actual, anticipated, contemplated or, to the knowledge of RMG, threatened, financial or otherwise) in the business, affairs, operations, assets, liabilities (contingent or otherwise) or capital of RMG and its subsidiaries considered as a whole; or

 

 

 

 

(b)    any change in any representation or warranty set forth in Schedule B which change is or may be of such a nature as to render any such representation or warranty misleading or untrue in a material respect.

 

RMG shall in good faith discuss with Enterra any change in circumstances (actual, anticipated, contemplated or, to the knowledge of RMG, threatened, financial or otherwise) which is of such a nature that there may be a reasonable question as to whether notice need to be given to Enterra pursuant to this Section 2.1.2.

 

2.1.3    RMG will not (otherwise than as may be contemplated in this Section 2.1:

 

(a)    enter into any employment, severance or similar agreement, policy or arrangement with, or grant any bonuses, salary increases, severance or termination pay to or make any loan to, any officers or directors of RMG; or

 

(b)    hire any employees.

 

2.1.4    RMG will use reasonable commercial efforts to cause its current insurance (or re insurance) policies not to be cancelled or terminated or any of the coverage thereunder to lapse, unless simultaneously with such termination, cancellation or lapse, replacement policies underwritten by insurance and re insurance companies of nationally recognized standing providing coverage equal to or greater than the coverage under the cancelled, terminated or lapsed policies for substantially similar premiums are in full force and effect;

 

2.1.5    RMG will:

 

(a)    use reasonable commercial efforts to preserve intact their respective business organizations and goodwill, to keep available the services of its officers and consultants as a group and to maintain satisfactory relationships with suppliers, agents, distributors, customers and others having business relationships with it; and

 

(b)    not take any action that would render, or that reasonably may be expected to render, any representation or warranty made by it in this Agreement untrue in any material respect at any time prior to the Effective Date;

 

2.1.6    RMG will not enter into or modify in any material respect any contract, agreement, commitment or arrangement with respect to any of the matters set forth in this Section 2.1.

 

2.2	Non-Solicitation .

 

2.2.1    RMG shall not, directly or indirectly, through any officer, director, employee, representative or agent of RMG: (i) solicit, initiate or encourage (including, without limitation, by way of furnishing information or entering into any form of agreement, arrangement or understanding) any inquiries or proposals regarding any merger, amalgamation, take over bid, sale of substantial assets, sale of treasury shares or any similar transaction or transactions involving RMG (any of the foregoing inquiries or proposals being referred to herein as an “Acquisition Proposal”); or (ii) provide any confidential information to, participate in any

 

 

 

discussions or negotiations relating to any such transactions with, or otherwise cooperate with or assist or participate in any effort to take such action by, any corporation, person or other entity or group; provided, however, that nothing contained in this Section 2.2 or other provision of this Agreement shall prevent the board of directors of RMG from considering, negotiating, approving and recommending to the Shareholders an unsolicited, bona fide, written Acquisition Proposal for which adequate financial arrangements have been made, that the board of directors of RMG determines in good faith (after consultation with its financial advisors, and after receiving a written opinion of outside counsel, or advice of outside counsel that is reflected in the minutes of the board of directors of RMG, to the effect that the board of directors is required to do so in order to discharge properly its fiduciary duties to RMG) would, if consummated in accordance with its terms, result in a transaction financially superior for the Shareholders than the transaction contemplated by this Agreement (any such Acquisition Proposal being referred to herein as a “Superior Proposal”).

 

2.2.2    RMG previously has been approached by Silverado Exploration regarding a proposed purchase by Silverado Exploration of interests in RMG’s Castle Rock and Oyster Ridge properties. RMG shall not discuss such proposed purchase with Silverado Exploration without prior consultation with and approval by Enterra, unless this Agreement is terminated.

 

2.2.3    In the event that any Acquisition Proposal is for consideration other than all cash, then the value of that Superior Proposal shall be as determined by agreement by the financial advisors to Enterra and RMG, or failing such agreement, the value of the Superior Proposal shall be determined by the financial advisors to RMG alone.

 

2.2.4    RMG will, and will direct and use its best efforts to cause its officers, directors, consultants, representatives and agents to, immediately cease and cause to be terminated any existing discussions or negotiations with any parties (other than Enterra) with respect to any potential Acquisition Proposal. Subject to Section 2.2.5 below, RMG will immediately close any data rooms that may be open. RMG agrees not to release any third party from any confidentiality or standstill agreement to which RMG and such third party are a party. RMG will immediately request the return or destruction of all information provided to any third parties who have entered into a confidentiality agreement with RMG relating to a potential Acquisition Proposal and will use its best efforts to ensure that such requests are honored.

 

2.2.5    RMG will immediately notify Enterra of any future Acquisition Proposal or any request for non public information relating to RMG or for access to the properties, books or records of RMG by any person or entity that informs any member of the board of directors of RMG that it is considering making, or has made, an Acquisition Proposal. Such notice to Enterra will be made, from time to time, orally and in writing and will indicate such details of the proposal, inquiry or contact as Enterra may reasonably request including the identity of the person making such proposal, inquiry or contact.

 

2.2.6    RMG will not make available, after the date hereof, any material non public information to any party in connection with any potential or actual Acquisition Proposal. Notwithstanding the foregoing sentence of this Paragraph 2.2.6, in the event that the board of directors of RMG receives a request for material non public information from a party who proposes to RMG a bona fide Acquisition Proposal and the board of directors of RMG

 

 

 

determines in good faith that such proposal is a Superior Proposal as contemplated by Section 2.2.1, then, and only in such case, RMG may, subject to the execution of a confidentiality agreement substantially similar to that then in effect between RMG and Enterra, provide such party with access to information regarding RMG. RMG agrees to send a copy of any such confidentiality agreement to Enterra immediately upon its execution.

 

2.2.7    RMG will ensure that the officers, directors and employees of RMG and any investment bankers or other advisors or representatives retained by RMG are aware of the provisions of this Section 2.2, and RMG will be responsible for any breach of this Section 2.2 by such bankers, advisors or representatives.

 

2.3	Access to Information .

 

Subject to the existing Confidentiality Agreement between RMG and Enterra, dated January 6, 2005 and the provisions of existing confidentiality agreements between RMG and third parties restricting RMG from disclosing the existence of discussions or negotiations between RMG and such third parties occurring prior to the date hereof, upon reasonable notice RMG will afford Enterra’s officers, employees, counsel, accountants and other authorized representatives and advisors (“Representatives”) access, at all reasonable times from the date hereof and until the termination of this Agreement, to its properties, books, contracts and records as well as to its management personnel, employees and agents or advisors, and, during such period, RMG will furnish promptly to Enterra all information concerning its business, properties and personnel as Enterra may request and Enterra will hold in confidence all such information on the terms and subject to the conditions contained in the existing Confidentiality Agreement between RMG and Enterra.

 

2.4	Structure of Transaction .

 

RMG will cooperate with Enterra in structuring the acquisition by Enterra of RMG in a tax efficient manner, provided that no such cooperation will be required where such structuring will have an adverse effect on RMG or the existing Shareholders of RMG or cause any breach of or default under this Agreement by RMG.

 

ARTICLE 3    DUE DILIGENCE/MATERIAL TITLE DEFECTS

 

3.1	Due Diligence .

 

Subject to Enterra receiving the access to information contemplated by Section 2.3, Enterra will have until April 15, 2005 to complete a due diligence review of RMG’s assets, business, operations, title documents, financial records, corporate records, wells and facilities, and Enterra’s obligation to complete the Share Exchange Plan is conditional upon the due diligence review being satisfactory to Enterra in all material respects, under the procedures of Sections 3.2 and 3.3.

 

3.2	Deficiencies .

 

On or before April 15, 2005 Enterra shall give written notice to RMG of any material deficiencies (“Due Diligence Deficiencies”) identified in the due diligence review, the non-

 

 

 

satisfaction of which would cause Enterra to terminate this Agreement and not complete the Share Purchase Plan. “Materiality” in this Section shall be construed in the context of RMG’s business and assets. However, resolution as between Enterra and RMG of material defects in RMGs title to assets (“Material Title Defects” as defined in Section 3.3.2 below), where the Material Title Defects are not cured by April 30, 2005 under Section 3.3.1, shall be subject to Section 3.3.2.

 

3.3	Time to Satisfy .

 

3.3.1    RMG shall have until April 30, 2005 to satisfy any Due Diligence Deficiencies for which it has received written notice from Enterra pursuant to Section 3.2 to the satisfaction of Enterra, acting reasonably. The April 30, 2005 deadline may be extended by agreement of the parties, it being understood that satisfaction of a deficiency could require more time (for examples, difficulty in obtaining signature of lessors in an instance of title failure, or a delay in confirmation or amendment of a permit due to backlogs at a regulatory agency).

 

3.3.2    If any of the information or materials supplied by RMG relating to RMG’s title to mineral properties pursuant to Section 3.1, reflects the existence of any encumbrance, encroachment, defect in or objection to title that renders title to the properties defective or encumbered, and not cured by April 30, 2005 (subject to mutual extension of time), which defect in or objection to title makes such title unmarketable in accordance with accepted industry standards (“Material Title Defects”), then:

 

(a)    Enterra shall notify RMG in writing of the Material Title Defects as they are identified, providing RMG with adequate information to enable RMG to go forward with curing the Material Title Defects. RMG then shall furnish to Enterra all documentation reasonably satisfying the Material Title Defects.

 

(b)    If RMG is unable to cure the Material Title Defects before completion of the Share Exchange Plan, Enterra shall have the option to: (A) accept the properties as being owned by RMG, with the Material Title Defects, and adjust the consideration to be paid to the RMG Shareholders in an amount to be agreed upon between RMG and Enterra; (B) accept the properties as being owned by RMG, with the Material Title Defects, and go forward to resolve the Material Title Defects after completion of the Share Exchange Plan pursuant to (iii) below; or (C) terminate this Agreement and receive a refund of the Deposit from USE, provided that for purposes of (A), t he aggregate value of the Material Title Defects must exceed 5% of the aggregate consideration set out in Section 1.1.1 before any adjustment will be made; and provided further , that for purposes of (C), the aggregate value of the Material Title Defects must exceed 10% of such aggregate consideration before Enterra will have the right to terminate this Agreement.

 

(c)    If RMG is unable to cure the Material Title Defects before completion of the Share Exchange Plan, Enterra may elect to accept the properties as being owned by RMG, with the Material Title Defects, and the former officers of RMG shall continue to work with Enterra to resolve such Defects. USE shall hold in reserve (from its portion of the Share Exchange Plan consideration) cash and Exchangeable Shares sufficient to pay back to Enterra an amount equal to the value (agreed to by RMG and Enterra) of the mineral properties

 

 

 

in question, and shall pay that amount to Enterra (one-third in cash and two-thirds in Exchangeable Shares), if the Material Title Defects are not resolved to Enterra’s reasonable satisfaction on or before six months after completion of the Share Exchange Plan. Provided, that the amount which USE may be obligated to pay Enterra shall not exceed $1,000,000 in aggregate amount, under any circumstances. Enterra’s ‘reasonable satisfaction’ shall (a) be construed in accordance with industry title standards as applied to the coalbed methane business, and (b) not be unreasonably withheld.

 

(d)    Enterra shall give written notice to USE of all payments due from USE under subsection (c) before that six months date; and upon receipt by Enterra of full payment therefore, thereafter, no payments shall be due from USE, and all Material Title Defects then outstanding shall be deemed waived by Enterra as of that six months date. For clarity, the parties understand that if the Share Exchange Plan is completed (which for all purposes of this Agreement shall be defined to be the date when Articles of Share Exchange are filed with the Wyoming Secretary of State (which filing is to be made as soon as possible after Enterra pays for the RMG Shares), then, by way of example only, if that filing is made on May 15, 2005, then the six months date would be as of the close of business on November 15, 2005.

 

(e)    Material Title Defects which become subject to (b) or (c) above shall not be deemed to be breaches of the representations and warranties in paragraph 12 of Schedule B

 

ARTICLE 4    COVENANTS OF USE

 

4.1	Covenants of RMG .

 

USE, as the major and controlling Shareholder and the provider of personnel to RMG, shall cause RMG to perform and comply with its covenants and agreements set out herein.

 

4.2	Transition Period .

 

Subject to the completion of the Share Exchange Plan, Enterra and USE shall enter into a Transition Agreement in the form attached as Schedule “E” hereto.

 

4.3	Indemnity Respecting Legal Actions .

 

Subject to the completion of the Share Exchange Plan, USE agrees to indemnify and save harmless RMG and Enterra, their respective officers, directors, employees, agents, shareholders and unitholders, from and against any and all legal actions, suits and claims of whatever nature by any third party respecting RMG or its operations and affairs arising prior to February 22, 2005; any judgments, settlements, or demands arising therefrom, and all expenses, costs and fees, including without limitation legal fees, pertaining thereto.

 

4.4	Indemnity Agreement .

 

Subject to the completion of the Share Exchange Plan, USE and Enterra shall enter into an indemnification agreement in the form attached as Schedule “E” hereto.

 

 

 

 

4.5	Payment of ‘Fair Value’ of RMG Shares Held by Dissenters .

 

Subject to completion of the Share Exchange Plan, USE shall pay to those Shareholders who perfect their rights as dissenters under Wyoming law the ‘fair value’ of their RMG Shares. Enterra shall not be responsible for any of such payments. The rights of Shareholders who wish to dissent from the Share Exchange Plan shall be set forth in the Circular.

 

ARTICLE 5    COVENANTS OF ENTERRA

 

5.1	Transition P