LIMITED LIABILITY COMPANY MEMBERSHIP INTEREST PURCHASE AGREEMENT

FINAL EXECUTION COPY

 

Exhibit 10.4

 

LIMITED LIABILITY COMPANY

 

MEMBERSHIP INTEREST PURCHASE AGREEMENT

 

by and between

 

ONEOK ENERGY RESOURCES COMPANY

 

as Seller

 

and

 

TXOK ACQUISITION, INC.

 

as Purchaser

 

for the purchase and sale of all

of the membership interests of

 

ONEOK ENERGY RESOURCES HOLDINGS, L.L.C.

 

a Delaware Limited Liability Company

 

Dated as of September 19, 2005

TABLE OF CONTENTS

 

 

i

 

ii

 

iii

EXHIBITS

 

 

SCHEDULES

 

 

iv

LIMITED LIABILITY COMPANY

 

MEMBERSHIP INTEREST PURCHASE AGREEMENT

 

This Limited Liability Company Membership Interest Purchase Agreement (the “Agreement” ) is entered into as of September 19, 2005, between TXOK Acquisition, Inc. , a Delaware corporation (the “Purchaser” ), and ONEOK Energy Resources Company a Delaware corporation (the “Seller” ).

 

RECITALS

 

WHEREAS, Seller owns all of the outstanding membership interests (the “Membership Interests” ) in ONEOK Energy Resources Holdings, L.L.C., a Delaware limited liability company ( “ONEOK Resources Holdings” );

 

WHEREAS, ONEOK Resources Holdings owns (i) all of the outstanding membership interests in ONEOK Texas Energy Holdings, L.L.C., a Delaware limited liability company ( “ONEOK Texas Holdings” ), which in turn owns 100% of the general partner interests in ONEOK Texas Energy Resources, L.P., a Delaware limited partnership (the “ONEOK Texas LP” ) and (ii) 100% of the limited partner interests in ONEOK Texas LP (ONEOK Resources Holdings, ONEOK Texas Holdings and ONEOK Texas LP are collectively referred to as the “Companies” );

 

WHEREAS, the Companies are engaged in the exploration and production of oil and natural gas in Texas;

 

WHEREAS, Purchaser has agreed to acquire from the Seller, and the Seller has agreed to sell to the Purchaser, all of the Membership Interests of ONEOK Resources Holdings on the terms and subject to the conditions set forth herein;

 

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

 

ARTICLE 1.

DEFINITIONS AND RULES OF CONSTRUCTION

 

Section 1.1 Definitions . As used herein, the following terms shall have the following meanings:

 

“Affiliate” means, with respect to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with, such specified Person through one or more intermediaries or otherwise. For the purposes of this definition, “control” means, where used with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have correlative meanings. Notwithstanding the foregoing, the term “Affiliate,” with respect to Seller, shall not include Northern Border Partners, L.P. or any of its subsidiaries.

 

“Benefit Plan” means (i) each “employee benefit plan,” as such term is defined in Section 3(3) of ERISA, (ii) each plan that would be an employee benefit plan if it was subject to ERISA, such as plans for directors, (iii) each stock bonus, stock ownership, stock option, stock purchase, stock appreciation rights, phantom stock or other stock plan (whether qualified or nonqualified), and

(iv) each bonus, deferred compensation or incentive compensation plan; provided, however, that such term shall not include (a) routine employment policies and procedures developed and applied in the ordinary course of business and consistent with past practice, including wage, vacation, holiday, and sick or other leave policies, (b) workers compensation insurance, (c) directors and officers liability insurance, or (d) Material Contracts.

 

“Business Day” means each calendar day except Saturdays, Sundays and other days on which national banks in the State of Oklahoma are authorized to close.

 

“Code” means the Internal Revenue Code of 1986, as amended.

 

“Company Guarantees” means all guaranties, letters of credit, bonds, sureties and other credit support or assurances provided by Seller or its Affiliates (other than any of the Companies) in support of any obligations of any of the Companies, including those obligations listed on Schedule 6.11 .

 

“Company Plan” means each Benefit Plan that is, or at any time within the six (6) year period ending on the Closing Date was, sponsored, maintained or contributed to by Seller, the Companies or any of their respective Affiliates and which Benefit Plan provides benefits solely with respect to current or former directors, officers or employees of any of the Companies.

 

“Dollars” and “$” mean the lawful currency of the United States.

 

“EBITDA” means the combined earnings before interest and taxes for the Companies as reported on the “earnings before interest, taxes, depreciation and amortization” or “EBITDA” line item on the combined statement of income for the Companies for the applicable period.

 

“Encumbrance” means any mortgage, lien, security interest, pledge, adverse claim, encumbrance, charge or other defect in title (including without limitation a discrepancy in the net revenue interests or working interests set forth in Exhibit A ).

 

“Environmental Law” means any applicable Law relating to the environment, natural resources, or the protection thereof, including any applicable provisions of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq. , the Hazardous Materials Transportation Act, 49 U.S.C. § 5101 et seq. , the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq. , the Clean Water Act, 33 U.S.C. § 1251 et seq. , the Clean Air Act, 42 U.S.C. § 7401 et seq. , the Toxic Substances Control Act, 15 U.S.C. § 2601 et seq. , the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. § 136 et seq. , and the Oil Pollution Act of 1990, 33 U.S.C. § 2701 et seq. , and all analogous state or local statutes, and the regulations promulgated pursuant thereto.

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

 

“Estimated Purchase Price” means Seller’s good faith estimate of the Purchase Price as set forth in a statement delivered by Seller to Purchaser at least two Business Days before the Closing.

 

“Excluded Assets” means the assets listed on the attached Exhibit D .

 

“Governmental Authority” means any federal, state, municipal, local or similar governmental authority, regulatory or administrative agency, court or arbitral body.

 

“Hydrocarbons” means oil, gas, condensate and other gaseous and liquid hydrocarbons or any combination thereof and sulphur extracted from hydrocarbons.

 

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“Indebtedness for Borrowed Money” means all obligations to any Person for borrowed money, including (i) any obligation to reimburse any bank or other Person in respect of amounts paid or payable under a standby letter of credit or (ii) any guarantee with respect to indebtedness for borrowed money of another Person.

 

“Intellectual Property” means intellectual property rights, statutory or common law, worldwide, including (i) trademarks, service marks, trade dress, slogans, logos and all goodwill associated therewith, and any applications or registrations for any of the foregoing; (ii) copyrights and any applications or registrations for any of the foregoing; and (iii) patents, all confidential know-how, trade secrets and similar proprietary rights in confidential inventions, discoveries, improvements, processes, techniques, devices, methods, patterns, formulae, specifications, and lists of suppliers, vendors, customers, and distributors.

 

“Knowledge” as to Seller means the actual knowledge of those persons listed in Schedule 1.1(a) .

 

“Law” means any applicable law, rule, regulation, ordinance, order, judgment or decree of a Governmental Authority, in each case as in effect on and as interpreted on the date of this Agreement.

 

“Leases” means all of the oil and gas leases, oil, gas and mineral leases, subleases and other leaseholds, royalties, overriding royalties, net profits interests, mineral fee interests, carried interests and other properties and interests described on Exhibit A .

 

“Legal Proceeding” means any judicial, administrative or arbitral actions, suits or proceedings (public or private) by or before a Governmental Authority.

 

“Liability” means any Indebtedness for Borrowed Money, debt, liability or obligation (whether direct or indirect, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, or due or to become due) and including all costs and expenses relating thereto.

 

“LIBOR” means the rate for any one month loan which appears on Page 3750 of the Dow Jones Market Service (or on any successor or substitute page of such service, or any successor to or substitute for such service, providing rate quotations comparable to those currently provided on such page of such service, for purposes of providing quotations of interest rates applicable to Dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of any period for which interest may be due under this Agreement.

 

“LLC Agreement” means that certain Limited Liability Company Agreement of ONEOK Energy Resources Holdings, L.L.C., effective January 1, 2005, entered into by ONEOK Energy Resources Company, a Delaware corporation, as the sole member.

 

“Losses” means all liabilities, losses, damages, fines, penalties, judgments, settlements, awards, costs and expenses (including reasonable fees and expenses of counsel, consultants, experts and other professional fees).

 

“Material Adverse Effect” means (i) a material adverse effect on the business, assets, properties or financial condition of the Companies taken as a whole or (ii) a material adverse effect on the ability of Seller to consummate the transactions contemplated by this Agreement, other than, in either case, any one or more of the following: (A) the effect of any change in the United States or foreign economies or securities or financial markets in general; (B) the effect of any change that generally affects the oil and gas exploration and production industry; (C) the effect of any change

 

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arising in connection with any natural disasters, hostilities, acts of war, sabotage or terrorism or military actions or any escalation or material worsening of any such hostilities, acts of war, sabotage or terrorism or military actions existing or underway as of the date hereof; (D) the effect of any action taken by Purchaser or its Affiliates with respect to the Companies or the transactions contemplated hereby; (E) any matter of which Purchaser is aware on the date hereof; (F) the effect of any changes in applicable Laws or accounting rules; (G) any effect resulting from the public announcement of this Agreement, compliance with terms of this Agreement or the consummation of the transactions contemplated by this Agreement; or (H) the loss of any Transferred Employee.

 

“Net Working Capital,” which may be positive or negative, means an amount equal to the total current assets of the Companies minus the total current liabilities of the Companies, determined (i) in accordance with GAAP, (ii) exclusive of intercompany accounts, (iii) without giving effect to the transactions contemplated hereby, (iv) exclusive of cash, and (v) exclusive of gas balancing amounts.

 

“ONEOK Thrift Plan” means the Thrift Plan for Employees of ONEOK, Inc. and Subsidiaries.

 

“Organizational Documents” means any charter, certificate of incorporation, articles of association, bylaws, operating agreement or similar formation or governing documents and instruments.

 

“Parties” means Seller and Purchaser.

 

“Permits” means authorizations, licenses, permits or certificates issued by Governmental Authorities; provided , right-of-way agreements and similar approvals are not included in the definition of Permits.

 

“Person” means any individual, firm, corporation, partnership, limited liability company, incorporated or unincorporated association, joint venture, joint stock company, Governmental Authority or other entity of any kind.

 

“Properties” means the Wells, Units and Leases, together with all pipelines, compressors, dehydrators and other equipment related thereto owned by the Companies and the tenements, hereditaments and appurtenances belonging to the Wells, Units and Leases.

 

“Purchaser FSP” means Purchaser’s health care flexible spending account program and Purchaser’s dependant day care spending account program.

 

“Reasonable Efforts” means efforts in accordance with reasonable commercial practice and without the incurrence of unreasonable expense.

 

“Representatives” means, as to any Person, its officers, directors, employees, counsel, accountants, financial advisers and consultants.

 

“Seller Disclosure Schedules” means the schedules attached hereto relating to disclosures by the Seller.

 

“Seller FSP” means Seller’s health care flexible spending account program and Seller’s dependant day care spending account program.

 

“Seller Plan” means each Benefit Plan that is, or at any time within the six (6) year period ending on the Closing Date was, sponsored, maintained or contributed to by Seller or by any Commonly Controlled Entity (other than any of the Companies).

 

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“ Tax Authority ” means any Governmental Authority having jurisdiction over the assessment, determination, collection or imposition of any Tax.

 

“Tax Benefit” means, with respect to a Loss, an amount by which the Tax liability of a Person (or group of corporations filing a Tax Return that includes the Person), with respect to a taxable period, is reduced as a result of such Loss or the amount of any Tax refund or Tax credit that is generated (including, by deduction, loss, credit or otherwise) as a result of such Loss, and any related interest received from any relevant Tax Authority.

 

“Tax Law” means the law (including any applicable regulations or any administrative pronouncement) of any Governmental Authority relating to any Tax.

 

“Tax Period” means, with respect to any Tax, the period for which the Tax is reported as provided under the applicable Tax Law.

 

“ Tax Returns ” means any report, return, election, document, estimated tax filing, declaration or other filing provided to any Tax Authority including any amendments thereto.

 

“ Taxes ” means all taxes, assessments, charges, duties, fees, levies, imposts or other similar charges imposed by a Governmental Authority, including all income, franchise, profits, capital gains, capital stock, transfer, gross receipts, sales, use, transfer, service, occupation, ad valorem, property, excise, severance, windfall profits, premium, stamp, license, payroll, employment, social security, unemployment, disability, environmental (including taxes under Code Section 59A), alternative minimum, add-on, value-added, withholding and other taxes, assessments, charges, duties, fees, levies, imposts or other similar charges of any kind whatsoever (whether payable directly or by withholding and whether or not requiring the filing of a Tax Return), and all estimated taxes, deficiency assessments, additions to tax, additional amounts imposed by any Governmental Authority, penalties and interest.

 

“Title Benefit” means any right, circumstance or condition that operates to increase the net revenue interest of the Companies in any Well or Unit above that shown on Exhibit A , without causing a greater than proportionate increase in the working interest of the Companies above that shown in Exhibit A .

 

“Title Defect” means any Encumbrance, other than a Permitted Encumbrance, that causes a breach of Seller’s representation and warranty in Section 3.1.

 

“United States” means United States of America.

 

“Units” means all pooled, communitized or unitized acreage that includes all or a part of any Lease or includes any Well shown on Exhibit A attached hereto.

 

“Wells” means all oil, gas, water, CO ₂ or injection wells on the Leases shown on Exhibit A attached hereto.

 

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Section 1.2 Terms Defined Elsewhere in this Agreement. For purposes of this Agreement, the following terms have meanings set forth in the sections indicated:

 

 

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Section 1.3 Rules of Interpretation.

 

Unless otherwise expressly provided hereby, for purposes of this Agreement, the following rules of interpretation shall apply:

 

(a) All article, section, schedule and exhibit references used in this Agreement are to articles, sections, schedules and exhibits to this Agreement unless otherwise specified. The schedules and exhibits attached to this Agreement constitute a part of this Agreement and are incorporated herein for all purposes.

 

(b) If a term is defined as one part of speech (such as a noun), it shall have a corresponding meaning when used as another part of speech (such as a verb). Terms defined in the singular have the corresponding meanings in the plural, and vice versa. Unless the context of this Agreement clearly requires otherwise, words importing the masculine gender shall include the feminine and neutral genders and vice versa. The term “includes” or “including” shall mean “including without limitation.” The words “hereof,” “hereto,” “hereby,” “herein,” “hereunder” and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular section or article in which such words appear.

 

(c) The Parties acknowledge that each Party and its attorneys have reviewed this Agreement and that any rule of construction to the effect that any ambiguities are to be resolved against the drafting Party, or any similar rule operating against the drafter of an agreement, shall not be applicable to the construction or interpretation of this Agreement.

 

(d) The captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement.

 

(e) All references to currency herein shall be to, and all payments required hereunder shall be paid in, Dollars.

 

(f) All accounting terms used herein and not expressly defined herein shall have the meanings given to them under GAAP.

 

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ARTICLE 2.

MEMBERSHIP INTERESTS; PURCHASE PRICE; ADJUSTMENTS

 

Section 2.1 Membership Interests. At the Closing, but effective as of the Effective Date, upon the terms and subject to the conditions set forth in this Agreement, Seller shall sell, transfer and convey to Purchaser, and Purchaser shall purchase and acquire from Seller, the Membership Interests, free and clear of any Encumbrances other than transfer restrictions imposed thereon by applicable securities Laws. Notwithstanding the foregoing, Seller shall cause the Companies to transfer the Excluded Assets to Seller or its Affiliates (other than the Companies), prior to the Closing, and neither Purchaser nor any of the Companies shall have any right, title or interest in or to the Excluded Assets from and after Closing; provided, however, any such transfer of the Excluded Assets from Company to Seller or its Affiliates shall be on an “as is, where is” basis without any warranty of, indemnity of or liability to the Company.

 

Section 2.2 Purchase Price and Adjustments; Escrow.

 

(a) The aggregate consideration payable by Purchaser to Seller for the Membership Interests (the “Purchase Price” ) shall consist of $ 367,730,870.00 (the “Base Purchase Price” ) plus or minus, as the case may be, the difference between the Net Working Capital as of the Effective Date and the Net Working Capital as of the Balance Sheet Date. For the avoidance of doubt, if Net Working Capital as of the Effective Date is greater than the Net Working Capital as of the Balance Sheet Date, then the difference shall be added to the Base Purchase Price. If Net Working Capital as of the Balance Sheet Date is greater than the Net Working Capital as of the Effective Date, then the difference shall be subtracted from the Base Purchase Price. In addition, the Base Purchase Price shall be subject to adjustment as provided in Sections 2.2(b), 2.2(c), 2.2(d), 2.2(e), 3.4, 6.15 and 9.2.

 

(b) The Purchase Price shall be decreased by the amount of EBITDA of the Companies for the period from the Balance Sheet Date to the Effective Date.

 

(c) The Purchase Price shall be increased by the aggregate amount of all costs, expenses, obligations and liabilities relating to preparing for drilling, drilling, equipping (including installing surface equipment) and completing the wells and other Properties listed on the attached Schedule 2.2(c) (and for any other wells not assigned an Allocated Value on Exhibit B for which Purchaser has approved Seller incurring such expenditures), in each case to the extent such amounts have been paid by the Seller or any of its Affiliates (including any of the Companies) prior to the Closing Date, including costs of title review, filing for permits, surface damage and access payments, access road construction and site preparation.

 

(d) The Purchase Price shall be adjusted for the actual aggregate gas imbalance (net of royalties) affecting the Properties that exists as of the Effective Date. Such imbalance in Mcf volumes shall be multiplied by $2.00 per Mcf to determine the dollar amount of the imbalance adjustment to the Purchase Price. The value so calculated of any net imbalance owing to the Seller shall be added to the Purchase Price and the value so calculated of any net imbalance owing by the Seller shall be subtracted from the Purchase Price.

 

(e) Purchaser shall deposit $11,031,926.10 upon execution of this Agreement by wire transfer of immediately available funds (the “Earnest Money” ), which shall be deposited and held by Seller in an account designated by Seller, as earnest money and part of the Purchase Price. At the Closing, any interest earned on the Earnest Money shall be applied to the Purchase Price. If the Earnest Money is returned to the Purchaser, then the Purchaser shall also receive any interest accrued

 

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thereon. If the Earnest Money is retained by the Seller as liquidated damages pursuant to Section 2.6, then the Seller shall also retain any interest accrued thereon.

 

Section 2.3 Closing. The closing of the transactions contemplated by this Agreement (the “Closing” ) will take place at 10:00 a.m., at the offices of Gable & Gotwals, 100 West 5 ^th Street, Tulsa, Oklahoma on the later of (i) September 30, 2005, (ii) the second Business Day following closing of that certain equity buyout transaction in respect of EXCO Holdings, Inc. as described in the Form 8-K filed on August 29, 2005 filed by EXCO Resources, Inc. with the U.S. Securities and Exchange Commission, but not later than October 14, 2005, or (iii) the second Business Day following the satisfaction or waiver of any condition set forth in Section 7.1 or Section 7.2, or such other date as Purchaser and Seller may mutually determine. The date on which the Closing occurs is hereinafter referred to as the “Closing Date.”

 

Section 2.4 Effective Date. The “Effective Date” of the transaction set forth in this Agreement shall be the first calendar day of the month in which the Closing Date occurs, unless the Closing Date occurs after the tenth (10 ^th ) calendar day of such month in which case the Effective Date shall be the first calendar day of the month immediately after the month in which the Closing Date occurs. The phrase “on or after the Effective Date” as used herein means on or after 7:00 a.m. central time on the Effective Date.

 

Section 2.5 Post-Closing Purchase Price Reconciliation.

 

(a) As soon as reasonably practicable following the Closing Date or the Effective Date, whichever is later, and in any event within 90 days thereafter, Seller shall prepare and deliver to Purchaser a calculation of Net Working Capital as of the Effective Date and a calculation of any other adjustments to the Purchase Price provided for in this Agreement, together with reasonably detailed supporting information (the “Closing Statement” ). The Net Working Capital as of the Effective Date shall be calculated in the same manner as reflected on Exhibit C (demonstrating the calculation of Net Working Capital as of the Balance Sheet Date).

 

(b) From and after the Closing, Purchaser and Seller shall each provide the other Party and its representatives reasonable access to the records relating to the calculation of Net Working Capital as of the Effective Date and the calculation of any other adjustments to the Purchase Price provided for in this Agreement as such other Party shall reasonably request and that are available.

 

(c) Within 60 days after Purchaser’s receipt of the Closing Statement, Purchaser shall notify Seller as to whether Purchaser agrees or disagrees with the Closing Statement and, if Purchaser disagrees, such notice shall set forth in reasonable detail the particulars of such disagreement. If Purchaser provides a notice of agreement or does not provide a notice of disagreement within such 60 day period, then Purchaser shall be deemed to have accepted the calculations and the amounts set forth in the Closing Statement delivered by Seller, which shall then be final, binding and conclusive for all purposes hereunder. If any such notice of disagreement is timely provided, then Purchaser and Seller shall each use Reasonable Efforts for a period of 30 days thereafter to resolve any disagreements with respect to the calculations in the Closing Statement.

 

(d) If, at the end of the 30-day resolution period, the Parties are unable to resolve any disagreements as to items in the Closing Statement, then KPMG LLP (or such other independent accounting firm of recognized national standing as may be mutually selected by Purchaser and Seller) shall resolve any remaining disagreements. If KPMG LLP is unwilling or unable to serve in such capacity and the Parties are unable to agree upon a replacement, then Seller shall within 10 days

 

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deliver to Purchaser a listing of three other accounting firms of recognized national or regional standing and Purchaser shall within 10 days after receipt of such list, select one of such three accounting firms (such firm as is ultimately selected pursuant to the aforementioned procedures being the “Accountant” ). The Accountant shall be charged with determining as promptly as practicable, but in any event within 30 days after the date on which such dispute is referred to the Accountant, any disputed items required to determine the Net Working Capital as of the Effective Date and any other adjustments to the Purchase Price provided for in this Agreement. The costs and expenses of the Accountant shall be borne 50% by Seller and 50% by Purchaser. The determination of the Accountant shall be final, binding and conclusive for all purposes hereunder. Such amounts as finally determined by the Accountant shall be used to determine the Purchase Price.

 

(e) Within five Business Days after the date on which the last disputed item required to determine the Net Working Capital as of the Effective Date and any other adjustments to the Purchase Price provided for in this Agreement is resolved pursuant to this Section 2.5, Purchaser shall pay to Seller an amount equal to the excess, if any, of the Purchase Price minus the Estimated Purchase Price, or Seller shall pay to Purchaser an amount equal to the excess, if any, of the Estimated Purchase Price minus the Purchase Price, in each case together with interest at a rate equal to LIBOR (determined, as applicable, on the Effective Date and at the end of each 30 day period thereafter) plus 1% on such excess from the Effective Date to the date of payment.

 

Section 2.6 Breach or Failure to Close.

 

If Seller performs all of Seller’s obligations under this Agreement, and if within five (5) days after the date specified for Closing as provided herein, the Purchaser fails to make any payment or to perform any of Purchaser’s obligations under this Agreement, and Purchaser shall not have terminated this Agreement as permitted in Section 8.1(b) or Section 8.2, then the Earnest Money (and any interest accrued thereon) shall be retained by Seller as liquidated damages for the breach of this Agreement by Purchaser. Notwithstanding any other provision of this Agreement, retention of the Earnest Money shall be Seller’s sole remedy for any failure to make payment or performance of any obligation of Purchaser prior to Closing. Seller and Purchaser agree that such amount is intended as liquidated damages, and not as a penalty, and is a reasonable amount for liquidated damages under this Agreement, and that it would be impractical and extremely difficult to determine actual damages. If the Purchaser performs all of Purchaser’s obligations under this Agreement, and if within five (5) days after the date specified for Closing as provided herein, Seller fails to perform any of Seller’s obligations under this Agreement, and Seller shall not have terminated this Agreement as permitted in Section 8.1(b) or Section 8.2, then Purchaser shall be entitled to cancel and terminate this Agreement and receive from Seller (i) a refund of the Earnest Money, together with all interest accrued thereon, and (ii) reimbursement of all of Purchaser’s actual out of pocket fees and expenses incurred in connection with the negotiation and execution of this Agreement. Notwithstanding any other provision of this Agreement, the recovery of the amounts set forth in (i) and (ii) above shall be Purchaser’s sole remedy for Seller’s failure to perform any of Seller’s obligations under this Agreement prior to Closing.

 

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ARTICLE 3.

TITLE MATTERS

 

Section 3.1 Seller’s Title.

 

(a) Seller represents and warrants to Purchaser that the Companies’ title to the Wells, Units and Leases shown on Exhibit A is Defensible Title as defined in Section 3.2.

 

(b) Seller represents and warrants to Purchaser that the Companies have good and valid, indefeasible title to the undivided interests described on Exhibit A-1 in the gas gathering systems, facilities, equipment, Easements and other property described on Exhibit A-1 (the “Gathering Systems” ).

 

(c) This Article 3 shall provide Purchaser’s exclusive remedy in respect of Title Defects.

 

Section 3.2 Definition of Defensible Title. As used in this Agreement, the term “Defensible Title” means that title of the Companies which, subject to Permitted Encumbrances:

 

(a) Entitles the Companies to receive throughout the duration of the productive life of any Well or Unit (after satisfaction of all royalties, overriding royalties, nonparticipating royalties, net profits interests or other similar burdens on or measured by production of Hydrocarbons), not less than the “net revenue interest” share shown in Exhibit A of all Hydrocarbons produced, saved and marketed from such Well or Unit, except decreases in connection with those operations in which the Companies may be a non-consenting co-owner, decreases resulting from the reversion of interests to co-owners with respect to operations in which such co-owners elected not to consent, decreases resulting from the establishment or amendment of pools or units, and decreases required to allow co-owners to make up past underproduction or pipelines to make up past under deliveries, and except as stated in such Exhibit A ;

 

(b) Obligates the Companies to bear a percentage of the costs and expenses for the maintenance and development of, and operations relating to, any Well or Unit not greater than the “working interest” shown in Exhibit A without increase throughout the productive life of such Well or Unit, except as required by COPAS, except as stated in Exhibit A and except increases resulting from contribution requirements with respect to defaulting co-owners under applicable operating agreements or applicable law and increases that are accompanied by at least a proportionate increase in the Companies’ net revenue interest; and

 

(c) Is free and clear of all Encumbrances other than Permitted Encumbrances.

 

Section 3.3 Definition of Permitted Encumbrances. As used herein, the term “Permitted Encumbrances” means any or all of the following:

 

(a) Lessors’ royalties and any overriding royalties, reversionary interests and other burdens to the extent that they do not, individually or in the aggregate, reduce the Companies’ net revenue interest in any Well or Unit below that shown in Exhibit A or increase the Companies’ working interest in any Well or Unit above that shown in Exhibit A without a corresponding increase in the net revenue interest;

 

(b) All leases, unit agreements, pooling agreements, operating agreements, production sales agreements, division orders and other sales contracts, agreements and instruments to which any Company is a party or by which any assets of a Company are bound, other than Excluded Assets (each, a “Contract” ) to the extent that they do not, individually or in the aggregate, reduce the

 

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Companies’ net revenue interest in any Well or Unit below that shown in Exhibit A or increase the Companies’ working interest in any Well or Unit above that shown in Exhibit A without a corresponding increase in the net revenue interest;

 

(c) Third-party consent requirements and similar restrictions with respect to which waivers or consents are obtained from the appropriate parties prior to the Closing Date or the appropriate time period for asserting the right has expired or which need not be satisfied prior to a transfer;

 

(d) Encumbrances for current Taxes or assessments not yet delinquent or, if delinquent, being contested in good faith by appropriate actions;

 

(e) 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 amounts not yet delinquent (including any amounts being withheld as provided by law), or if delinquent, being contested in good faith by appropriate actions;

 

(f) All rights to consent, required notices to, filings with, or other actions by any Governmental Authority in connection with the transactions contemplated hereby if they are customarily obtained subsequent to such transactions;

 

(g) Rights of reassignment arising upon final intention to abandon or release any assets of the Companies;

 

(h) Easements, rights-of-way, servitudes, permits, surface leases and other rights in respect of surface operations which do not materially interfere with or materially inhibit the normal conduct of such surface operations;

 

(i) Calls on production under existing Contracts;

 

(j) Gas balancing, cash balancing and other production balancing obligations with respect to any Well or Unit (it being understood that the Purchase Price adjustment in Section 2.2(d) addresses such imbalances) and obligations to balance or furnish make-up Hydrocarbons under Hydrocarbon sales, gathering, processing or transportation contracts;

 

(k) All rights reserved to or vested in any Governmental Authority to control or regulate the Company or any of its assets in any manner and all obligations and duties under all applicable laws, rules and orders of any such Governmental Authority or under any franchise, grant, license or permit issued by any such Governmental Authority;

 

(l) Any actual or asserted termination of the Companies’ title to any assets held by production as a consequence of the cessation of production or insufficient production over any period;

 

(m) Any Encumbrance on or affecting the assets of any Company which is expressly assumed, bonded or paid by Seller or its Affiliates (other than a Company) at or prior to Closing or which is discharged by Seller or its Affiliates (other than a Company) at or prior to Closing;

 

(n) The litigation and other matters listed on Seller Disclosure Schedules;

 

(o) The occurrence of payout under any farmout agreement, joint operating agreement or similar arrangement, or the exercise of any other back-in right or reversionary interest held by a third Person;

 

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(p) Any lease amendment, or any consent by any non-participating royalty interest or non-executive mineral interest, authorizing the lessee or executive rights holder to pool a leasehold interest, royalty interest, or mineral interest constituting part of any Property, or to pool another leasehold interest, royalty interest, or mineral interest with any Property;

 

(q) Any Encumbrances or other matters as to the ownership of the mineral, royalty or surface estate dating from sovereignty to the date of acquisition by Seller, except for leases acquired by Seller directly from the mineral owner, which would reasonably be expected to have been raised as an issue in the normal course by an experienced and competent title attorney giving a drilling or division order title opinion with respect to any Property, if a drilling or division order title opinion had been rendered as to such Property, and where such Encumbrances or other matters do not have a material adverse impact on the Allocated Value of the specific Property so encumbered when taking into account the age, remoteness, magnitude, nature and past treatment of such Encumbrances or other matter;

 

(r) Such Encumbrances or other matters that do not have a material adverse impact when taking into account the age, remoteness, magnitude and nature of such Encumbrances or other matter;

 

(s) The failure of Exhibit A to reflect any leased or unleased mineral interest, where the owner thereof was treated as a non-participating co-tenant during the drilling of any Well;

 

(t) Changes initiated by Purchaser in the (A) well location, (B) drilling unit configuration, or (C) pooling and unitization outlines;

 

(u) Any matters shown on Exhibit A ; and

 

(v) Any other Encumbrances (i) which do not, individually or in the aggregate, materially detract from the value of or materially interfere with the use, operation or ownership of the assets of the Companies (taken as a whole) subject thereto or affected thereby (as currently used, operated or owned) and (ii) which would be accepted by a reasonably prudent purchaser engaged in the business of owning and operating oil and gas properties.

 

Section 3.4 Notice of Title Defects; Defect Adjustments.

 

(a) To assert a claim arising out of a breach of Section 3.1, Purchaser must deliver a written claim notice to Seller promptly after becoming aware of a Title Defect but in any event on or before the date that is two (2) Business Days prior to Closing (the “Title Claim Date” ), except as otherwise provided under Section 3.5. Such notice shall be in writing and shall include (i) a specific description of the alleged Title Defects, (ii) the Wells or Units affected, (iii) the Allocated Values (as described below) of the Wells or Units subject to the alleged Title Defects, (iv) supporting documents reasonably necessary for Seller (as well as any title attorney or examiner hired by Seller) to verify the existence of the alleged Title Defects and (v) the amount by which Purchaser reasonably believes the Allocated Values of those Wells or Units are reduced by the alleged Title Defects and the computations and information upon which Purchaser’s belief is based. Purchaser shall be deemed to have waived all breaches of Section 3.1 for which Seller has not been given proper written notice as described above on or before the Title Claim Date. The term “Allocated Value” for any asset of the Companies equals the portion of the Purchase Price allocated to such asset as described on Exhibit B . Seller, to the extent it desires to assert a Title Benefit, must deliver to Purchaser, on or before the Title Claim Date, a similar written notice as to each Title Benefit asserted.

 

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(b) Should Purchaser discover any Title Benefit on or before the Title Claim Date, Purchaser shall, as soon as practicable, but in any case by the Title Claim Date, deliver to Seller a written notice including (i) a specific description of the Title Benefit, (ii) the Wells affected, and (iii) the computations and information upon which Purchaser’s belief is based. Seller shall have the right, but not the obligation, to deliver to Purchaser a similar notice on or before the Title Claim Date with respect to each Title Benefit discovered by Seller. Seller shall be deemed to have waived all Title Benefits of which neither Party has given notice on or before the Title Claim Date, except to the extent Purchaser has failed to give a notice that it was obligated to give under this Section 3.4(b).

 

(c) Seller and any Company shall have the right, but not the obligation, to attempt, at Seller’s sole cost, to cure or remove, on or before the Closing Date, any Title Defects.

 

(d) With respect to each Well or Unit affected by Title Defects reported under Section 3.4(a) and not cured during the period permitted under Section 3.4(c), the Purchase Price shall be reduced by an amount (the “Title Defect Amount” ) equal to the reduction in the Allocated Value for such Well or Unit caused by such Title Defects, as determined pursuant to Section 3.4(g). Notwithstanding the foregoing provisions of this Section 3.4(d), no reduction shall be made in the Purchase Price with respect to any Title Defect for which Seller at its election executes and delivers to Purchaser a written indemnity agreement, in form and substance reasonably satisfactory to Purchaser, under which Seller agrees to fully, unconditionally and irrevocably indemnify and hold harmless Purchaser and its successors and assigns from any and all Damages arising out of or resulting from such Title Defect.

 

(e) With respect to each Well or Unit affected by Title Benefits, the Purchase Price shall be increased by an amount (the “Title Benefit Amount” ) equal to the increase in the Allocated Value for such Well or Unit caused by such Title Benefits, as determined pursuant to Section 3.4(h).

 

(f) Section 3.4(d) shall, to the fullest extent permitted by applicable law, be the exclusive right and remedy of Purchaser with respect to Seller’s breach of its representations and warranties in Section 3.1.

 

(g) The Title Defect Amount resulting from a Title Defect shall be determined as follows:

 

(i) if Purchaser and Seller agree on the Title Defect Amount, that amount shall be the Title Defect Amount;

 

(ii) if the Title Defect is an Encumbrance which is undisputed and liquidated in amount, then the Title Defect Amount shall be the amount necessary to be paid to remove the Title Defect from the affected Well or Unit;

 

(iii) if the Title Defect represents a discrepancy between (A) the net revenue interest for any Well or Unit and (B) the net revenue interest or percentage stated on Exhibit A , then the Title Defect Amount shall be the product of the Allocated Value of such Well or Unit multiplied by a fraction, the numerator of which is the net revenue interest decrease or percentage ownership decrease and the denominator of which is the net revenue interest or percentage ownership stated on Exhibit A , provided that if the Title Defect is not effective or does not affect a Well or Unit throughout its entire term, the Title Defect Amount determined under this Section 3.4(g)(iii) shall be reduced accordingly;

 

(iv) if the Title Defect represents an obligation, Encumbrance, burden or charge upon or other defect in title to the affected Well or Unit of a type not described in subsections (i), (ii) or (iii) immediately above, the Title Defect Amount shall be determined by taking into

 

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account the Allocated Value of the Well or Unit so affected, the portion of Companies’ interest in the Well or Unit 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 Well or Unit, the values placed upon the Title Defect by Purchaser and Seller and such other factors as are necessary to make a proper evaluation;

 

(v) notwithstanding anything to the contrary in this Article 3, (A) an individual claim for a Title Defect for which a claim notice is given prior to the Title Claim Date shall only be subject to adjustment under this Article 3 (except for adjustments required by Section 3.5) if the Title Defect Amount with respect to such claim exceeds $100,000, (B) the aggregate Title Defect Amount attributable to the effects of all Title Defects upon any given Well or Unit shall not exceed the Allocated Value of such Well or Unit and (C) except for adjustments required by Section 3.5, there shall be no Purchase Price adjustment for Title Defects unless and until the aggregate amount of all Title Defect Amounts for all Wells or Units for which claim notices were timely delivered in accordance with Section 3.4(a) exceed $2,000,000, and then only to the extent that such amount exceeds $2,000,000;

 

(vi) if a Title Defect is reasonably susceptible of being cured, the Title Defect Amount shall not be greater than the lesser of (A) the reasonable cost and expense of curing such Title Defect or (B) the share of such curative work cost and expense which is allocated to such Well or Unit pursuant to subsection (vii) below; and

 

(vii) the Title Defect Amount with respect to a Well shall be determined without duplication of any costs or losses (A) included in another Title Defect Amount hereunder, (B) included in a casualty loss under Section 3.5, or (C) for which Purchaser otherwise receives credit in the calculation of the adjusted Purchase Price. To the extent that the cost to cure any Title Defect will result in the curing of all or a part of one or more other Title Defects, such cost of cure shall be allocated for purposes of Section 3.4(g)(vi) among the Wells or Units so affected on a fair and reasonable basis.

 

(h) The Title Benefit Amount for any Title Benefit shall be the product of the Allocated Value of the affected Well or Unit multiplied by a fraction, the numerator of which is the net revenue interest increase and the denominator of which is the net revenue interest stated on Exhibit A , provided that if the Title Benefit is not effective or does not affect a Well or Unit throughout the entire life of the Well or Unit, the Title Benefit Amount determined under this Section 3.4(h) shall be reduced accordingly.

 

(i) Seller and Purchaser shall attempt to agree on all Title Defect Amounts and Title Benefit Amounts by a date not less than ten (10) days after the Title Claim Date. If Seller and Purchaser are unable to agree by that date, the Title Defect Amounts and Title Benefit Amounts in dispute shall be exclusively and finally resolved by arbitration pursuant to this Section 3.4(i). During the 30-day period following the Title Claim Date, Title Defect Amounts and Title Benefit Amounts in dispute shall be submitted to a title attorney with at least 10 years’ experience in oil and gas titles in the location that is the subject of the dispute, as selected by (A) mutual agreement of Purchaser and Seller or (B) absent such agreement during the 30-day period, by the American Arbitration Association (the “Title Arbitrator” ). The Title Arbitrator shall not have had an affiliation with either Party or their Affiliates within the seven (7) year period preceding the arbitration, or have any financial interest in the dispute, controversy or claim. The arbitration proceeding shall be held in Tulsa, Oklahoma and shall be conducted in accordance with the Commercial Arbitration Rules of the

 

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American Arbitration Association, to the extent such rules do not conflict with the terms of this Section. The Title Arbitrator’s determination shall be made within 45 days after submission of the matters in dispute and shall be final and binding upon the Parties, without right of appeal. In making his determination, the Title Arbitrator shall be bound by the rules set forth in this Sections 3.4 and may consider such other matters as in the opinion of the Title Arbitrator are necessary or helpful to make a proper determination. Additionally, the Title Arbitrator may consult with and engage disinterested third parties to advise the arbitrator, including without limitation title attorneys and petroleum engineers. In no event shall any Title Defect Amount exceed the estimate given by Purchaser in its claim notice delivered in accordance with Section 3.4(a) and in no event shall any Title Benefit Amount exceed any estimate given by Seller in a claim notice delivered in accordance with Section 3.4(b). The Title Arbitrator shall act as an expert for the limited purpose of determining the specific disputed Title Defect Amounts and Title Benefit Amounts submitted by either Party and may not award damages, interest or penalties to either Party with respect to any matter. Seller and Purchaser shall bear its own legal fees and other costs of presenting its case. Seller and Purchaser shall each bear one-half of the costs and expenses of the Title Arbitrator.

 

(j) Seller may at its option and sole cost continue, after the Closing but prior to the date of the final adjustment to the Purchase Price as provided in Section 2.5, to attempt to cure or remove any Title Defects. If any Title Defect for which a Purchase Price adjustment is made or indemnity given under Section 3.4(d) is cured or removed by Seller prior to the date of the final adjustment to the Purchase Price, then (i) Seller shall be reimbursed in that final adjustment for the amount of any previous deduction from the Purchase Price with respect to such Title Defect or (ii) such indemnity shall be deemed terminated without further action on the part of any Party, as applicable.

 

Section 3.5 Casualty or Condemnation Loss. If, after the date of this Agreement, but prior to the Closing Date, any assets of the Companies are destroyed by fire or other casualty or is taken in condemnation or under right of eminent domain, Purchaser shall nevertheless be required to close and Seller shall elect by written notice to Purchaser prior to the Closing either (i) to cause the assets affected by any casualty to be repaired or restored, at Seller’s sole cost, as promptly as reasonably practicable (which work may extend after the Closing Date), (ii) to indemnify Purchaser through a document reasonably acceptable to Seller and Purchaser against any costs or expenses that Purchaser reasonably incurs to repair the assets subject to any casualty or (iii) to treat such casualty or taking as a Title Defect with respect to the affected property under Section 3.4. In each case, Seller shall retain all rights to insurance and other claims against third parties with respect to the casualty or taking except to the extent the Parties otherwise agree in writing.

 

Section 3.6 Limitations on Applicability. The representation and warranty in Section 3.1 shall terminate as of the Title Claim Date and shall have no further force or effect thereafter, provided there shall be no termination of Purchaser’s or Seller’s rights under Section 3.4 with respect to any bona fide Title Defect or Title Benefit claim properly reported on or before the Title Claim Date.

 

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ARTICLE 4.

REPRESENTATIONS AND WARRANTIES OF THE SELLER

 

The Seller represents and warrants to the Purchaser as follows, but expressly excludes the Excluded Assets from any of such representations or warranties:

 

Section 4.1 Disclaimers.

 

(a) Except as and to the extent expressly set forth in Articles 3 and 4 of this Agreement, (i) Seller makes no representations or warranties, express or implied, and (ii) Seller expressly disclaims all liability and responsibility for any representation, warranty, statement or information made or communicated (orally or in writing) to Purchaser or any of its Affiliates, employees, agents, consultants or representatives (including, without limitation, any opinion, information, projection or advice that may have been provided to Purchaser by any officer, director, employee, agent, consultant, representative or advisor of Seller or any of its Affiliates).

 

(b) EXCEPT AS EXPRESSLY REPRESENTED OTHERWISE IN ARTICLE 3 OR THIS ARTICLE 4, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, ORAL OR WRITTEN, AS TO (I) TITLE TO ANY OF THE PROPERTIES OR OTHER ASSETS OF ANY OF THE COMPANIES, (II) THE CONTENTS, CHARACTER OR NATURE OF ANY DESCRIPTIVE MEMORANDUM, OR ANY REPORT OF ANY PETROLEUM ENGINEERING CONSULTANT, OR ANY GEOLOGICAL OR SEISMIC DATA OR INTERPRETATION, RELATING TO THE PROPERTIES OR OTHER ASSETS OF ANY OF THE COMPANIES, (III) THE QUANTITY, QUALITY OR RECOVERABILITY OF HYDROCARBONS IN OR FROM THE PROPERTIES OR OTHER ASSETS OF ANY OF THE COMPANIES, (IV) ANY ESTIMATES OF THE VALUE OF THE ASSETS OR FUTURE REVENUES GENERATED BY THE PROPERTIES OR OTHER ASSETS OF ANY OF THE COMPANIES, (V) THE PRODUCTION OF PETROLEUM SUBSTANCES FROM THE PROPERTIES OR OTHER ASSETS OF ANY OF THE COMPANIES, OR WHETHER PRODUCTION HAS BEEN CONTINUOUS, OR IN PAYING QUANTITIES, (VI) THE MAINTENANCE, REPAIR, CONDITION, QUALITY, SUITABILITY, DESIGN OR MARKETABILITY OF THE PROPERTIES OR OTHER ASSETS OF ANY OF THE COMPANIES, OR (VII) ANY OTHER MATERIALS OR INFORMATION THAT MAY HAVE BEEN MADE AVAILABLE OR COMMUNICATED TO PURCHASER OR ITS AFFILIATES, OR ITS OR THEIR EMPLOYEES, AGENTS, CONSULTANTS, REPRESENTATIVES OR ADVISORS IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY DISCUSSION OR PRESENTATION RELATING THERETO, AND FURTHER DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CONFORMITY TO MODELS OR SAMPLES OF MATERIALS OF ANY EQUIPMENT, IT BEING EXPRESSLY UNDERSTOOD AND AGREED BY THE PARTIES HERETO THAT PURCHASER SHALL BE DEEMED TO BE OBTAINING ASSETS, EQUIPMENT AND OTHER TANGIBLE PROPERTY IN ITS PRESENT STATUS, CONDITION AND STATE OF REPAIR, “AS IS” AND “WHERE IS” WITH ALL FAULTS AND THAT PURCHASER HAS MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AS PURCHASER DEEMS APPROPRIATE.

 

(c) The disclosure of any matter or item in any schedule hereto shall not be deemed to constitute an acknowledgment that any such matter is required to be disclosed. Matters may be disclosed on a schedule to this Agreement for purposes of information only. Disclosure of any matter under one schedule shall be deemed disclosure of that matter under any other schedules to the extent reasonably ascertainable on the face of such disclosure.

 

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Section 4.2 Organization and Good Standing. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now conducted. ONEOK Resources Holdings and ONEOK Texas Holdings are limited liability companies, each duly organized, validly existing and in good standing under the laws of the State of Delaware and each has all requisite power and authority to own, lease and operate its properties and to carry on its business as now conducted. ONEOK Texas LP is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now conducted. Each Company is duly qualified or authorized to do business as a limited liability company or as a limited partnership, as applicable, and is in good standing under the laws of each jurisdiction in which the conduct of its business or the ownership of its properties requires such qualification or authorization, except where the failure to be so qualified, authorized or in good standing would not reasonably be expected to have a Material Adverse Effect.

 

Section 4.3 Authorization of Agreement. Seller has all requisite power, authority and legal capacity to execute and deliver this Agreement and each other agreement, document, or instrument or certificate contemplated by this Agreement or to be executed by Seller in connection with the consummation of the