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Exhibit 10.4
PURCHASE AND SALE AGREEMENT
BY AND BETWEEN
THE OPERATING CO., et al AS SELLER
AND
LEGACY RESERVES OPERATING LP, AS BUYER
TABLE
OF CONTENTS
PAGE
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1.
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SALE
AND PURCHASE OF THE ASSETS.
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1
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1.1
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Acquired
Assets
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1
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1.2
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Excluded
Assets.
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2
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1.3
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Assumed
Liabilities
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2
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2.
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PURCHASE
PRICE.
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3
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2.1
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Base
Purchase Price.
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3
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2.2
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Deposit.
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3
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2.3
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Adjustments
to the Base Purchase Price
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3
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2.4
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Allocation
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4
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3.
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CLOSING.
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5
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3.1
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Closing.
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5
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3.2
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Delivery
by Seller
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5
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3.3
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Delivery
by Buyer
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6
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3.4
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Further
Cooperation
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6
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4.
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ACCOUNTING
ADJUSTMENTS.
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6
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4.1
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Closing
Adjustments.
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6
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4.2
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Strapping
and Gauging
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6
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4.3
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Taxes
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7
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4.4
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Post-Closing
Adjustments
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7
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4.5
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Suspended
Funds
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8
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4.6
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Cooperation
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8
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5.
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DUE
DILIGENCE: TITLE MATTERS.
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9
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5.1
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General
Access
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9
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5.2
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Defensible
Title
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9
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5.3
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Defect
Letters.
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11
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5.4
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Effect
of Title Defect
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12
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5.5
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Preferential
Rights and Consents.
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14
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6.
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ENVIRONMENTAL
ASSESSMENT.
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15
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6.1
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Physical
Condition of the Assets
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15
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6.2
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Inspection
and Testing.
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16
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6.3
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Notice
of Adverse Environmental Conditions
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17
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6.4
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Rights
and Remedies for Adverse Environmental
Conditions.
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17
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6.5
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Remediation
by Seller
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19
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7.
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REPRESENTATIONS
AND WARRANTIES OF SELLER.
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20
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7.1
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Seller’s
Representations and Warranties
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20
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7.2
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Scope
of Representations of Seller.
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22
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8.
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REPRESENTATIONS
AND WARRANTIES OF BUYER.
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23
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8.1
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Buyer’s
Representations and Warranties
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23
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9.
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CERTAIN
AGREEMENTS OF SELLER
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24
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9.1
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Maintenance
of Assets
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24
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9.2
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Records
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25
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9.3
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Audit
Rights.
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25
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10.
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CERTAIN
AGREEMENTS OF BUYER
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26
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10.1
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Plugging
Obligation
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26
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10.2
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Plugging
Bond
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26
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10.3
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Seller’s
Logos
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26
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10.4
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Like-Kind
Exchanges
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26
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11.
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CONDITIONS
PRECEDENT TO OBLIGATIONS OF BUYER
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26
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11.1
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No
Litigation
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26
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11.2
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Representations
and Warranties
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26
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12.
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CONDITIONS
PRECEDENT TO THE OBLIGATIONS OF SELLER
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27
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12.1
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No
Litigation
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27
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12.2
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Representations
and Warranties
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27
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13.
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TERMINATION.
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27
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13.1
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Causes
of Termination
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27
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13.2
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Effect
of Termination.
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28
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14.
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INDEMNIFICATION.
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28
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14.1
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Indemnification
by Seller
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29
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14.2
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Indemnification
by Buyer
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31
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14.3
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Physical
Inspection
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31
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14.4
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Notification
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31
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15.
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MISCELLANEOUS.
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32
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15.1
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Casualty
Loss.
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32
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15.2
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Confidentiality.
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32
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15.3
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Notices
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33
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15.4
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Press
Releases and Public Announcements
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33
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15.5
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Compliance
with Express Negligence Test
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34
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15.6
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Governing
Law
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34
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15.7
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Exhibits
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34
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15.8
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Fees,
Expenses, Taxes and Recording.
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34
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15.9
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Assignment
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35
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15.10
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Entire
Agreement
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35
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15.11
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Severability
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35
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15.12
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Captions
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35
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15.13
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Time
of the Essence
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35
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15.14
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Counterpart
Execution.
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35
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15.15
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Preferential
Right to Purchase
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35
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EXHIBITS
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A
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Oil
and Gas Leases and Land
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B
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Wells
Allocation
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C
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Equipment
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D
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Excluded
Assets
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E
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Form
of Assignment and Bill of Sale
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F
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Services
Agreement
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G
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Lease
Agreement
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7.1(E)
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AFE’s
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7.1(G)
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Pending
Litigation
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7.1(K)
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Material
Agreements
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7.1(L)
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Consents
and Preferential Purchase Rights
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7.1(P)
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Calls
on Production
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PURCHASE AND SALE AGREEMENT
This Purchase and Sale
Agreement (this “Agreement”) is entered into this
30th day of August, 2007, but effective as of 7:00 a.m.
(Central Time) on September 1, 2007 (the “Effective
Time”), by and between The Operating Co., a Texas
corporation, Nova Oil & Gas, Inc., a Texas corporation,
X-Pert Corporation, a Texas corporation, The 195 AF, Ltd., a
Texas family limited partnership, Cowboy Crude Oil & Gas,
F.L.P., a Texas family limited partnership, and
Cottonhead, Ltd., a Texas limited partnership (collectively
referred to as “Seller”) and Legacy Reserves
Operating LP, a Delaware limited partnership
(“Buyer”). Buyer and Seller are collectively
referred to herein as the “Parties” and sometimes
individually referred to as a
“Party.”
RECITALS:
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A.
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Seller
desires to sell to Buyer certain oil, gas and mineral properties
and other assets on the terms and conditions set forth in this
Agreement.
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B.
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Buyer
desires to purchase from Seller such oil, gas and mineral
properties and other assets on the terms and conditions set forth
in this Agreement.
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WITNESSETH:
In
consideration of the mutual agreements contained in this
Agreement and other good and valuable consideration, Buyer and
Seller agree as follows:
1. SALE
AND PURCHASE OF THE ASSETS.
1.1
Acquired Assets. Subject
to the terms and conditions of this Agreement, Seller agrees
to sell, convey and deliver to Buyer and Buyer agrees to
purchase and acquire from Seller the following (collectively,
the “Assets”):
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(A)
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All
of Seller’s right, title and interest in, to and under the
oil, gas and/or mineral leases described on Exhibit
A attached hereto (the “Leases”), whether or not
such interests are accurately or completely described on Exhibit
A , and all of Seller’s oil and gas leasehold, mineral,
royalty, overriding royalty, surface or other interests in the
lands covered by the Leases or in the lands described on Exhibit
A (collectively, the “Land”), together with all the
property and rights incident thereto, including without limitation
Seller’s rights in, to and under all operating agreements;
pooling, communitization and unitization agreements; farmout
agreements; joint venture agreements; product purchase and sale
contracts; transportation, processing, treatment or gathering
agreements; leases; permits (the “Permits”);
rights-of-way (the “Rights-of-Way”); surface use
agreements; surface leases; surface estates; easements (the
“Easements”); licenses; options; declarations; orders;
contracts; and instruments in any way relating to the Leases or
Land;
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(B)
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All
of Seller’s right, title and interest in and to the wells
situated on or used in conjunction with operations on the Leases
and/or Land or on land pooled, communitized or unitized therewith
(“Pooled Land”), including, without limitation, all
producing, non-producing, injection, disposal and water supply
wells and the wells listed on Exhibit B attached hereto
(collectively, the “Wells”);
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(C)
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All
of Seller’s right, title and interest in and to all of the
personal property, fixtures, improvements and other property,
whether real, personal or mixed, now or as of the Effective Time
on, appurtenant to or used or obtained by Seller in connection with
the Leases, Land, Pooled Land or Wells or with the production,
injection, treatment, sale or disposal of hydrocarbons and all
other substances produced therefrom or attributable thereto,
including, without limitation, well equipment, casing, tubing,
tanks, generators, boilers, buildings, pumps, motors, machinery,
pipelines, gathering systems, power lines, telephone and telegraph
lines, roads, field processing plants, field offices and other
furnishings related thereto, all vehicles, rolling stock, pulling
units, equipment leases, trailers, inventory in storage and storage
yards located thereon or used in connection therewith, all of the
equipment and other personal property described on Exhibit C
attached hereto, and all other improvements or appurtenances
thereunto belonging (collectively, the
“Equipment”);
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(D)
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All
of the oil and gas and associated hydrocarbons (“Oil and
Gas”) in and under or otherwise attributable to the Leases,
Land, and Pooled Land or produced from the Wells;
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(E)
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To
the extent assignable, all governmental permits, licenses and
authorizations, as well as any applications for the same, related
to the Leases, Land, Pooled Land and Wells or the use thereof;
and
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(F)
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All
of the files, records, and data of Seller relating to the items
described in subsections (A), (B), (C), (D) and (E) above (the
“Records”), including, without limitation, lease
records, well records, and division order records; well files and
prospect files; title records (including abstracts of title, title
opinions and memoranda, and title curative documents related to the
Leases and Wells); contracts and contract files; correspondence;
computer data files; micro-fiche data files; geological,
geophysical and seismic records, interpretations, data, maps and
information, production records, electric logs, core data, pressure
data, decline curves and graphical production curves; and
accounting records, to the extent only that the Records can be
transferred without violation of any third-party restriction and
are not protected by Seller’s attorney-client
privilege.
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1.2
Excluded Assets . Notwithstanding
the foregoing, the Assets shall not include, and there is
excepted, reserved and excluded from the sale contemplated
hereby the property described on Exhibit D attached
hereto.
1.3
Assumed Liabilities . Subject
to the terms of this Agreement, if Closing occurs, Buyer shall
assume and agree to timely and fully pay, perform and
otherwise discharge, without recourse to Seller or its
affiliates, all of the liabilities and obligations of Seller
and its affiliates, predecessors, successors, assigns or
representatives, direct or indirect, known or unknown,
asserted or unasserted, absolute or contingent, accrued or
unaccrued, which relate, directly or indirectly, to the
Assets, whether such liabilities and obligations accrue
before, on or after the Effective Time (collectively, the
“Assumed Liabilities”). Notwithstanding
the foregoing, the Assumed Liabilities shall not include, and
there is excepted, reserved and excluded from the Assumed
Liabilities, the liabilities and obligations for which Seller
indemnifies Buyer pursuant to Section 14.1.
2.
PURCHASE PRICE .
2.1
Base Purchase Price . The
purchase price for the Assets is SIXTY MILLION FIVE HUNDRED
THOUSAND AND NO/100 DOLLARS ($60,500,000.00) Base Purchase
Price(the “Base Purchase Price”), subject to the
adjustments provided for herein.
2.2
Deposit . Within
three (3) days of the execution of this Agreement, Buyer shall
deliver to Seller, in cash by wire-transfer in immediately
available funds to an account designated by Seller, a Deposit
in an amount equal to THREE MILLION TWENTY FIVE THOUSAND AND
NO/100 DOLLARS ($3,025,000.00) (such amount together with all
accrued interest thereon, the
“Deposit”). Prior to Closing, the
Deposit shall be maintained by Seller in an interest bearing
account. The Deposit shall be distributed to Seller
and credited to the Base Purchase Price at Closing, or if this
Agreement is terminated, shall be distributed or retained
pursuant to Article 13. In the event the
Deposit is not delivered to Seller as prescribed, this
Agreement shall terminate. This Agreement is
expressly subject to Buyer obtaining approval of the board of
directors of its general partner, which approval shall be
obtained within three (3) business days after the execution of
this Agreement. In the event Buyer does not notify
Seller of such board approval within three (3) business days
after the execution of this Agreement, this Agreement shall
terminate and be of no further force and effect.
2.3
Adjustments to the Base Purchase Price
. At
Closing, appropriate adjustments to the Base Purchase Price
shall be made as follows in accordance with Section 4.1 (as
adjusted, the “Purchase Price”):
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(A)
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The
Base Purchase Price shall be adjusted upward by:
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(i) any amount
determined to be due Seller pursuant to Section
4.2;
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(ii)
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Property
Taxes and Severance Taxes related to the Assets paid by Seller for
the period following the Effective Time as determined pursuant to
Section 4.3;
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(iii)
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an
amount equal to the costs, expenses and other expenditures (whether
capitalized or expensed) paid by Seller in accordance with this
Agreement that are attributable to the Assets for the period from
and after the Effective Time;
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(iv)
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for
all operated wells, a monthly overhead fee of $400, prorated for
partial months, per active Well while Seller is operating the
Assets from and after the Effective Time;
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(v)
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an
amount equal to the amount of proceeds derived from the sale of Oil
and Gas, net of royalties and severance taxes paid by Buyer,
actually received by Buyer and directly attributable to the Wells
which are, in accordance with generally accepted accounting
procedures, attributable to the period of time prior to the
Effective Time;
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(vi)
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an
amount equal to $7,873 per day for each day from, but not
including, October 1, 2007 until Closing, representing the daily
interest accruing on the Base Purchase Price less the Deposit,
based on a 5% annual rate of interest;
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(vii)
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any
other amount agreed upon in writing by Seller and
Buyer.
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(B)
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The
Base Purchase Price shall be adjusted downward by:
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(i)
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an
amount equal to the amount of proceeds derived from the sale of Oil
and Gas, net of royalties and severance taxes paid by Seller,
actually received by Seller and directly attributable to the Wells
which are, in accordance with generally accepted accounting
procedures, attributable to the period of time from and after the
Effective Time;
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(ii)
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an
amount equal to all expenditures, liabilities and costs relating to
the Assets (other than Taxes related to the Assets) that are unpaid
as of the Closing Date and assessed for or attributable to periods
of time or the ownership of production prior to the Effective Time
regardless how such expenditures, liabilities and costs are
calculated provided that to the extent the actual amounts cannot be
determined prior to the agreement of Buyer and Seller with respect
to the Closing Adjustment Statement, a reasonable estimate of such
expenditures, liabilities and costs shall be used;
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(iii)
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all
amounts related to Title Defects as determined pursuant to Section
5.4, consents and preferential rights as determined pursuant to
Section 5.6, Adverse Environmental Conditions as determined
pursuant to Section 6.4, Exclusion Adjustments as determined
pursuant to Sections 5.6 or 6.4, and Casualty Losses as determined
pursuant to Section 15.1;
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(iv)
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Property
Taxes and Severance Taxes related to the Assets to be paid by
Seller for the period prior to the Effective Time as determined
pursuant to Section 4.3;
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(v)
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the
amount of the Deposit; and
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(vi) any
other amount agreed upon in writing by Seller and
Buyer.
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(C)
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Seller
shall have the right to collect any receivable, refund or other
amounts associated with periods prior to the Effective
Time. To the extent that Buyer collects any such
receivable, refund or other amounts, then Buyer shall promptly
remit any such amounts to Seller.
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2.4
Allocation . The
Base Purchase Price shall be allocated to the Assets as set
forth in Exhibit B . The Parties agree that
the values allocated to various portions of the Assets, which
are set forth on Exhibit B (singularly with respect to
each item, the “Allocated Value” and collectively,
the “Allocated Values”), shall be binding on
Seller and Buyer and shall be used only for the purposes of
adjusting the Base Purchase Price pursuant to Sections 4.3
(relating to Taxes), 5.4 (relating to Title Defects), 15.1
(relating to Casualty Losses), and 6 (relating to Adverse
Environmental Conditions), and are not intended as a measure
of value for any other purpose.
3.
CLOSING .
3.1
Closing . The
sale and purchase of the Assets (“Closing”) shall
be held at 9:00 a.m. on October 1, 2007 (“Closing
Date”); provided however, that Buyer shall have the
right to extend the Closing Date until October 15, 2007, at
9:00 a.m. by giving Seller written notice of such extension
prior to October 1, 2007. In the event Buyer
extends the Closing Date as provided above, the Base Purchase
Price shall be increased as set forth in Section
2.3(A)(vi). The Closing will take place at the
offices of Seller, in Pampa, Texas.
3.2
Delivery by Seller . At
Closing, Seller shall deliver to Buyer (with all documents to
be prepared by Buyer or Buyer’s counsel except those
documents required under subsection E, I and L
below):
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(A)
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A
separate Assignment and Bill of Sale executed by Seller for each
jurisdiction where the Assets are located, substantially in the
form attached hereto as Exhibit E , effecting the sale,
transfer, conveyance and assignment of the Assets, with (i) a
special warranty of the real property title by, through and under
Seller but not otherwise, and (ii) with all personal property
and fixtures conveyed “AS IS, WHERE IS,” with no
warranties whatsoever, express, implied or statutory;
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(B)
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Any
governmental forms required to effect transfer in accordance with
applicable regulations, including appropriate state and federal
assignments of record title and operating rights executed by
Seller;
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(C)
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Executed
letters in lieu of transfer orders instructing purchasers of
production to pay to Buyer the proceeds of sales of Oil and Gas
from the Assets;
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(D)
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Executed
change of operator forms as required by applicable governmental
regulation;
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(E)
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Executed
releases of any mortgages or financing statements in favor of any
third party that may be currently encumbering the
Assets;
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(F)
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An
executed Closing Adjustment Statement;
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(G)
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An
executed Non-Foreign Affidavit of Seller;
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(H)
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Possession
of the Records and all other Assets;
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(I)
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The
suspensed funds pursuant to Section 4.5;
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(J)
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Services
Agreement executed by Seller providing for the contract services
of David Smith ($750 per month) and J. D. Carr ($3,000
per month) for a period of one year from Closing in the form of
Exhibit F attached hereto (the “Services
Agreement”);
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(K)
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An
executed Lease Agreement in the form of Exhibit G attached hereto
covering the Office and Yard located at 1211 N. Price Rd, Pampa,
Texas, as further described on Exhibit G attached hereto, providing
for a real property lease at $4,500 per month for a term of one
year (the “Lease Agreement”); and
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(L)
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Shareholder
or partner resolutions, as applicable, of each Seller, certified by
the secretary or other appropriate officer of each Seller or of its
general partner, authorizing the execution and performance of this
Agreement and the transactions contemplated hereby.
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3.3
Delivery by Buyer . At
Closing, Buyer shall deliver to Seller:
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(A)
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The
Base Purchase Price set forth in the Closing Adjustment Statement
by wire transfer in immediately available funds, less the
Deposit;
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(B)
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An
executed Closing Adjustment Statement;
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(C)
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Executed
counterparts of the Assignment and Bill of Sale;
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(D)
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Executed
counterparts of the Services Agreement; and
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(E)
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Executed
counterparts of the Lease Agreement.
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3.4
Further Cooperation . At
the Closing and thereafter as may be necessary, Seller and
Buyer shall execute and deliver such other instruments and
documents and take such other actions as may be reasonably
necessary to evidence and effectuate the transactions
contemplated by this Agreement.
4.
ACCOUNTING ADJUSTMENTS .
4.1
Closing Adjustments . With
respect to matters that can be determined as of the Closing,
Seller shall prepare, in accordance with the provisions of
this Article 4, a statement (the “Closing Adjustment
Statement”) with relevant supporting information setting
forth each adjustment to the Base Purchase Price submitted by
Seller. Seller shall submit the Closing Adjustment
Statement to Buyer, together with all records or data
supporting the calculation of amounts presented on the Closing
Adjustment Statement, no later than three (3) business days
prior to the scheduled Closing Date. Prior to the
Closing, Buyer and Seller shall review the adjustments
proposed by Seller in the Closing Adjustment
Statement. Agreed adjustments shall be taken into
account in computing any adjustments to be made to the Base
Purchase Price at the Closing. When available,
actual figures will be used for the adjustments at
Closing. To the extent actual figures are not
available, estimates shall be used subject to final
adjustments as described in Section 4.4 below.
4.2
Strapping and Gauging Seller
will cause the Oil and Gas in the storage facilities located
on, or utilized in connection with, the Leases to be measured,
gauged or strapped as of the Effective Time. Seller
will cause the production meter charts (or if such do not
exist, the sales meter charts) on the pipelines transporting
Oil and Gas from the Leases to be read as of such
time. The Oil and Gas in such storage facilities
above six inches or through the meters on the pipelines as of
the Effective Time shall belong to Seller and shall be valued
based on the price actually paid for Oil and Gas produced from
the Assets for the month prior to the Effective Time, and the
Oil and Gas placed in such storage facilities after the
Effective Time and production upstream of the aforesaid meters
shall belong to Buyer and become part of the
Assets. Buyer or Buyer’s representative shall
have the option to witness the gauging by
Seller. In the event Buyer or Buyer’s
representative exercising the option to witness the gauging by
Seller, Buyer agrees that the waiver and release provisions
set forth in Section 5.1(A) of this Agreement shall apply
thereto. This provision should not apply to any
Assets that are not operated and/or owned by
Seller. There shall be no settlement for Stock in
Tanks on non-operated or non-owned Assets.
4.3
Taxes .
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(A)
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Property Taxes . All ad valorem taxes, real property
taxes, personal property taxes and similar obligations assessed on
the Assets (“Property Taxes”) shall be apportioned as
of the Effective Time between Buyer and Seller. Buyer
shall file or cause to be filed all required reports and returns
incident to Property Taxes which are due on or after the Closing,
and shall pay or cause to be paid to the taxing authorities all
such taxes reflected on such reports and returns. The
Post-Closing Adjustment Statement shall settle all liability for
Property Taxes, using estimates based on previous assessments to
the extent current assessments are not known.
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(B)
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Sales Taxes, Filing Fees, Etc . The Base Purchase Price is net
of any sales taxes or other transfer taxes. Buyer shall
be liable for any sales tax or other transfer tax as well as any
applicable conveyance, transfer and recording fees, and real estate
transfer stamp or taxes imposed upon the sale pursuant to this
Agreement. If Seller is required by applicable state law
to report and pay these taxes or fees, Buyer shall promptly
reimburse Seller in full payment of the invoice.
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(C)
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Severance Taxes . All production, severance or
excise taxes, conservation fees and other similar such taxes or
fees (other than income taxes) payable on a current basis with
respect to Oil and Gas produced and sold from the Assets
(“Severance Taxes”) shall be borne by Seller to the
extent the production on which such taxes are based occurs during
Seller’s ownership prior to the Effective Time and shall be
borne by Buyer to the extent such production occurs after the
Effective Time.
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4.4
Post-Closing Adjustments
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(A)
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A
post-closing adjustment statement (the “Post-Closing
Adjustment Statement”) based on the actual income and
expenses shall be prepared and delivered by Seller to Buyer within
ninety (90) days after the Closing, proposing further adjustments
to the calculation of the Purchase Price based on the information
then available. Seller or Buyer, as the case may be,
shall be given access to and shall be entitled to review and audit
the other Party’s records pertaining to the computation of
amounts claimed in such Post-Closing Adjustment
Statement.
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(B)
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Within
thirty (30) days after receipt of the Post-Closing Adjustment
Statement, Buyer shall deliver to Seller a written statement
describing in reasonable detail its objections (if any) to any
amounts or items set forth on the Post-Closing Adjustment
Statement. If Buyer does not raise objections within
such period, then the Post-Closing Adjustment Statement shall
become final and binding upon the Parties at the end of such
period.
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(C)
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If
Buyer raises objections, the Parties shall negotiate in good faith
to resolve any such objections. If the Parties are
unable to resolve any disputed item within thirty (30) days after
Buyer’s receipt of the Post-Closing Adjustment Statement, any
disputed accounting item shall be submitted to a nationally
recognized independent accounting firm mutually agreeable to the
Parties who shall be instructed to resolve such disputed item
within thirty (30) days. The resolution of disputes by
the accounting firm so selected shall be set forth in writing and
shall be conclusive, binding and non-appealable upon the Parties
with respect to the accounting matters submitted and the
Post-Closing Adjustment Statement shall become final and binding
upon the Parties on the date of such resolution. The
fees and expenses of such accounting firm shall be paid one-half by
Buyer and one-half by Seller.
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(D)
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After
the Post-Closing Adjustment Statement has become final and binding
on the Parties, Seller or Buyer, as the case may be, shall pay to
the other such sums as are due to settle accounts between the
Parties due to differences between the estimated Purchase Price
paid pursuant to the Closing Adjustment Statement and the actual
Purchase Price set forth on the Post-Closing Adjustment
Statement.
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4.5
Suspended Funds . At
the Closing, Seller shall provide to Buyer a listing showing
all proceeds from production attributable to the Leases which
are currently held in suspense and shall transfer to Buyer all
of those suspended proceeds. Buyer shall be
responsible for proper distribution of all the suspended
proceeds, to the extent turned over to it by Seller, to the
parties lawfully entitled to them and any claims related
thereto, and Buyer hereby agrees to indemnify, defend and hold
harmless Seller from and against any and all claims,
liabilities, losses, costs and expenses arising out of or
relating to those suspended proceeds and any claims related
thereto after the Effective Time. Seller shall
remain responsible and liable for any claims, liabilities,
losses, costs and expenses arising out of or relating to those
suspended proceeds and any claims related thereto through the
Closing Date.
4.6
Cooperation . Each
Party covenants and agrees to promptly inform the other with
respect to amounts owing under Sections 4.4
hereof.
5.
DUE DILIGENCE: TITLE MATTERS .
5.1
General Access .
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(A)
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During
reasonable business hours, Seller agrees to grant Buyer physical
access to the Assets to allow Buyer to conduct, at Buyer’s
sole risk and expense, on-site inspections and environmental
assessments of the Assets. In connection with any such
on-site inspections, Buyer agrees not to interfere with the normal
operation of the Assets and agrees to comply with all requirements
of the operators of the Wells. If Buyer or its agents
prepares an environmental assessment of any Asset, Buyer agrees to
keep such assessment confidential and to furnish copies thereof to
Seller. In connection with granting such access, Buyer
represents that it is adequately insured and waives, releases and
agrees to indemnify the Seller against all claims for injury to, or
death of, persons or for damage to operations or property arising
in any way from the access afforded to Buyer hereunder or the
activities of Buyer, except to the extent caused by Seller’s
gross negligence or willful misconduct. This waiver,
release and indemnity by Buyer shall survive termination of this
Agreement.
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(B)
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Upon
the execution of this Agreement, Seller shall give Buyer and its
representatives, employees, consultants, independent contractors,
attorneys and other advisors reasonable access to the Records
during regular office hours for any and all inspections and
copying.
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5.2
Defensible Title . As
used herein the term Defensible Title shall mean:
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(A)
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As
to the Assets, that record title of Seller which:
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(i)
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entitles
Seller to receive not less than the interests shown in Exhibit
B as the “Net Revenue Interest” of all Oil and Gas
produced, saved and marketed from or allocated to the Wells, all
without reduction, suspension or termination during the life of
such Wells except as stated in such Exhibit; and
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(ii)
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obligates
Seller to bear a percentage of the costs and expenses relating to
the maintenance and development of, and operations relating to, the
Wells not greater than the “Working Interest” shown in
Exhibit B (without a proportionate increase in the Net
Revenue Interest), all without increase during the life of such
Wells except as stated in such Exhibit; and
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(B)
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That
title of Seller to the Assets is free and clear of liens,
encumbrances and defects that materially and adversely affect the
ownership, operation or use of the Assets, except for Permitted
Encumbrances.
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(C)
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As
used herein, the term “Permitted Encumbrances” shall
mean any one or more of the following:
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(1)
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Any
lessor’s royalties, overriding royalties, net profits
interests, carried interests, production payments, reversionary
interests and similar burdens reflected in the public records, if
the net cumulative effect of the burdens does not operate to reduce
the Net Revenue Interest of Seller below the interests described in
Exhibit B ;
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(2)
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Any
increase in lessor’s royalty occasioned by the repeal or
suspension of any governmental regulation providing for the
reduction of royalty for wells producing below defined threshold
amounts;
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(3)
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Division
orders and production sales contracts terminable without penalty
upon no more than ninety (90) days notice to the
purchaser;
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(4)
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Preferential
Rights and required third party consents to assignment and similar
agreements with respect to which waivers or consents are obtained
from the appropriate parties, or the appropriate time period for
asserting any such right has expired without an exercise of the
right;
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(5)
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Materialman’s,
mechanic’s, repairman’s, employee’s,
contractor’s, operator’s and other similar liens or
charges arising in the ordinary course of business for obligations
that are not delinquent and that will be paid and discharged in the
ordinary course of business, or if delinquent, that are being
contested in good faith by appropriate action of which Buyer is
notified in writing before Closing;
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(6)
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All
rights to consent by, required notices to, filings with, or other
actions by governmental entities in connection with the sale or
conveyance of oil and gas leases or interests therein if they are
routinely obtained subsequent to the sale or
conveyance;
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(7)
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Easements,
rights-of-way, servitudes, permits, surface leases and other rights
in respect of surface operations that do not materially interfere
with the oil and gas operations to be conducted on any Well or
Lease;
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(8)
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All
operating agreements, unit agreements, unit operating agreements,
pooling agreements and pooling designations affecting the Assets
that are either (i) of record in Seller’s chain of title
or (ii) reflected or referenced in the Records or
(iii) included as Material Agreements on Exhibit 7.1(K), to
the extent the same do not decrease Seller’s Net Revenue
Interests below the interests set forth on Exhibit B or
increase Seller’s Working Interests above the interests set
forth on Exhibit B ;
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(9)
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Conventional
rights of reassignment prior to release or surrender requiring
notice to the holders of the rights;
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(10)
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All
rights reserved to or vested in any governmental, statutory or
public authority to control or regulate any of the Assets in any
manner, and all applicable laws, rules and orders of governmental
authority;
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(11)
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Defects
that are defensible by possession under applicable statutes of
limitation for adverse possession or for prescription;
and
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(12)
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All
other liens, charges, encumbrances, contracts, agreements,
instruments, obligations, defects and irregularities affecting the
Assets that individually or in the aggregate are not such as to
materially interfere with or affect the operation, value or use of
any of the Assets and have not prevented, and cannot reasonably be
expected to prevent, Buyer from receiving the proceeds of
production from the affected Assets.
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(13)
Assumed Liabilities of Buyer as set out herein.
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5.3
Defect Letters .
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(A)
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Buyer
may from time to time and no later than three (3) business days
prior to Closing notify Seller in writing (a “Notice”)
of any matter which would cause title to all or part of the Assets
not to be Defensible Title (“Title Defect”), provided
that no Title Defect shall be deemed to exist unless the Title
Defect Value thereof exceeds Ten Thousand Dollars ($10,000.00).
Further, there shall be no adjustment to the Base Purchase Price
unless the aggregate Title Defect Values of all Title Defects
satisfying the condition in clause (i) exceed one percent (1%)
of the Base Purchase Price (the “Title Defect
Threshold”) (such amount being a threshold, not a
deductible). In order to provide Seller a reasonable
opportunity to cure any Title Defects prior to Closing, Buyer shall
use reasonable efforts to provide the Notice as soon as reasonably
possible after becoming aware of or making its determination of the
Title Defect.
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(B)
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In
the Notice, Buyer must describe with reasonable detail each alleged
Title Defect it has discovered and the steps required to cure each
Title Defect, include Buyer’s reasonable estimate of the
Title Defect Value attributable to each, and include all data and
information in Buyer’s possession or control bearing
thereon. Subject to the special warranty in the
Assignment and Bill of Sale delivered at Closing, Buyer shall be
deemed to have conclusively waived all Title Defects not disclosed
to Seller in a Notice on or before three (3) business days prior to
Closing.
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(C)
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Upon
timely delivery of a Notice by Buyer:
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(i)
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within
three (3) business days after Seller’s receipt of the Title
Defects Notice, Seller shall notify Buyer whether Seller agrees
with Buyer’s claimed Title Defects and/or the proposed Title
Defect Values therefor (“Seller’s
Response”). If Seller does not agree with any
claimed Title Defect and/or the proposed Title Defect Value
therefor, then the Parties shall enter into good faith negotiations
and shall attempt to agree on such matters;
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(ii)
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within
one (1) business day after Seller’s notice of its cure of a
Title Defect, Buyer shall notify Seller whether Buyer agrees with
Seller’s proposed cure of a Title Defect
(“Buyer’s Response”). If Buyer does
not agree with any such cure, then the Parties shall enter into
good faith negotiations and shall attempt to agree on such
matters;
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(iii)
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if
the Parties cannot reach agreement concerning either the existence
of a Title Defect, Seller’s proposed cure of a Title Defect,
or a Title Defect Value within ten (10) days after Buyer’s
receipt of Seller’s Response or Seller’s receipt of
Buyer’s Response, as applicable, upon either Party’s
request, the Parties shall mutually agree on and employ an attorney
experienced in title examination in the state where the Assets are
located (“Title Consultant”) to resolve all points of
disagreement relating to Title Defects and Title Defect Values;
provided that Seller or Buyer may elect not to proceed to Closing
with regard to such Assets and adjust the Base Purchase Price in
the amount of the Allocated Value and not submit such matter to
arbitration;
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(iv)
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if
at any time any Title Consultant so chosen fails or refuses to
perform hereunder, a new Title Consultant shall be chosen by the
Parties. The cost of any such Title Consultant shall be
borne fifty percent (50%) by Seller and fifty percent (50%) by
Buyer. Each Party shall present a written statement of
its position on the Title Defect and/or Title Defect Value in
question to the Title Consultant within five (5) days after the
Title Consultant is selected, and the Title Consultant shall make a
determination of all points of disagreement in accordance with the
terms and conditions of this Agreement within ten (10) business
days of receipt of such position statements. The
determination by the Title Consultant shall be conclusive and
binding on the Parties, and shall be enforceable against any Party
in any court of competent jurisdiction. If necessary,
the Closing Date shall be deferred only as to those Assets affected
by any unresolved disputes regarding the existence of a Title
Defect and/or the Title Defect Value until the Title Consultant has
made a determination of the disputed issues with respect thereto
and all subsequent dates and required activities with respect to
any such Assets having reference to the Closing Date shall be
correspondingly deferred; provided, however, that, unless Seller
and Buyer mutually agree to the contrary, the Closing Date shall
not be deferred in any event for more than thirty (30) days beyond
the scheduled Closing Date in Section 3.1. Once the
Title Consultant’s determination has been expressed to both
Parties, if applicable, Seller shall have five (5) days in which to
advise Buyer in writing which of the options available to Seller
under Section 5.4 that Seller elects regarding each of the Assets
as to which the Title Consultant has made a
determination. In evaluating whether a Title Defect
exists, due consideration shall be given to the length of time that
the particular Asset has been producing Oil and Gas and whether
such fact, circumstance or condition is of the type expected to be
encountered in the area involved and is usual and customarily
acceptable to reasonable and prudent operators, working interest
owners and/or purchasers engaged in the business of the
exploration, development, and operation of oil and gas
properties.
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5.4
Effect of Title Defect
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(A)
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In
the event Buyer provides Seller with a timely Notice and the Title
Defects are valid and exceed the Title Defect Threshold, for those
Title Defects not cured by Closing, Seller may, at its sole
discretion:
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(i)
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adjust
the Base Purchase Price in the amount of the Title Defect Value of
the Asset to which such Title Defect relates and proceed to Closing
on all Assets; or
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(ii)
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proceed
with (a) Closing on those Assets not affected by the valid Title
Defects and such Assets to which a Title Defect relates but for
which Seller has elected to proceed to Closing with an adjustment
of the Base Purchase Price in the amount of the Title Defect Value
of such Assets and (b) defer Closing on those other Assets to
which a Title Defect relates and for which Seller has elected to
attempt to cure such Title Defect and to not proceed to Closing,
for which Buyer shall place into escrow an amount equal to the
Allocated Values of the Assets affected by the valid Title Defects,
which withheld amount shall be paid to Seller when the Asset
affected by any valid Title Defect is cured or the Title Defect is
waived by Buyer and the affected Asset is conveyed from Seller to
Buyer. If neither of the above occurs and if Seller
later determines it will not cure a Title Defect on or before
thirty (30) days from the Closing Date, the amount in the escrow
account attributable to such Title Defect will be returned to Buyer
and Seller shall retain such Asset affected by such Title
Defect.
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(B)
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The
diminution in value of an Asset attributable to a valid Title
Defect (the “Title Defect Value”) notified in a Notice
shall be determined by the following:
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(i)
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if
the valid Title Defect asserted is that the actual Net Revenue
Interest attributable to the producing or valued formation in any
Asset is less than that stated in the applicable Exhibit, then the
Title Defect Value is the product of the Allocated Value attributed
to the affected formation(s) in such Asset, multiplied by a
fraction, the numerator of which is the difference between the Net
Revenue Interest set forth in the applicable Exhibit and the actual
Net Revenue Interest, and the denominator of which is the Net
Revenue Interest stated in the applicable Exhibit; or
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(ii)
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if
the valid Title Defect represents an obligation, encumbrance,
burden or charge upon the affected Asset (including any increase in
Working Interest for which there is not a proportionate increase in
Net Revenue Interest), the amount of the Title Defect Value is to
be determined by taking into account the Allocated Value of such
Asset, the portion of the Asset affected by the Title Defect, the
legal effect of the Title Defect, the potential economic effect of
the Title Defect over the life of the affected Asset, and the Title
Defect Values placed upon the Title Defect by Buyer and
Seller.
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(iii)
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Notwithstanding
the above, in no event shall the total of the Title Defect Values
related to a particular Asset exceed the Allocated Value of such
Asset.
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(C)
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If
the aggregate value of (i) the Base Purchase Price adjustment
for Title Defect Values plus (ii) the Allocated Value of
Assets which are retained in lieu of cure or adjustment equals or
exceeds ten percent (10%) of the Base Purchase Price, then by
notice delivered prior to the Closing either Party may terminate
this Agreement and neither Party shall have any further obligation
to conclude the transfer of the Assets under this
Agreement.
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5.5
Preferential Rights and Consents .
Seller
shall use its best efforts to obtain all required consents and
to give notices required in connection with preferential
purchase rights, so that the third party election date to
exercise the preferential right will occur at least seven (7)
business days prior to Closing. If Buyer discovers
other affected Assets during the course of Buyer’s due
diligence activities, Buyer shall notify Seller immediately
and Seller shall use its best efforts to obtain such consents
and to give the notices required in connection with the
preferential rights prior to Closing.
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(A)
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Consents. Except for consents and approvals which are
customarily obtained post-Closing, if a necessary consent to assign
any Lease has not been obtained as of the Closing, then
(i) the portion of the Assets for which such consent has not
been obtained shall not be conveyed at the Closing, (ii) the
Allocated Value for that Asset shall not be paid to Seller, and
(iii) Seller shall use best efforts to obtain such consent as
promptly as possible following Closing. If such consent
has been obtained as of the date on which the Post-Closing
Adjustment Statement becomes final, Seller shall convey the
affected Asset to Buyer effective as of the Effective Time and
Buyer shall pay Seller the Allocated Value of the affected Asset,
less any proceeds from the affected Asset received by Seller
attributable to the period of time after the Effective Time
(calculated in accordance with Section 2.3). If such
consent has not been obtained or has not been waived by Buyer as of
the date on which the Post-Closing Adjustment Statement becomes
final, Seller shall elect either to (i) challenge in court the
enforceability of such consent right, in which event Seller shall
retain the affected Asset until such legal challenge is finally
resolved by settlement or non-appealable court order, after which
either Seller shall convey the affected Asset to Buyer under the
terms of this Agreement and Buyer shall pay the Allocated Value for
such Asset, less any proceeds received by Seller attributable to
such Asset for the period from and after the Effective Time
(calculated in accordance with Section 2.3) or (ii) retain the
affected Asset and the Base Purchase Price shall be reduced by an
amount equal to the Allocated Value of the retained Asset (with
such adjustment being an “Exclusion
Adjustment”). Buyer shall reasonably cooperate
with Seller in obtaining any required consent including providing
assurances of reasonable financial conditions, but Buyer shall not
be required to expend funds or make any other type of financial
commitments a condition of obtaining such consent.
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(B)
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Preferential Purchase Rights .
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(i)
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If
any preferential right to purchase any portion of the Assets is
exercised prior to the Closing Date, or if the time frame for the
exercise of such preferential purchase rights has not expired and
Seller has not received notice of an intent not to exercise or
waiver of the preferential purchase right, that portion of the
Assets affected by such preferential purchase right shall be
excluded from the Assets and the Base Purchase Price shall be
adjusted downward by an amount equal to the Allocated Value of such
affected Assets without the requirement for Buyer to give notice
(with such adjustment being an “Exclusion Adjustment”).
Notwithstan
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