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EQUITY PARTICIPATION AGREEMENT

Participation Agreement

EQUITY PARTICIPATION AGREEMENT | Document Parties: ENTREE GOLD INC You are currently viewing:
This Participation Agreement involves

ENTREE GOLD INC

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Title: EQUITY PARTICIPATION AGREEMENT
Date: 6/22/2005

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EQUITY PARTICIPATION AGREEMENT

THIS AGREEMENT made as of the 17th day of June 2005.

BETWEEN:

ENTRÉE GOLD INC. , a corporation continued under the laws of the Province of British Columbia, having an office at Suite 1201 – 1166 Alberni Street, Vancouver, British Columbia, V6E 3Z3;

(“Entrée”)

AND:

KENNECOTT CANADA EXPLORATION INC. , a corporation incorporated under the laws of Canada, having an office at Suite 354 – 200 Granville Street, Vancouver, British Columbia, V6C 1S4;

(“Kennecott”)

WHEREAS Kennecott wishes to acquire certain equity securities of Entrée and the parties have agreed to effect a private placement subject to the terms and conditions hereinafter provided;

NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the recitals and of the mutual covenants and agreements hereinafter contained, the parties hereto agree as follows:

ARTICLE 1          

DEFINITIONS AND INTERPRETATION

Definitions

1.1

In this Agreement, unless there is something in the subject matter or context inconsistent therewith:

 

(a)

“A Warrant” means a non-transferable (except to Affiliates of Kennecott) share purchase warrant A which forms part of a Unit and “A Warrants” means more than one A Warrant;

 

 

 

 

 

b)

“Affiliate” means any person, partnership, limited liability company, joint venture, corporation, or other form of enterprise which Controls, is Controlled by, or is under common Control with a party to this Agreement;

(c)

“Agreement”, “herein”, “hereby”, “hereof”, “hereunder” , and similar expressions mean or refer to this agreement or any instrument supplementary or ancillary hereto and the expressions “Article”, “section” or “subsection” followed

 

 

 


 

by a number mean and refer to the specified Article, section or subsection of this Agreement;

(d)

“Applicable Securities Laws” has the meaning given to such term under subsection 4.2(d);

(e)

“B Warrant” means a non-transferable (except to Affiliates of Kennecott) share purchase warrant B which forms part of a Unit and “B Warrants” means more than one B Warrant;

(f)

“Business Days” means any day upon which banks in Vancouver, British Columbia and London, England are open for business;

(g)

“Cash Offer Securities” has the meaning given to that term under section 2.4;

 

(h)

“Closing Period” has the meaning given to that term under section 3.1;

 

(i)

“Common Share” means a common share of Entrée and “Common Shares” means more than one Common Share;

(j)

“Control” used as a verb means, when used with respect to an entity, the ability, directly or indirectly through one or more intermediaries, to direct or cause the direction of the management and policies of such entity through the legal or beneficial ownership of voting securities or membership interests, the right to appoint managers, directors or corporate officers, rights arising under operating agreements or other contracts, a voting trust or otherwise; and, when used with respect to a person, means the actual or legal ability to control the actions of another, through family relationship, agency, contract or otherwise; and “Control” used as a noun means an interest which gives the holder the ability to exercise any of the foregoing powers;

(k)

“Disposition Notice” has the meaning given to that term under section 2.9;

 

(l)

“Encumbrance” means any mortgage, charge, pledge, hypothec, security interest, lien, easement, right-of-way, encroachment, covenant, condition, right of entry, lease, license, assignment, option, claim or any other encumbrance of whatever kind or nature, regardless of form;

(m)

“Entrée Board” means the board of directors of Entrée;

 

(n)

“Entrée Securities” has the meaning given to that term under section 2.9;

 

(o)

“Entrée Subsidiary” means Entrée LLC, a company incorporated under the laws of Mongolia;

(p)

“Entrée’ s Designee” has the meaning given to that term under section 2.7;

 

(q)

“Exchange” means TSX Venture Exchange;

 

(r)

“Exercise Notice” has the meaning given to that term under section 3.1;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

(s)

“Exercise Period” has the meaning given to that term under section 3.1;

 

(t)

“Existing Licenses” means, collectively, the Ulziit Uul License and Mineral Exploration License number 3148X, Mineral Exploration License number 3150X and Mineral Exploration License number 3136X issued by the Mineral Resources Authority of Mongolia;

(u)

“First Closing Date” has the meaning given to that term under section 6.1;

 

(v)

“First Subscription Agreement” has the meaning given to that term under section 2.3;

(w)

“First Tranche” has the meaning given to that term under section 2.1;

 

(x)

“Governmental Authority” means any national, central, federal, provincial, state, municipal or county government or regional authority and includes any ministry, department, commission, bureau, board, administrative or other agency or regulatory body or instrumentality thereof;

(y)

“Interest” has the meaning given to that term under section 3.1;

 

(z)

“Ivanhoe” means Ivanhoe Mines Ltd.;

 

(aa)

“Ivanhoe Pre-emptive Right” means the pre-emptive right to purchase Common Shares granted to Ivanhoe pursuant to the Equity Participation and Earn-In Agreement between Entrée and Ivanhoe dated October 15, 2004;

(bb)

“Notices” has the meaning given to that term under section 7.1;

 

(cc)

“Offer Notice” has the meaning given to that term under section 2.4;

 

(dd)

“Offered Securities” has the meaning given to that term under section 2.9;

 

(ee)

“party” means Entrée or Kennecott, or any successor or permitted assign of Entrée or Kennecott under this Agreement;

(ff)

“Private Placement” means the offering and sale of up to 6,306,921 Units to Kennecott;

(gg)

“Property” has the meaning given to such term under subsection 4.2(j);

 

(hh)

“Public Record” has the meaning given to such term under subsection 4.2(g);

 

(ii)

“Second Closing Date” has the meaning given to that term under section 6.1;

 

(jj)

“Second Subscription Agreement” has the meaning given to that term under section 2.3;

(kk)

“Second Tranche” has the meaning given to that term under section 2.1;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

(ll)

“Transfer Notice” has the meaning given to that term under section 3.1;

 

(mm)

“Ulziit Uul License” means Mineral Exploration License 3045X issued by the Mineral Resources Authority of Mongolia, as more particularly described in Schedule A;

(nn)

“Unit” means one unit of Entrée offered under the Private Placement, consisting of one Common Share, one A Warrant and one B Warrant and “Units” means more than one Unit; and

(oo)

“Voting Notice” has the meaning given to that term under section 2.6;

 

 

 

 

 

 

Interpretation

1.2

For the purposes of this Agreement, except as otherwise expressly provided:

 

 

(a)

words importing the singular number will mean and include the plural and vice versa, and words importing the masculine gender will include the feminine and neuter genders;

 

(b)

any statement of or reference to dollar amounts in this Agreement will mean coin or currency of Canada;

 

(c)

in the event that any date on which any action is required to be taken hereunder by any of the parties hereto is not a Business Day, such action will be required to be taken on the next succeeding day which is a Business Day; and

 

(d)

the division of this Agreement into Articles and sections and the insertion of headings are for convenience of reference only and will not affect the construction or interpretation hereof.

 

 

 

 

 

Schedules

1.3

Attached to and forming part of this Agreement is the following Schedule:

 

Schedule A

-

Ulziit Uul License

 

 

 

 

 

 

 

ARTICLE 2          

EQUITY INVESTMENT AND RELATED OBLIGATIONS

Private Placement

2.1

Subject to the terms and conditions of this Agreement, on the First Closing Date, pursuant to the First Subscription Agreement, Kennecott will subscribe for and purchase and Entrée will issue and sell, 5,665,730 Units (the “First Tranche”) at a price of $2.20 per Unit. If the Ivanhoe Pre-emptive Right is exercised in connection with the Private Placement, then, subject to the terms and conditions of this Agreement, on the Second Closing Date, pursuant to the Second Subscription Agreement, Kennecott will subscribe for and purchase and Entrée will issue and sell

 

 

 


 

that number of Units that would result in Kennecott beneficially owning 9.9% of the issued and outstanding Common Shares of Entrée (the “Second Tranche”) immediately after the closing of the Second Tranche. The issued and outstanding Common Shares of Entrée immediately after the closing of the Second Tranche will be calculated by taking the issued and outstanding Common Shares of Entrée as at the date of this Agreement and adding (i) any Common Shares issued to Ivanhoe on or prior to the Second Closing Date pursuant to the exercise of Ivanhoe’s existing share purchase warrants; (ii) the Common Shares to be issued to Ivanhoe on the Second Closing Date pursuant to the exercise of the Ivanhoe Pre-emptive Right; and (iii) any Common Shares issued to Kennecott pursuant to the Private Placement.

Composition of Units

2.2

Each Unit will consist of one Common Share, one A Warrant and one B Warrant. Two A Warrants will entitle Kennecott to purchase one additional Common Share at a price of $2.75 for a period of two years. Two B Warrants will entitle Kennecott to purchase one additional Common Share at a price of $3.00 for a period of two years. The instruments representing the A Warrants and the B Warrants will be in a form mutually satisfactory to the parties, acting reasonably, and will reflect the foregoing terms together with such other terms as are customary in respect of similar convertible securities including, without limitation, terms providing for the adjustment of the number of Common Shares issuable upon the exercise of the A Warrants and B Warrants and the exercise prices upon the occurrence of certain specified corporate events.

Subscription Agreement

2.3

The parties will enter into a separate subscription agreement immediately prior to the First Closing Date in respect of the First Tranche (the “First Subscription Agreement”) and, if applicable, immediately prior to the Second Closing Date in respect of the Second Tranche (the “Second Subscription Agreement”), in form and substance mutually satisfactory to the parties, acting reasonably, and containing such representations, warranties, covenants and acknowledgements as are customary in similar private placement transactions. Notwithstanding the foregoing, the parties acknowledge and agree that the substantive terms of the Private Placement are as provided in this Article 2 and that this Article 2 constitutes a legal, valid and binding agreement and not merely an “agreement to agree” with respect to the Private Placement.

Pre-emptive Rights

2.4

If, at any time after the First Closing Date, Entrée offers to sell for cash, by way of a private placement or a public offering, any Common Shares or any securities convertible into or exchangeable for Common Shares (for greater certainty, other than (i) incentive stock options or Common Shares issued on the exercise thereof, (ii) warrants outstanding as at the date hereof to purchase Common Shares, (iii) Common Shares issued on the exercise of any warrants, or (iv) Units to Ivanhoe on the Second Closing Date) (“Cash Offer Securities”), Entrée will offer to Kennecott, at least 10 Business Days prior to the issuance of any such Cash Offer Securities, by

 

 

 


 

Notice (the “Offer Notice”) the right, for a period of 10 Business Days, to purchase that number of Cash Offer Securities (including a pro rata share of any Cash Offer Securities that are securities convertible into or exchangeable for Common Shares) which would result in Kennecott beneficially owning, in aggregate, the same percentage of outstanding Common Shares after the issuance of the Cash Offer Securities that Kennecott beneficially owned on the date of the Offer Notice. For purposes of this section 2.4, outstanding Common Shares after the issuance of the Cash Offer Securities will be calculated by taking the issued and outstanding Common Shares as at the date of the Offer Notice and adding the Common Shares issued in the sale of the Cash Offer Securities (including those that may be issued to Kennecott pursuant to this section 2.4). Kennecott may purchase the Cash Offer Securities for cash in an amount per Cash Offer Security equal to the price for which the particular Cash Offer Securities are to be issued. The Offer Notice will describe the Cash Offer Securities proposed to be issued and specify the number, price and payment terms. Kennecott may accept Entrée’s offer as to the full number of Cash Offer Securities offered to it or any lesser number, by Notice thereof given by it to Entrée prior to the expiration of the aforesaid 10 Business Day period, in which event Entrée will, within 10 Business Days following the closing of the sale of Cash Offer Securities to third parties, sell and Kennecott will buy, upon the terms specified, the number of Cash Offer Securities agreed to be purchased by Kennecott.

Termination

2.5

Kennecott’s rights under section 2.4 will terminate if:

 

 

(a)

the number of Common Shares held by Kennecott and its Affiliates (assuming the exercise of all securities held by Kennecott and its Affiliates which are convertible into or exchangeable for Common Shares but which have not actually been issued) ceases to represent at least 10% of Entrée’s issued and outstanding Common Shares; or

 

(b)

Kennecott fails to exercise its rights under section 2.4 to subscribe for and purchase the maximum number of Cash Offer Securities which it has the right to purchase thereunder (other than Cash Offer Securities that are securities convertible into or exchangeable for Common Shares) and, as a result of the issuance of Cash Offer Securities to parties other than Kennecott, Kennecott’s percentage holding of the issued and outstanding Common Shares of Entrée is reduced.

 

 

 

 

 

Voting

2.6

Kennecott will vote its Common Shares, at every meeting of the shareholders of Entrée and at every adjournment thereof after the First Closing Date, in the manner that the Entrée Board specifies with respect to:

 

(a)

fixing the number of directors to be elected;

 

 

(b)

the election of directors of Entrée;

 

 

 

 

 

 

 

 

 

 

 


 

 

(c)

the appointment and remuneration of the auditors of Entrée; and

 

(d)

the approval of any corporate incentive compensation plan or any amendment thereof, provided the compensation plan could not result at any time in the number of Common Shares reserved for issuance under the plan exceeding 20% of the issued and outstanding Common Shares.

 

 

 

 

Any voting instructions given by the Entrée Board pursuant to this section 2.6 will be based on a resolution passed by a majority of Entrée’s directors and will be communicated to Kennecott by Notice given at least 10 Business Days before the date of the meeting at which the Common Shares are to be voted (a “Voting Notice”).

Delivery of Proxy

2.7

Upon receipt of a Voting Notice given in accordance with section 2.6, Kennecott will execute and deliver to an individual designated by Entrée in the Voting Notice (“Entrée’s Designee”) a proxy entitling Entrée’s Designee to vote the Common Shares held by Kennecott at the meeting to which the Voting Notice relates in accordance with the instructions in the Voting Notice. Kennecott agrees not to revoke the proxy. In any situation where the Entrée Board would not be entitled under law or the rules of any applicable securities regulatory authority or stock exchange to give voting instructions to Kennecott or to vote the Common Shares held by Kennecott by proxy at a meeting of shareholders, Kennecott will, with respect to the matters set out in section 2.6, vote the Common Shares held by it in the manner recommended by Entrée in its communications to shareholders in respect of such matters.

Suspension and Termination of Voting Requirements

2.8

The requirements of section 2.6 and section 2.7 will:

 

 

(a)

not apply for any meeting of the shareholders of Entrée if, at the time of the meeting:

 

(i)

the number of Common Shares held by Kennecott and its Affiliates represents less than 10% of Entrée’s issued and outstanding Common Shares (excluding, for greater certainty, any Common Shares issuable on the exercise of any securities held by Kennecott and its Affiliates which are convertible into or exchangeable for Common Shares but which have not actually been issued) at such time; or

 

 

 

 

 

 

 

 

(ii)

the number of Common Shares held by Kennecott and its Affiliates represents 40% or more of Entrée’s issued and outstanding Common Shares (excluding, for greater certainty, any Common Shares issuable on the exercise of any securities held by Kennecott and its Affiliates which are convertible into or exchangeable for Common Shares but which have not actually been issued) at such time; and

(b)

terminate on the fourth anniversary of the First Closing Date.

 

 

 

 

 

 

 

 

 

 


 

 

Disposition of Securities

2.9

If at any time after the First Closing Date or from time to time thereafter Kennecott wishes to dispose of any of its Common Shares or any of its securities convertible into or exchangeable for Common Shares (collectively, the “Entrée Securities”), Kennecott will so advise Entrée in a written notice (the “Disposition Notice”) which specifies the Entrée Securities that Kennecott wishes to dispose of (the “Offered Securities”), the minimum price that Kennecott would be prepared to accept for the Offered Securities and any other terms and conditions of the disposition. If, within 15 days of its receipt of the Disposition Notice, Entrée notifies Kennecott in writing of the identities of one or more persons who will purchase all, but not less than all, of the Offered Securities at the price and on the terms and conditions specified in the Disposition Notice, Kennecott will sell the Offered Securities to those purchasers(s), provided the purchaser(s) provide evidence satisfactory to Kennecott, acting reasonably, of the purchaser(s)’ ability to pay for the Offered Securities and to satisfy the other terms and conditions for the disposition. The purchaser(s) and Kennecott shall use their reasonable commercial efforts to complete the transaction within 45 days of Entrée’s receipt of the Disposition Notice. If Entrée does not notify Kennecott of the identities of one or more purchaser(s) and provide evidence, satisfactory to Kennecott, acting reasonably, of each purchaser(s) ability to pay for the Offered Securities and to satisfy the other terms and conditions of the disposition by the end of the 15 day period following Entrée’s receipt of the Disposition Notice or if Kennecott, despite its reasonable commercial efforts, is unable to complete the sale transaction within the 45 day period following Entrée’s receipt of the Disposition Notice as a result of the failure of the proposed purchaser(s), then Kennecott may dispose of the Offered Securities to any third party purchaser(s) at a price and on terms no less favourable to Kennecott than those specified in the Disposition Notice. This section will apply again to the Offered Securities if a sale to a bona fide third party purchaser(s) is not completed within 105 days of Entrée’s receipt of the Disposition Notice.

Permitted Dispositions of Securities

2.10

Section 2.9 does not apply in the case of:

 

 

(a)

a disposition by Kennecott of Entrée Securities to an Affiliate of Kennecott, provided that such Affiliate agrees in writing to be bound by Kennecott’s obligations under this Agreement (in which case the Affiliate will also be entitled to Kennecott’s rights under this Agreement);

 

(b)

Kennecott depositing Entrée Securities pursuant to a take over bid for which a circular has been delivered to Entrée shareholders in accordance with applicable securities laws;

 

(c)

a corporate consolidation, reorganization, merger, amalgamation or arrangement involving Kennecott by which the entity resulting therefrom owns, directly or indirectly, all or substantially all of the assets of Kennecott and assumes, directly or indirectly, all of the liabilities of Kennecott including, without limitation,

 

 

 

 

 

 

 

 


 

Kennecott’s obligations under this Agreement (in which case the entity will also be entitled to Kennecott’s rights under this Agreement);

(d)

the grant to a bank or other bona fide financial institution of any Encumbrance in respect of all or part of the Entrée Securities and any transfer of any such Entrée Securities by reason of the exercise of any rights, powers or remedies under or in relation to


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