LLC OPERATING AGREEMENT
LIMITED LIABILITY COMPANY AGREEMENT
OF
RIDGEWOOD ENERGY L FUND, LLC
THIS LIMITED LIABILITY COMPANY AGREEMENT (this "Agreement") is made and
entered as of July 6, 2004 by and among Ridgewood Energy Corporation, a Delaware
Corporation ("Manager"), and the Investors as defined below.
WHEREAS, the Manager has formed and the Investors have agreed to become
members of RIDGEWOOD ENERGY L FUND, LLC, a Delaware limited liability company
(the "Fund") and the Manager has caused a certificate of formation to be
executed and filed with the Delaware Secretary of State pursuant to Section
18-201 of the Delaware Limited Liability Company Act ("Delaware Act").
NOW, THEREFORE, in consideration of the mutual terms, covenants and
conditions contained herein, the parties agree as follows:
ARTICLE 1: ORGANIZATION AND POWERS
1.1 Name. The name of the Fund is "RIDGEWOOD ENERGY L FUND, LLC". The
Manager may conduct the business of the Fund or hold its property under other
names as necessary to comply with law or to further the affairs of the Fund, as
it deems advisable in its sole discretion. This Agreement, the Certificate and
any other documents, and any amendments of any of the foregoing, required by law
or appropriate, shall be recorded in all offices or jurisdictions where the Fund
shall determine such recording to be necessary or advisable for the conduct of
the business of the Fund.
1.2 Purpose (a) The Fund's purpose is to acquire, drill, construct and
develop natural gas and oil prospects, including natural gas infrastructure
projects, in the offshore waters of Texas and Louisiana in the Gulf of Mexico
("Oil and Gas Projects"). In addition to these acquisition and development
activities, the Fund may participate in pre-development and other preparatory
activities for the Oil and Gas Projects, including without limitation,
evaluation, investigation, due diligence activities, permitting, and other
development activities. The Fund may effect any of these transactions on its
own, together with Affiliates, or together with non-Affiliates, and may do so
with the encouragement or consent of management or controlling equity holders of
the entity it invests in or without such consent.
A-1
(b) In carrying out its purposes, the Fund has the power to perform any act
that is necessary, advisable, customary or incidental thereto. It may invest in
a passive or active manner in, develop, plan, construct, manage, operate,
advise, transfer or dispose of, any facility or interest and produce or market
products or services. The Fund may act independently, through subsidiary
organizations, in cooperation with others or through business entities in which
others have interests whether as principal, agent, partner, owner, member,
associate, joint venturer or otherwise. When related to its purposes, the Fund
may also guarantee obligations of other persons, supply collateral for those
obligations or for the issuance of letters of credit or surety bonds benefiting
other persons, enter into leases as lessor or lessee or acquire goods or
services for the use or benefit of other persons.
(c) Without the prior affirmative vote or written consent of Investors
whose aggregate Capital Contributions constitute more than 50% of all Capital
Contributions to the Fund at such time, the Fund will not take any action that
would cause it to be required to register as an "investment company" subject to
the requirements of the Investment Company Act of 1940 and will not hold itself
out as an "investment company."
(d) The Fund may make interim investments of funds in any vehicle otherwise
permitted by this Agreement and may take all action necessary, advisable or
appropriate to maintain its existence, enforce this Agreement and its rights or
the rights of the Shareholders and comply with legal requirements.
1.3 Relationship among Shareholders; No Partnership. As among the Fund, the
Shareholders and the officers and agents of the Fund, a limited liability
company and not a partnership is created by this Agreement and the Certificate
irrespective of whether any different status may be held to exist as far as
others are concerned or for tax purposes or in any other respect. The
Shareholders hold only the relationship of members of the Fund with only such
rights as are conferred on them by this Agreement and the Delaware Act.
1.4 Organization Certificates. The parties hereto have or shall cause to be
executed and filed (a) the Certificate, (b) such certificates as may be required
by so-called "assumed name" laws in each jurisdiction in which the Fund has a
place of business, (c) all such other certificates, notices, statements or other
instruments required by law or appropriate for the formation and operation of a
Delaware limited liability company in all jurisdictions where the Fund may elect
to do business, and (d) any amendments of any of the foregoing required by law
or otherwise appropriate.
A-2
1.5 Principal Place of Business. The principal place of business of the
Fund shall be ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, or such other place
as the Fund may designate from time to time by notice. The Fund may maintain
such other offices at such other places as the Fund may determine to be in the
best interests of the Fund.
1.6 Admission of Investors. (a) The Fund shall have the unrestricted right
at all times prior to the Termination Date to admit to the Fund such Investors
as it may deem advisable. One Investor Share will be issued for each accepted
subscription for $150,000 of Capital Contributions (before discounts or
incentives) and fractional Shares may be issued in the Manager's sole discretion
for proportional amounts of Capital Contributions. After the Termination Date,
the sale of Shares or different classes of Shares shall be governed by Section
9.6.
(b) The aggregate subscriptions received for Capital Contributions of the
Investors and accepted by the Fund will not exceed 350 Investor Shares
($52,500,000 nominal), immediately following the admission of such Investors.
However, at any time prior to the Termination Date, the Fund in its sole
discretion may increase the number of Investor Shares to 670 Investor Shares or
more.
(c) (i) If, by the close of business on March 31, 2005, Investor Shares
representing Investor Capital Contributions in the aggregate amount of at least
$1,500,000 have not been sold, the Fund shall be immediately dissolved at the
expense of the Manager and all subscription funds shall be forthwith returned to
the respective subscribers together with any interest earned thereon.
(ii) If the Fund withdraws the Offering after the Fund has received
Investor Shares representing Investor Capital Contributions in the aggregate
amount of at least $1,500,000, but before the Termination Date, the Fund shall
be immediately dissolved at the expense of the Manager and all subscription
funds, net of third party fees, shall be returned to the respective subscribers
together with any interest earned thereon. For purposes of this Section
1.6(c)(ii), third party fees do not include any fees paid to the Manager or its
affiliates.
(d) Each Investor shall execute a Subscription Agreement and will make a
Capital Contribution to the Fund equal to $150,000 per Investor Share. The Fund
may accept or reject any subscription in whole or in part in its sole
discretion. Each Investor who executes an accepted Subscription Agreement shall
be admitted to the Fund as a Shareholder. All funds received from such
subscriptions until used by the Fund will be deposited in the Fund's name in an
account at a commercial bank.
(e) The Capital Contribution for Investor Shares must be paid to the Fund
at the time of subscription.
A-3
1.7 Term of the Fund. For all purposes, this Agreement shall be effective
on and after its date and the Fund shall continue in existence until December
31, 2040, at which time the Fund shall terminate unless sooner terminated under
any other provision of this Agreement.
1.8 Powers of the Fund. Without limiting any powers granted to the Fund
under this Agreement or applicable law, in carrying out its purposes the Fund
has all powers granted to a limited liability company organized under the
Delaware Act, including, without limitation:
(a) To borrow money or to loan money and to pledge or mortgage any and all
Fund Property and to execute conveyances, mortgages, security agreements,
assignments and any other contract or agreement deemed proper and in furtherance
of the Fund's purposes and affecting it or any Fund Property; provided, however,
that the Fund shall not loan money to the Manager, or any other Managing Person;
(b) To pay all indebtedness, taxes and assessments due or to be due with
regard to Fund Property and to give or receive notices, reports or other
communications arising out of or in connection with the Fund's business or Fund
Property;
(c) To collect all monies due the Fund;
(d) To establish, maintain and supervise the deposit of funds or Fund
Property into, and the withdrawals of the same from, Fund bank accounts or
securities accounts;
(e) To employ accountants to prepare required tax returns and provide other
professional services and to pay their fees at the Fund's expense;
(f) To make any election relating to adjustments in basis on behalf of the
Fund or the Shareholders which is or may be permitted under the Code,
particularly with respect to Sections 743, 754 and 771 of the Code;
(g) To employ legal counsel for Fund purposes and to pay their fees and
expenses at the Fund's expense; and
(h) To invest in any asset consistent with the objectives of the Fund as
described in the Memorandum; and
ARTICLE 2: DEFINITIONS
A-4
The following terms, whenever used herein, shall have the meanings assigned
to them in this Article 2 unless the context clearly indicates otherwise.
References to sections and articles without further qualification denote
sections and articles of this Agreement. The singular shall include the plural
and the masculine gender shall include the feminine, and vice versa, as the
context requires, and the terms "person" and "he" and their derivations whenever
used herein shall include natural persons and entities, including, without
limitation, corporations, partnerships, limited liability companies and trusts,
unless the context indicates otherwise.
"Act"---The federal Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
"Adjusted Capital Account Deficit"--- with respect to any Shareholder, the
deficit balance, if any, in such Shareholder's Capital Account as of the end of
the relevant Fiscal Year, with the following adjustments:
A credit to such Capital Account of any amounts which such Shareholder is
obligated to restore pursuant to any provision of this Agreement or is deemed
obligated to restore pursuant to the penultimate sentences of Regulations
Section 1.704-2(g)(1) and 1.704-2(i)(5); and
A debit from such Capital Account for the items described in Sections
1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6) of
the Regulations.
The foregoing definition of "Adjusted Capital Account Deficit" is intended to
comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations
and shall be interpreted consistently therewith.
"Affiliate"---An "Affiliate" of, or person "Affiliated" with, a specified
person is a person that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with, the
person specified.
"Agreement"---This Limited Liability Company Agreement, as further amended
from time to time.
"Available Cash from Dispositions"--- The amount by which (a) the sum of
(i) the total cash proceeds received by the Fund in connection with the
transfer, injury, distribution, condemnation, or other disposition of Fund
Property (or interest therein) that is made other than in the ordinary course of
the Fund's business, plus (ii) the proceeds of any insurance payments or
financing transactions that are not otherwise used to construct, replace or
repair Fund Property, exceed (b) the amount that the Manager determines is
necessary to be retained by the Fund (i) to satisfy any debt or other obligation
of the Fund that is secured by, attributable to or otherwise connected with the
Fund Property disposed of (including Shareholder loans, if any) and (ii) to
establish reasonable reserves for actual or contingent obligations of the Fund.
A-5
"Available Cash from Operations"--- The total cash received by the Fund
from operation of the business in the ordinary course (but excluding any
Available Cash Flow from Dispositions and excluding any Investor Capital
Contributions), less (i) all operating expenses and other cash expenditures, and
(ii) such reserves for operating expenses, debt service and other actual or
contingent obligations and liabilities of the Fund as the Manager may determine
are necessary or advisable.
"Capital Account"---The amount representing a Shareholder's capital
interest in the Fund, as determined under Article 6 hereof.
"Capital Contributions"---The aggregate capital contributions of the
Investors accepted by the Fund in payment of the purchase price of one or more
whole or fractional Investor Shares, minus any return of capital by the Fund
pursuant to Section 5.3.
"Certificate"---The Certificate of Formation of the Fund, as amended from
time to time.
"Code"---The United States Internal Revenue Code of 1986, as amended from
time to time, or any corresponding provision or provisions of any succeeding law
and, to the extent applicable, any rules and regulations promulgated thereunder.
"Delaware Act"---The Delaware Limited Liability Company Act, as amended
from time to time (currently codified as Title 6, Chapter 18 of the Delaware
Code).
"Dry-Hole Costs" --- The cost of drilling a well.
"Escrow Date" --- The later of the dates on which the Fund (i) accepts
Investor subscriptions of at least $1,500,000 in the aggregate, and (ii) has in
deposit at least $1,500,000 in collected funds in escrow under Section 1.6(c),
provided, however, the Escrow Date shall not be later than March 31, 2005.
"Fiscal Year"---The calendar year ending December 31st.
"Fund"---Ridgewood Energy L Fund, LLC, a Delaware limited liability
company.
"Fund Property" --- All property owned or acquired by the Fund.
"Investor"---A purchaser of whole or fractional Investor Shares (which will
include the Manager to the extent it acquires Investor Shares for its own
account) whose subscription is accepted by the Fund.
"Investor Share" --- A Investor Share in the Fund representing a required
Capital Contribution (before any discounts or waivers of fees) of $150,000.
"Losses"---Defined at "Profits" or "Losses."
"Management Share" - The equity interest in the Profits and Losses of the
Fund and in distributions granted to Ridgewood as compensation for organizing
and sponsoring the Fund and acting as its Manager.
"Managing Person"---Any of the following: (a) Fund officers, agents,
consultants or Affiliates, the Manager and (b) any directors, trustees,
officers, agents or Affiliates of any organizations named in (a), above, when
acting on behalf of the Fund.
A-6
"Manager"-- Ridgewood Energy Corporation and any successor, substitute or
different Manager under this Agreement.
"Memorandum"---The Confidential Memorandum dated April 1, 2004 of the Fund,
as the same may be amended or supplemented from time to time.
"1940 Act"---The federal Investment Company Act of 1940, as amended, and
the rules and regulations promulgated thereunder.
"Non-recourse Deductions"---Shall have the meaning set forth in Regulations
Section 1.704-2(b)(1) and 1.704-2(c).
"Non-recourse Liability"--- Shall have the meaning set forth in Regulations
Section 1.752-1(a)(2).
"Oil and Gas Projects" --- The natural gas or oil projects acquired and
developed by the Fund.
"Partnership Minimum Gain" --- Shall have the meaning set forth in
Regulations Section 1.704-(2)(b)(2) and 1.704-2(d).
"Placement Agent"---Ridgewood Securities Corporation, a Delaware
corporation, or any successor.
"Profits" or "Losses"---For a given fiscal period, an amount equal to the
taxable income or loss for such period, determined in accordance with Code
Section 703(a) (for this purpose, all items of income, gain, expense, loss,
deduction or credit required to be stated separately pursuant to Code Section
703(a)(1) shall be included in taxable income or loss), with the following
adjustments:
(a) Any income that is exempt from federal income tax and not
otherwise taken into account in computing Profits or Losses pursuant to this
definition and any income and gain described in Regulation Section
1.704-1(b)(2)(iv)(g) shall be added to such taxable income or loss;
(b) Any expenditures described in Code Section 705(a)(2)(B) or treated
as Code Section 705(a)(2)(B) expenditures pursuant to Regulation Section
1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits
or Losses pursuant to this definition shall be subtracted from such taxable
income or loss;
(c) In the event of a distribution in kind under Section 8.2, the
amount of any unrealized gain or loss deemed to have been realized on the
property distributed shall be added or subtracted from such taxable income or
loss; and
(d) Notwithstanding any other provision of this definition, any items
that are specially allocated pursuant to Sections 4.3, and 7.3 shall not be
taken into account in computing Profits or Losses.
"Regulation"---A final or temporary Treasury regulation promulgated under
the Code.
"Ridgewood Energy Corporation" or "Ridgewood" -- Ridgewood Energy
Corporation, a Delaware corporation.
"Salvage Fund" --- As used herein shall have the meaning set forth in
Section 9.7.
A-7
"Shareholder" --- The Investors and the owner of the Management Share. The
Shareholders are the members of the Fund.
"Share"---A Shareholder's interest as a member of the Fund.
"Subscription Agreement"---The form of subscription agreement (contained in
Exhibit D to the Memorandum, which is separately bound) which each prospective
Investor must complete and execute in order to subscribe for an interest in the
Fund.
"Supplemental Offering" --- A supplemental offering by the Fund at a date
to be determined and as further described in Section 9.6.
"Termination Date" --- The date on which the initial offering of Investor
Shares is ended, as set or extended from time to time by the Fund in its sole
discretion, provided that the Termination Date may not occur before the Escrow
Date, and that if the Offering is withdrawn, the Termination Date is the date
the Fund elects to do so. In no event shall the Termination Date extend beyond
ninety (90) days beyond March 31, 2005.
"Working Interest" --- For purposes of this Agreement, a Working Interest
is an interest under an oil and natural gas well, which carries with it the
obligation to pay the costs of the operation of such well. The holders of the
entire Working Interest bear 100% of the costs of exploring, drilling,
developing and operating the well and are entitled to receive revenues derived
from the oil and natural gas production of the well which remain after deduction
of the cost of processing, transporting and marketing such oil and natural gas,
including royalty payments.
ARTICLE 3: LIABILITIES
3.1 Liability of Investors in General. Except as expressly set forth in
this Agreement or required by law, no Investor shall be personally liable for
any debt, obligation, or liability of the Fund whether arising in contract, tort
or otherwise, in any amount beyond the unpaid amount, if any, of the Capital
Contribution subscribed for by him, solely by reason of being a Shareholder of
the Fund.
3.2 Liability of Investors to Fund and Shareholders. No Investor in his
capacity as such shall be liable, responsible or accountable in damages or
otherwise to any other Shareholder or the Fund for any claim, demand, liability,
cost, damage or cause of action of any nature whatsoever that arises out of or
that is incidental to the management of the Fund's affairs.
3.3 Liability of Managing Persons to Third Person, Fund and Shareholders.
No Managing Person shall be liable to any person other than the Fund or a
Shareholder for any obligation of the Fund. No Managing Person shall have
liability to the Fund or to any Shareholder for any loss suffered by the Fund
that arises out of any action or inaction of the Managing Person if the Managing
Person, in good faith, determined that such course of conduct was in the Fund's
A-8
best interest and such course of conduct did not constitute bad faith, gross
negligence or willful misconduct of such Managing Person. Nothing in this
Section 3.3, however, shall limit or supersede any contractual or other defenses
a Managing Person may have against the Fund or a Shareholder.
3.4 Indemnification of Managing Persons. (a) Each Managing Person shall be
indemnified from Fund Property against any losses, liabilities, judgments,
expenses and amounts paid in settlement of any claims sustained by him in
connection with the Fund or claims by the Fund, in right of the Fund or by or in
right of any Shareholder, if the Managing Person would not be liable under the
standards of Section 3.3, or with respect to any criminal action or proceeding
he had no reasonable cause to believe his conduct was unlawful, and, in the case
of Managing Persons other than the Manager, they were acting within the scope of
authority validly delegated to them by the Manager or this Agreement. The
termination of any action, suit or proceeding by judgment, order or settlement
shall not, of itself, create a presumption that the Managing Person charged did
not act in good faith and in a manner that he reasonably believed was in the
Fund's best interests. To the extent that any Managing Person is successful on
the merits or otherwise in defense of any action, suit or proceeding or in
defense of any claim, issue or matter therein, the Fund shall indemnify that
Managing Person against the expenses, including reasonable attorneys' fees,
actually and reasonably incurred by him in connection therewith. The Manager
shall have full and complete discretion to authorize indemnification of any
Managing Person consistent with the requirements of this Agreement at any time,
regardless of whether a claim is pending or threatened and regardless of any
conflict of interest between the Manager and the Fund that may arise in regard
to the decision to indemnify a Managing Person.
(b) Notwithstanding the foregoing, no Managing Person, the Placement Agent
or any broker-dealer entitled to indemnification pursuant to Section 12.10 of
this Agreement shall be indemnified, for any losses, liabilities or expenses
arising from or out of an alleged violation of federal or state securities laws,
unless (i) there has been a successful adjudication on the merits of each count
involving alleged securities law violations as to the particular indemnitee,
(ii) those claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee or (iii) a court of
competent jurisdiction approves a settlement of the claims against the
particular indemnitee. In any claim for federal or state securities law
violations, the party seeking indemnification shall place before the court the
positions of the Securities and Exchange Commission and other securities
administrators to the extent required by them with respect to the issue of
indemnification for securities law violations.
(c) The restrictions of this Section 3.4 do not apply to the purchase of
directors and officers' insurance or any other insurance or bond by the Fund or
by
A-9
a Managing Person on behalf of the Fund, nor do they apply to any claim against
or proceeds of that insurance or bond.
3.5 General Provisions. The following provisions shall apply to all rights
of indemnification and advances of expenses under this Agreement and to all
liabilities described in this Article 3:
(a) Expenses, including attorneys' fees, incurred by a Managing Person in
defending any action, suit or proceeding shall be paid by the Fund in advance of
the final disposition of the action, suit or proceeding upon receipt of an
undertaking by the recipient to repay such amount if it shall ultimately be
determined that the Managing Person is not entitled to be indemnified by the
Fund under this Agreement or otherwise and if it is reasonable to make the
advance. It is reasonable to make the advance if at least one of the following
conditions is satisfied:
(i) The Managing Person provides appropriate security for the
undertaking;
(ii) The Managing Person is insured against losses or expenses of
defense or settlement so that the advances may be recovered;
(iii) The Managing Person was not a "controlling person" of the
Fund, as defined by the federal securities laws; or
(iv) There are other reasonable grounds for making the advance.
(b) Rights to indemnification and advances of expenses under this Agreement
are not exclusive of any other rights to indemnification or advances to which a
Managing Person may be entitled, both as to action in a representative capacity
or as to action in another capacity taken while representing another. The
restrictions of Section 3.5(a) or of any other provision of this Article 3 do
not apply to the purchase of directors and officers' insurance or any other
insurance or bond by the Fund or by a Managing Person on behalf of the Fund, nor
do they apply to any claim against or proceeds of that insurance or bond.
(c) Each Managing Person shall be entitled to rely upon the opinion or
advice of or any statement or computation by any counsel, engineer, accountant,
investment banker or other person retained by such Managing Person or the Fund
that he believes to be within such person's professional or expert competence.
In so doing, he or she will be deemed to be acting in good faith and with the
requisite degree of care unless he or she has actual knowledge concerning the
matter in question that would cause such reliance to be unwarranted.
3.6 Dealings with the Fund. With regard to all rights of the Fund and all
actions to be taken on its behalf, the Fund, the Fund's officers and agents, or
the
A-10
Shareholders, shall be the principal and the Fund shall be entitled as such to
the extent permitted by law to enforce the same, collect damages and take all
other action. All agreements, obligations and actions of the Fund shall be
executed or taken in the name of the Fund or by an appropriate nominee. Money
may be paid and property delivered to any duly authorized officer or agent of
the Fund who may receive same in the name of the Fund and no person dealing in
good faith thereby shall be bound to see to the application of any moneys so
paid or property so delivered. No entity whose securities are held by the Fund
shall be affected by notice of such fact or be bound to see to the execution of
the Fund or to ascertain whether any transfer of its securities by or to the
Fund is authorized.
ARTICLE 4: ALLOCATION OF PROFIT AND LOSS
4.1 General. The rules set forth below in this Article 4 shall apply for
the purposes of determining each Shareholder's allocable share of the items of
income, gain, loss and expense of the Fund comprising Profits or Losses of the
Fund for each Fiscal Year, determining special allocations of other items of
income, gain, loss and expense, and adjusting the balance of each Shareholder's
Capital Account to reflect the aforementioned general and special allocations.
For each Fiscal Year, the special allocations in Section 4.3 and Section 7.4
hereof shall be made immediately prior to the general allocations of Section 4.2
hereof. Allocations to the Investors shall be made in accordance with their
relative Investor Shares.
4.2 General Allocations.
(a) General. Except as provided in Section 4.3 hereof and subject to
Article 7, 8 and 9 hereof, all items of income, gain, expense, loss, deduction
and credit of the Fund shall be allocated 15% to the Manager and 85% to the
Investors.
(b) Loss Limitation. Notwithstanding anything to the contrary contained in
this Section 4.2, the amount of Fund Losses allocated pursuant to Section 4.2(b)
to any Shareholder shall not exceed the maximum amount of such items that can be
so allocated without causing such Shareholder to have an Adjusted Capital
Account Deficit at the end of any Fiscal Year. All such items in excess of the
limitation set forth in the previous sentence shall be allocated first to
Shareholders who would not have an Adjusted Capital Account Deficit, pro rata,
until no Shareholder would be entitled to any further allocation, and then to
the Manager.
(c) No Deficit Restoration Obligation. Except as provided in Section 14.7,
at no time during the term of the Fund or upon dissolution and liquidation
thereof shall a Shareholder with a negative balance in his, her or its Capital
A-11
Account have any obligation to the Fund or the other Shareholders to restore
such negative balance, except as may be required by law.
(d) Items. Except as otherwise provided in this Agreement, all items of
Fund income, gain, expense, loss, and deduction for a particular Fiscal Year and
any other allocations not otherwise provided for shall be divided among the
Shareholders in the same proportions as they share Profits or Losses, as the
case may be, for such Fiscal Year.
(e) Tax Reporting. The Shareholders shall be bound by the provisions of
this Agreement in reporting their shares of Fund Profits, Losses and other items
for income tax purposes.
(f) Allocation to Fiscal Periods. The Fund may use any permissible method
under Code Section 706(d) and the Regulations thereunder to determine Profits,
Losses and other items on a daily, monthly or other basis for any Fiscal Year in
which there is a change in a Shareholder's interest in the Fund.
(g) Capital Account Regulations. The definition of "Capital Account" and
certain other provisions of this Agreement are intended to comply with
Regulations Sections 1.704-1(b) and 1.704-2 and shall be interpreted and applied
in a manner consistent with such Regulations. These Regulations contain
additional rules governing maintenance of Capital Accounts that may not have
been provided for in this Agreement because, in part, these rules may relate to
transactions that are not expected to occur and in some instances are prohibited
by this Agreement. If the Fund after consultation with its regular accountants
or tax counsel determines that it is prudent to modify the manner in which the
Capital Accounts, or any debits or credits thereto, are computed in order to
comply with such Regulations, or to avoid the effects of unanticipated events
that might otherwise cause this Agreement not to comply with such Regulations,
the Fund shall make such modification without the need of prior notice to or
consent of any Shareholder; so long as no such modification is likely to have a
material effect on the amounts distributable to any Shareholder.
4.3 Capital Contribution Allocations. Subject to Section 1.6 and Articles
7, 8, and 9 hereof, all items of expense, loss, deduction and credit
attributable to the expenditure of any Capital Contributions and all income and
gains derived from temporary investment of the Fund's funds prior to application
of such funds to the business of the Fund shall be allocated 1% to the Manager
and 99% to the Investors.
4.4 Tax Allocations. The tax allocations made pursuant to this Section 4.4
shall be solely for tax purposes and shall not affect any Shareholder's Capital
Account or share of non-tax allocations or distributions under this Agreement.
A-12
(a) Section 704(c) Allocations. In the event any property of the Fund is
credited to the Capital Account of a Shareholder at a value other than its tax
basis, the allocations of taxable income, gain, loss and deductions with respect
to such property shall be made in a manner that will comply with Code Section
704(b) and 704(c) and the Regulations thereunder. The Fund, in the sole and
absolute discretion of the Manager, may make, or not make, "curative" or
"remedial" allocations (within the meaning of the Regulations under Code Section
704(c) including, but not limited to:
(i) "curative" allocations which offset the effect of the "ceiling rule"
for a prior Fiscal Year (within the meaning of Regulations Section
1.704-3(c)(3)(ii)); and
(ii) "curative" allocations from dispositions of contributed property
(within the meaning of Regulations Section 1.704-3(c)(3(iii)(B)).
(b) Depreciation Recapture. To the maximum extent permitted by the Code,
income realized by the Fund in the nature of recapture of depreciation or other
cost recovery allowances (other than of Non-recourse Deductions or Shareholder
Non-recourse Deductions) shall be allocated to Shareholders in the same
proportions as depreciation allowances were allocated to them pursuant to
Section 4.3(a).
ARTICLE 5: CAPITAL CONTRIBUTIONS OF SHAREHOLDERS
5.1 Additional Capital Contributions. Investors shall not be required or
permitted to make additional contributions to the Fund.
5.2 Manager's Capital Contributions. The Manager in its capacity as Manager
shall only be required to make Capital Contributions in accordance with Section
14.7.
5.3. Returns of Capital. If the Fund for any reason at any time does not
find it necessary or appropriate to retain or expend all Capital Contributions,
the Manager in its sole discretion may cause the Fund to return any or all such
excess Capital Contributions ratably to Investors. The Investors will be
notified of the source of the payment. The Fund is not obligated to return the
amount of any fees charged in connection with the Investor Capital Contribution
and the return of a Investor Capital Contribution is net of any fees so charged.
A-13
ARTICLE 6: CAPITAL ACCOUNTS
6.1 Capital Accounts. A Capital Account shall be established and maintained
for each Shareholder and shall be adjusted as follows:
(a) The Capital Account of each Shareholder shall be increased by:
(1) The amount of such Shareholder's Capital Contributions to the Fund;
(2) The amount of Profits allocated to such Shareholder pursuant to
Articles 4 and 7;
(3) The fair market value of property contributed by the Shareholder to the
Fund (net of liabilities secured by the contributed property that the Fund under
Code Section 752 is considered to have assumed or taken subject to);
(4) Any items in the nature of income or gain that are specially allocated
to such Shareholder or adjusted pursuant to Sections 4.3 and 7.4; and
(b) The Capital Account of each Shareholder shall be decreased by:
(1) The amount of Losses allocated to such Shareholder pursuant to Articles
4 and 7;
(2) All amounts of money and the fair market value of property paid or
distributed to such Shareholder pursuant to the terms hereof (other than
payments made with respect to loans made by such Shareholder to the Fund), net
of liabilities secured by that property that the Shareholder under Code Section
752 is considered to have assumed or taken subject to;
(3) Any items in the nature of expenses or losses that are specially
allocated to such Shareholder pursuant to Sections 4.3 and 7.4; and
(4) Any return of a Capital Contribution under Section 5.3.
6.2 Calculation of Capital Account. Whenever it is necessary to determine
the Capital Account of any Shareholder, the Capital Account of such Shareholder
shall be determined in accordance with the rules of Regulation Sections 1.704-1
(b) (2) (iv) and 1.704-2 (as amended from time to time). If necessary to comply
with the Code, an adjusted Capital Account may be employed.
6.3 Effect of Loans. Loans by any Shareholder to the Fund shall not be
considered contributions to the capital of the Fund.
A-14
6.4 Withdrawal of Capital. No Shareholder shall be entitled to withdraw any
part of his Capital Account or to receive any distribution from the Fund, except
as specifically provided herein.
6.5 Capital Accounts of New Shareholders. Any person who shall acquire
Shares in accordance with the terms and conditions of Article 13 of this
Agreement shall have the Capital Account of his transferor after adjustments
reflecting the transfer, if any, except as specifically provided herein.
6.6 Limitation. Neither the Manager nor any other Managing Person shall be
required or shall have any personal liability to fund any or all of any negative
Capital Account of any Investor, including without limitation Investor Capital
Contributions.
ARTICLE 7: ADDITIONAL PROVISIONS APPLICABLE TO ALLOCATIONS
7.1 Determination of Income and Loss. At the end of each Fiscal Year, and
at such other times as the Fund shall deem necessary or appropriate, each item
of Fund income, gain, expense, loss, deduction and credit shall be determined
for the period then ending and shall be allocated to the Capital Account of each
Shareholder in accordance with this Agreement. With respect to the admission of
Shareholders, the Fund will use the "interim closing date" method of accounting
as permitted by the Regulations.
7.2 Determination of Income and Loss in the Event of Transfer. In the event
that a Shareholder transfers his interest in the Fund in accordance with the
terms of this Agreement, the determination and allocation described in Section
7.1 shall be made as of the date of such transfer and thereafter all such
allocations shall be made to the account of the transferee of such interest;
provided, however, that the Fund may determine that such determination and
allocation shall be pro rata to the Shareholders based upon the actual number of
days in such Fiscal Year that each such Shareholder held an interest in the
Fund. In the event of a pro rata determination and allocation, the foregoing
provisions of this Section relating to a pro rata determination and allocation
will not be applicable to the distributive shares, with respect to the Shares
transferred, of items of Fund income, gain, expense, loss, deduction and credit
arising out of (a) the sale or other disposition of all or substantially all
Fund Property, or (b) other extraordinary nonrecurring items, all of which will
be allocated to the holder of such Trust interest on the date such items of Fund
income, gain, expense, loss, deduction and credit are earned or incurred.
7.3 Allocation of Net Income and Net Losses. All items of income, gain,
expense, loss, deduction and credit of the Fund from operations and in the
A-15
ordinary course of operation of Fund Property shall be allocated among the
Shareholders in accordance with Article 4.
7.4 Qualified Income Offset and Other Allocation Provisions. (a) If there
is a net decrease in "partnership minimum gain" (within the meaning of
Regulation Section 1.704-2(d)) during a fiscal period, then there shall be
allocated to each Shareholder items of income and gain for such fiscal period
(and, if necessary, subsequent fiscal periods) in proportion to, and to the
extent of, an amount equal to the portion of such Shareholder's share of the net
decrease in partnership minimum gain during such fiscal period that is allocable
to the disposition of Fund Property subject to one or more Non-recourse
liabilities of the Fund. However, such allocation shall be reduced to the extent
(i) the Shareholder contributes capital to the Fund that is used to repay the
Non-recourse liability and (ii) the Shareholder's share of the net decrease in
partnership minimum gain is caused by the repayment. The foregoing is intended
to be a "minimum gain chargeback" provision as described in Regulation Section
1.704-2(f), and shall be interpreted and applied in all respects in accordance
with such Regulation. If there is a net decrease in the minimum gain
attributable to a "partner non-recourse debt" (as defined in Regulation Section
1.704-2(b) (4)) for a fiscal period, then, in addition to the amounts, if any,
allocated pursuant to the first sentence of this Subsection 7.4(a), there shall
be allocated to each Shareholder with a share of such minimum gain attributable
to a "partner non-recourse debt" items of income and gain for such fiscal period
(and, if necessary, subsequent fiscal periods) in proportion to, and to the
extent of, an amount equal to the portion of such Shareholder's share of the net
decrease in the minimum gain attributable to a partner non-recourse debt during
such fiscal period that is allocable to the disposition of Trust Property
subject to one or more non-recourse liabilities of the Fund. However, such
amount shall be reduced to the extent (i) the Shareholder contributes capital to
the Fund that is used to repay the Non-recourse liability and (ii) the
Shareholder's share of the net decrease in the minimum gain attributable to a
partner non-recourse debt is caused by the repayment.
(b) If during any fiscal period of the Fund a Shareholder unexpectedly
receives an adjustment, allocation or distribution described in Regulation
Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), which causes or increases a deficit
balance in the Shareholder's Capital Account, there shall be allocated to the
Shareholder items of income and gain (consisting of a pro rata portion of each
item of Fund income, including gross income, and gain for such period) in an
amount and manner sufficient to eliminate such deficit balance as quickly as
possible. The foregoing is intended to be a "qualified income offset" provision
as described in Regulation Section 1.704-1(b)(2)(ii)(d), and shall be
interpreted and applied in all respects in accordance with such Regulation.
A-16
(c) Notwithstanding anything to the contrary in Article 4 or this Article
7, any item of deduction, loss or Code Section 705(a)(2)(B) expenditure that is
attributable to "partner non-recourse debt" shall be allocated in accordance
with the manner in which the Shareholders bear the economic risk of loss for
such debt (determined in accordance with Regulation Section 1.704-2(i)).
(d) To the extent that any item of income, gain, loss or deduction has been
specially allocated pursuant to paragraph (a), (b) or (c) of this Section 7.4
("Required Allocations") and such allocation is inconsistent with how the same
amount otherwise would have been allocated under Sections 4.1 and 4.2,
subsequent allocations under Sections 4.1 and 4.2 shall be made, to the extent
possible, in a manner consistent with paragraphs (a), (b) and (c) of this
Section 7.4 which negates as rapidly as possible the effect of all previous
Required Allocations.
(e) Solely for federal, state and local income and franchise tax purposes
and not for book or Capital Account purposes, income, gain, loss and deduction
with respect to property carried on the Fund's books at a value other than its
tax basis shall be allocated (i) in the case of property contributed in kind, in
accordance with the requirements of Code Section 704(c) and such Regulations as
may be promulgated thereunder from time to time, and (ii) in the case of other
property, in accordance with the principles of Code Section 704(c) and the
Regulations thereunder, in each case, as incorporated among the requirements of
the relevant provisions of the Regulations under Code Section 704(b).
ARTICLE 8: DISTRIBUTIONS TO SHAREHOLDERS
8.1 Distributions of Available Cash from Operations. Subject to the terms
of this Agreement, the Fund shall make distributions to Shareholders of
Available Cash from Operations with respect to each Fiscal Year in the manner
and at the time determined by the Manager. The amount of Available Cash From
Operations determined to be available, if any, will be distributed 15% to the
Manager and 85% to the Investors.
8.2 Distribution of Available Cash from Dispositions. Subject to the terms
of this Agreement, the Fund shall make distribution to Shareholders of Available
Cash from Dispositions with respect to each Fiscal Year, in the manner and at
the times determined by the Manager, as follows:
(i) Before Investors have received total distributions (including
distributions from Available Cash From Operations) equal to their Capital
Contributions, 99% of Available Cash From Dispositions will be distributed
to Investors and 1% to the Manager.
A-17
(ii) After Investors have received total distributions (including Available
Cash From Operations and any distributions of Available Cash From
Dispositions) equal to their Capital Contributions, 85% of Available Cash
From Dispositions will be distributed to Investors and 15% to the Manager.
8.3 Interim Distributions Based on Estimates. To the extent that the Fund
makes interim distributions prior to the end of any Fiscal Year, such
distributions are provisional and may be made based upon estimates of the
Manager of the results of operations of the Fund for the balance of the Fiscal
Year, subject to a true-up at the end of such Fiscal Year. To the extent that
the Fund subsequently determines that any amounts were improperly distributed,
and not repaid to the Fund by any Shareholder, the Fund may take such action as
the Manager shall determine to recover such amounts, including, without
limitation, the offset any amounts of future distributions to such Shareholder
to satisfy such repayment obligation.
8.4 Distribution in Kind. If the Fund elects to make distribution in kind
of any of the assets of the Fund, it shall give notice of its election to each
Shareholder, specifying the nature and value of all such assets to be
distributed in kind, the deadline for giving notice of refusal to accept a
distribution in kind and to the extent advisable, the estimated time necessary
for the Fund to liquidate assets if those assets are not distributed and other
information as required. In making such election, the Fund shall not arbitrarily
value assets to be distributed in kind nor shall it specify assets to be
distributed in kind in such a manner as to unreasonably advantage or
disadvantage any Shareholder. A Shareholder may refuse to accept a distribution
in kind by giving written notice to the Fund not later than 30 days after the
effective date of the Fund's notice of distribution. If a Shareholder refuses
distribution in kind, the Fund shall retain in the Fund's name the portion of
the assets which were to be distributed in kind and which were to be allocated
to the refusing Shareholder (the "Retained Assets") and shall liquidate the
Retained Assets in accordance with this Agreement. Upon liquidation of the
Retained Assets, the sum realized shall be distributed to the Shareholder
refusing distribution in kind in full discharge of the Fund's obligation to
distribute the Retained Assets. In determining the Capital Accounts of the
Shareholders, a distribution of assets in kind shall be considered a sale of the
property distributed so that any unrealized gain or loss with respect to such
property shall be deemed to have been realized and allocated among the
Shareholders in accordance with Article 4.
8.5 Amounts Withheld. All amounts withheld pursuant to the Code or any
provision of any state or local tax law with respect to any payment or
distribution to the Fund or the Shareholders shall be treated as amounts
distributed to the Shareholders pursuant to this Article 8 for all purposes
under
A-18
this Agreement. The Fund may allocate any such amounts among the Shareholders in
any manner that is in accordance with applicable law.
8.6 Limitations. Distributions to Shareholders shall not be made to the
extent they are prohibited by restrictions contained in the Delaware Act or
other provisions of this Agreement. Further, distribution shall not be made to
any Investor to the extent that the effect of such distributions would cause the
balance of such Investor's Capital Account to be below zero unless such Investor
undertakes an affirmative obligation to make a cash contribution to the Fund in
the amount of any negative balance in such Investor's Capital Account and posts
security satisfactory to the Manager to satisfy such restoration obligation.
ARTICLE 9:OPERATION OF FUND
9.1 Investment Fee. The Fund shall pay Ridgewood out of Fund Property an
investment fee in an amount equal to 4.5% of the base amount of each Capital
Contribution per Investor Share. The base amounts are computed at the rate of
$150,000 of Capital Contributions per Investor Share, without considering any
discounts or waivers of fees. The investment fee payable in respect of Investors
whose subscriptions for Shares are accepted by the Fund in 2004 is for the
Manager's services provided in that year and the fee payable by Investors whose
subscriptions for Shares are accepted by the Fund in a later year is for those
services for capital contributed in that year. The fee in respect of services
performed by the Manager during any year in which such additional funds are
received by the Fund under Section 9.5 shall be payable upon the later of each
date on which payment is accepted by the Fund or the fulfillment of any
applicable escrow conditions.
9.2 Placement Agent and other Selling Commissions. (a) The Fund shall pay
out of Fund Property to Ridgewood Securities Corporation or to any broker-dealer
who effects the sale of one or more whole or fractional Shares, cash selling
commissions in an aggregate amount equal to 8% of the base amount of each
Capital Contribution. The base amounts are computed at the rate of $150,000 of
Capital Contributions per Investor Share, without considering any discounts or
waivers of fees. For serving as Placement Agent, Ridgewood Securities
Corporation shall in addition be entitled to receive out of Fund Property a fee
in an amount equal to 1% of each Capital Contribution. Such commissions payable
on each Capital Contribution in respect of sales of Shares prior to the
Termination Date and shall be due and payable promptly after the latest to occur
of (i) acceptance by the Fund of an Investor's subscription, (ii) the Escrow
Date, or (iii) the receipt by the Fund of the Investor's Capital Contribution.
Except as set forth in this Section 9.2(a), the Placement Agent is not entitled
to any other fee or reimbursement from the Fund.
A-19
(b) Ridgewood may pay additional compensation to registered broker-dealers
assisting in the sale of Investor Shares out of its own funds, including a
portion of the cash otherwise distributable to the Manager hereunder or the fees
payable to it by the Fund. In addition, Ridgewood, in its sole discretion, may
waive or pay over to certain Investors a portion of distributions or fees from
the Fund otherwise payable to it.
9.3 Other Expenses.
(a) Subject to Sections 9.3(b) and (c), the Fund shall reimburse Ridgewood
for all actual and necessary direct expenses paid or incurred in connection with
the operation of the Fund, including but not limited to travel expenses and
third party accounting, legal and consulting fees, to the extent that those
expenses were incurred by Ridgewood in carrying out responsibilities assigned to
it by this Agreement and were consistent with such Agreement.
(b) The Fund shall pay the Manager out of Fund Property an organizational,
distribution and offering fee in an amount equal to 3.5% of each Capital
Contribution to cover all expenses incurred in the offer and sale of Shares,
including legal, accounting, and consulting fees, printing, filing, postage and
other expenses of organizing the Fund, distribution and selling costs and
closing costs for the offering. The fee shall be payable on the Escrow Date as
to Shares purchased through that date and on each date thereafter on which the
Fund receives and collects full payment for additional accepted subscriptions
for Shares. If these expenses exceed 3.5% of the aggregate Capital
Contributions, the Manager shall pay such excess.
(c) The Fund shall reimburse Ridgewood for direct expenses actually
incurred for operational or project development services provided by Ridgewood
to the extent (i) the charges for the services do not exceed amounts that would
be charged by unrelated firms offering similar services and (ii) the Oil and Gas
Projects do not reimburse the Manager for those expenses.
(d) In respect of the acquisition or disposition of all or a portion of the
Fund Property, the Fund may be required to or may find it advantageous to and is
authorized to, engage a broker or similar adviser and to pay a brokerage fee to
the broker or other persons responsible for bringing the acquisition or
disposition opportunity to the Fund's attention or for investigating, evaluating
or negotiating the acquisition or disposition of the Fund's interest therein.
9.4 Management Fee. For each 12-month period beginning on the date the
offering of Investor Shares is commenced, and ending upon the winding up of the
Fund's business, the Fund shall pay the Manager from Fund Property a Management
Fee, payable in advance in equal monthly installments, at the annual rate of
2.5% of the aggregate of Capital Contributions.
A-20
9.4.1. The fee will be payable by the Fund in equal monthly installments in
advance beginning on the date the offering commences, and is payable from Fund
cash flow, if any, or from other Fund assets, including without limitation,
contributed capital and interest earned on interim investments.
9.4.2 The Management Fee shall be in lieu of any reimbursement to the
Manager for administrative and overhead expenses, including without limitation
postage, communication, computer service, accounting, regulatory reporting and
compensation costs of the Manager allocable to the Fund.
9.4.3 The Management Fee does not defray fees, expenses and payments such
as legal, outside accounting and consulting expenses, including amounts paid by
the Fund to persons other than Ridgewood or any Affiliate of Ridgewood, the Fund
or ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ for performing due diligence or identifying investment
opportunities for the Fund. The Management Fee also does not defray
extraordinary expenses incurred by Ridgewood or any expenses described in
Section 9.3(a). Amounts not defrayed by the Management Fee shall be borne by the
Fund or Ridgewood under Section 9.3.
9.5 Payment and Recoupment of Fees. As soon as funds have been released to
the Fund from the escrow account referred to in Section 1.6(c), they may be used
to pay the fees referred to in Sections 9.1, 9.2 and 9.4 then due. If the
Manager withdraws the offering of Shares, or rejects any subscription for
Shares, any person that has received payments from the proceeds of the offering
shall return such payments to the Fund upon demand by the Manager.
9.6 Supplemental Offering of Shares. The Fund from time to time may create
and sell additional Investor Shares or additional classes or series of Shares if
the Manager in its sole discretion determines that the best interests of the
Fund so require. The Manager is authorized to determine or alter any or all of
the powers, rights, qualifications, limitations or restrictions granted or
imposed upon any such series or supplemental Shares or the offering thereof, and
to fix, alter or reduce the number of Shares comprising any such class or
series, and to provide for the rights and terms of redemption or conversion of
the Shares of any such class or series. Any such Shares may be offered to such
persons and on such terms and conditions as the Fund may determine.
9.7 Salvage Fund. The Fund will (and may be required by the operator of any
Oil and Gas Project to) reserve and set aside each month in a separate
interest-bearing account ("Salvage Fund") a portion of the Fund's net revenue,
if any, that the Fund may receive form the production and sale of oil and
natural gas from each Oil and Gas Project in which the Fund has invested until
such time as the Salvage Fund contains an amount equal to the Fund's anticipated
salvage value of dismantling production platforms, plugging and abandoning the
platform ▇▇▇▇▇, and removing the platforms and platform ▇▇▇▇▇ in respect of each
such Oil
A-21
and Gas Project after its useful life, in accordance with applicable federal and
state law and regulations. Any portion of the Salvage Fund that remains after
the Fund pays its share of the salvage costs will be distributed to the
Investors in accordance with the provisions of Section 8.1.
ARTICLE 10: ACCOUNTING
10.1 Elections. The Fund shall elect the calendar year as its Fiscal Year.
The Fund shall adopt the accrual method of accounting or such other method of
accounting as the Fund shall determine. The Fund shall elect to be taxed only as
a partnership unless this provision is amended with the consent of Investors
whose aggregate Capital Contributions constitute more than 50% of all Capital
Contributions to the Fund. The Fund may but shall not be required to make an
election under Section 754 of the Code or corresponding state taxation laws. The
Manager is empowered to make any other election permitted by law, including
without limitation an election under Code Section 771, without prior notice to
or consent by any other Shareholder.
10.2 Books and Records. The Fund's books and records shall be kept at the
principal place of business of the Fund and shall be maintained in accordance
with generally accepted accounting principles, consistently applied. The Fund
shall maintain supplemental records on the basis utilized in preparing the
Fund's federal income tax return with such adjustments in accounting as are
required by this Agreement or as the Fund determines would be in the best
interests of the Fund.
10.3 Reports. The Fund will keep each Shareholder and assignee complying
with Article 13 currently advised as to activities of the Fund by communications
furnished at least quarterly. An independent certified public accounting firm
selected by the Fund will prepare the Fund's federal income tax return as soon
as practicable after the conclusion of each year and each Shareholder will be
furnished, at that time, with the necessary accounting information for each
Shareholder to take into account and report separately such Shareholder's
distributive share of the income and deductions of the Fund. The Fund will use
its reasonable best efforts to obtain the information necessary for the
accounting firm as soon as practicable and to transmit the resulting accounting
and tax information to the Shareholders as soon as possible after receipt from
the accounting firm.
10.4 Bank Accounts. The Fund shall maintain separate segregated accounts in
its name at one or more commercial banks, and the cash of the Fund shall be kept
in any of those accounts as determined by the Fund.
10.5 Interim Assets. To the extent the Fund's liquid capital is not
otherwise committed to transactions or required for other purposes, the Fund may
A-22
invest such liquid capital in any manner it deems prudent, including, but not
limited to, the following:
(a) Obligations of banks or savings and loan associations that are
insured in their entirety by agencies of the United States government;
(b) Obligations of or guaranteed by the United States government or
its agencies; and
(c) Money market or other short-term obligations or financial
instruments (having a maturity of one year or less).
ARTICLE 11: RIGHTS AND OBLIGATIONS OF INVESTORS
11.1 Participation in Management. No Shareholder (other than the Manager
acting in its capacity as such) shall have the right, power, authority or
responsibility to participate in the ordinary and routine management of the
Fund's affairs or to bind the Fund in any manner.
11.2 Rights to Engage in Other Ventures. No Investor or any officer,
director, shareholder or other person holding a legal or beneficial interest in
any Investor shall, by virtue of his ownership of a direct or indirect interest
in the Fund, be in any way prohibited from or restricted in engaging in, or
possessing an interest in, any other business venture of a like or similar
nature including any other oil and gas fund, project or property.
11.3 Limitations on Transferability. The interest of an Investor shall not
be transferable except under the conditions set forth in Article 13 hereof.
11.4 Information. (a) In addition to information to be provided under
Section 10.3, the Fund will provide each Investor with information as specified
in this Section 11.4. No Investor has any rights to information from the Fund
except as provided in this Section 11.4 and Section 10.3, or by law other than
the Delaware Act.
(b) No Investor or other person acting in the right of or for the benefit
of an Investor is entitled to receive from the Fund or its Manager any
information concerning any other Investor or offeree of the Fund's securities,
without the prior written consent of the other Investor or offeree.
(c) The Fund may withhold, redact or summarize other types of information
so as to prevent Investor information from being disclosed in violation of
Section 11.4.(b).
(d) Each Investor is entitled to obtain the following information from the
Fund upon reasonable written demand stating the purpose of the demand (which
must be reasonably related to the Investor's interest in the Fund):
A-23
(i) True and full information regarding the Fund's business and financial
condition and the contributions to the Fund;
(ii) Promptly after becoming available, a copy of the Fund's federal, state
and local income tax returns or information returns for the preceding year and
prior years to the extent reasonably available;
(iii) A copy of the Certificate and this Agreement and all amendments
thereto;
(iv) Copies of material agreements between the Fund and Ridgewood Energy
Corporation or other Ridgewood Programs; and
(v) Other reasonable information regarding the Fund, but not including
information that the Fund is entitled to withhold under this Section 11.4.
(e) Investors are not entitled to agreements, technical information, trade
secrets and other confidential information relating to the Fund's development of
the Oil and Gas Projects, or to the acquisition or transaction documents related
thereto, unless the Manager, in its sole discretion, determines that disclosure
will not harm the Fund or the Oil and Gas Projects.
(f) Notwithstanding Section 11.4(d), the Fund may keep confidential from
Investors for such period of time as it deems reasonable any other information
that it reasonably believes to be in the nature of trade secrets or other
information that the Fund in good faith believes would not be in the best
interests of the Fund to disclose or that could damage the Fund or its business
or that the Fund is required by law or by agreement with a third party to keep
confidential.
(g) This Section 11.4 sets out all rights that Investors have to demand or
receive information from the Fund, except as provided by the federal securities
laws or other laws that are not superseded by this Agreement.
(h) The Fund may establish reasonable standards governing, without
limitation, the information and documents to be furnished and the time and the
location, if appropriate, of furnishing that information and documents. Costs of
providing information and documents shall be borne by the requesting Investor
except for de minimis amounts consistent with the Fund's ordinary practices. The
Fund shall be entitled to reimbursement for its direct, out-of-pocket expenses
incurred in declining unreasonable requests (in whole or in part) for
information.
(i) Providing information to one Investor or to persons outside the Fund
does not act as a waiver of the Fund's rights to withhold information to another
Investor.
(j) The Fund may keep its records in other than written form if capable of
conversion into written form within a reasonable time.
A-24
ARTICLE 12:
POWERS, DUTIES AND LIMITATIONS OF MANAGER
12.1 Management of the Fund. The Manager shall have full, exclusive and
complete discretion in the management and control of the Fund, except as
otherwise provided herein. The Manager agrees to manage and control the affairs
of the Fund to the best of its ability and to conduct the operations
contemplated under this Agreement in a careful and prudent manner and in
accordance with good industry practice. The Manager may bind the Fund.
12.2 Acceptance of Subscriptions. The Manager shall not cause the Fund to
accept any subscription for Shares except as provided in Article 1 or in Section
9.6, as the case may be.
12.3 Specific Limitations. (a) The Manager shall not take any of the
following actions without the affirmative vote or written consent of all
Investors pursuant to the procedures set forth in Article 15 of this Agreement:
(1) Any act that would make it impossible to carry on the Fund's ordinary
business;
(2) Causing the dissolution or termination of the Fund prior to the
expiration of its term, except as provided under Article 14;
(3) Possessing Fund Property or assigning rights in specific Fund Property
for other than a Fund purpose; or
(4) Constituting any other person as a Manager, except as provided in
Article 14.
(b) The Manager shall not take any action that would cause the Fund to be
regulated as an "investment company" under the 1940 Act, nor will the Manager
take any action that would cause the Fund to change its investment objectives
and policies without the approval of Investors whose aggregate Capital
Contributions constitute more than 50% of all Capital Contributions to the Fund
at such time.
(c) The Manager shall not sell, exchange, lease, mortgage, pledge or
transfer all or a substantially all of the Fund's assets if not in the ordinary
course of operation of Fund Property without the approval of a 50% of all
Capital Contributions to the Fund at such time.
(d) The Fund and the Fund's agents shall not take any action that is
prohibited to the Manager by this or any other provision of this Agreement.
12.4 Specific Powers. In addition to the powers and duties otherwise
provided for in this Agreement, the Manager has the following powers and duties:
A-25
(a) To direct or supervise the Fund and the Fund's agents in the exercise
of any action relating to the Fund's affairs, including without limitation the
powers described in Section 1.8;
(b) To take the actions specified in Section 12.3 or elsewhere in this
Agreement if the approvals specified therein are obtained;
(c) To amend this Agreement as specified in Section 15.7(a) or other
provisions of this Agreement;
(d) To lend money to the Fund or request the Investment Adviser to do so
(without being obligated to do so) if such loan bears interest at a reasonable
rate not exceeding the interest cost to the Manager or the amount that would be
charged to the Fund by an unrelated lender on a comparable loan for the same
purpose (without reference to the financial abilities or guarantees of the
Manager or the Investment Adviser). The Manager or the Investment Adviser may
not receive points or other financing charges or fees regardless of the amount
loaned to the Fund. Before the Manager makes any loans to the Fund, the Manager
will attempt to obtain a loan from an unrelated lender secured, if at all, only
by Fund Property;
(e) To approve in its sole discretion any transfer of Investor Shares;
(f) To terminate the offering of Shares at any time prior to the
Termination Date;
(g) To withdraw the offering of Shares at any time as provided for in this
Agreement;
(h) To acquire such assets or properties, real or personal, as the Manager
in its sole discretion deems necessary or appropriate for the conduct of the
Fund's business and to sell, exchange, hedge or distribute to Shareholders in
kind or otherwise dispose of any part of the Fund Property;
(i) To operate any Oil and Gas Project or other Fund Property acquired by
the Fund, or to contract for operation under Section 12.5, or to engage
non-Affiliates to operate any Project or other Fund Property on such terms as
they may determine in their sole discretion;
(j) To waive any fees or compensation payable to it and to credit such
waived amount in its discretion against any obligations it may have to
contribute capital under Section 14.7;
A-26
(k) To provide, or arrange for the provision of, managerial assistance to
the Oil and Gas Projects in which the Fund invests; and
(l) To retain and own Working Interests in oil and natural gas ▇▇▇▇▇ that
are in the same lease block as, but are not part of, Fund Property and to own
Working Interests in oil and natural gas ▇▇▇▇▇ that may be part of Fund
Property.
(m) To establish valuation principles and to periodically apply such
principles to the Fund's investment portfolio.
12.5 Operation by an Affiliate. The Fund, by action of the Manager, may
engage an Affiliate of the Manager to provide development, construction,
operating, management, purchasing, planning and administrative services for any
or all Oil and Gas Projects operated by the Fund. The Affiliate of the Manager
under this Section 12.5 shall act under the supervision and direction of the
Manager and does not have the authority to bind the Fund or act directly in its
name except as authorized by the Manager or an officer of the Fund. The Manager
under this Section 12.5 shall be reimbursed for all costs incurred by it as
provided in Section 9.3(c) but shall not receive any compensation in excess of
its costs. The Fund may enter into an Operation Agreement or other agreements to
implement this Section 12.5. The Manager under this Section 12.5 shall not be
compensated or reimbursed for any services related to the administration of the
Fund as a whole, to relations with Investors or the offering of Shares or to the
identification, acquisition or disposition of Oil and Gas Projects.
12.6 Officers of Fund. (a) The Manager shall appoint a President, one or
more Vice Presidents, a Secretary and such other officers and agents of the Fund
as the Manager may from time to time consider appropriate, none of whom need be
a Shareholder. Except as otherwise prescribed by the Manager or in this
Agreement, each officer shall have the powers and duties usually appertaining to
a similar officer of a Delaware corporation under the direction of the Manager
and shall hold office at the pleasure of the Manager. Unless otherwise specified
by the Manager, the President of the Fund shall be its chief executive officer.
Any two or more offices may be held by the same person. Any officer may resign
by delivering a written resignation to the Manager and such resignation shall
take effect upon delivery or as otherwise specified therein.
(b) All conveyances of real property or any interest therein by the Fund
may be made by the Manager, which shall execute on behalf of the Fund any
instruments necessary to effect the conveyance. A certificate of the Secretary
of the Fund stating compliance with this Section 12.6(b) shall be conclusive in
favor of any person relying thereon.
A-27
(c) All other documents, agreements, instruments and certificates that are
to be made, executed or endorsed on behalf of the Fund shall be made, executed
or endorsed by such officers of the Fund, the Manager or persons as the Manager
shall from time to time authorize and such authority may be general or confined
to specific instances. In the absence of other provisions, the President is
authorized to execute any document, to take any action on behalf of the Fund
within this Section 12.6(c), and to authorize other officers to execute
confirmatory documents or certificates.
12.7 Presumption of Power. The execution by the Manager or the Fund's
officers of leases, assignments, conveyances, contracts or agreements of any
kind whatsoever shall be sufficient to bind the Fund. No person dealing with the
Manager or the Fund's officers shall be required to determine their authority to
make or execute any undertaking on behalf of the Fund, nor to determine any fact
or circumstances bearing upon the existence of their authority nor to see the
application or distribution of revenues or proceeds derived therefrom, unless
and until such person has received written notice to the contrary.
12.8 Obligations Not Exclusive. The Manager and the officers of the Fund
shall be required to devote only such part of their time as is reasonably needed
to manage the business of the Fund or discharge their duties, it being
understood that Ridgewood, as Manager, and the officers of the Fund have and
shall have other business interests and therefore shall not be required to
devote their time exclusively to the Fund. Ridgewood Energy Corporation and the
officers of the Fund shall in no way be prohibited from or restricted in
engaging in, or possessing an interest in, any other business venture of a like
or similar nature. Nothing in this Section 12.8 shall relieve Ridgewood Energy
Corporation of its or their fiduciary or contractual obligations to the
Investors, except as limited in Article 3. Notwithstanding anything to the
contrary contained in this Article or elsewhere in this Agreement, Ridgewood
Energy Corporation has no duty to take any affirmative action with respect to
management of the Fund's business or Fund Property which might require the
expenditure of monies by the Fund or Ridgewood Energy Corporation unless the
Fund is then possessed of such monies available for the proposed expenditure.
Except as otherwise provided in this Agreement, under no circumstances shall
Ridgewood Energy Corporation be required to expend its own funds in connection
with the day to day operation of Fund business.
12.9 Removal or Incapacity of a Manager. (a) Investors whose aggregate
Capital Contributions constitute at least 25% of all Capital Contributions to
the Fund at such time may propose the removal of the Manager, either by calling
a meeting or soliciting consents in accordance with the terms of this Agreement.
On the affirmative vote of Investors whose aggregate Capital Contributions
constitute more than 50% of all Capital Contributions to the Fund at
A-28
such time the Manager shall be removed effective as of the date the vote is
completed.
(b) If Ridgewood is removed as Manager or is incapable of acting as Manager
as enumerated in Section 14.1(c), or it resigns for cause, it may elect in its
sole discretion to take and to cause the Fund to take one of the following
courses of action:
(1) The former Manager may elect to exchange its Management Share for a
series of cash payments from the Fund to the former Manager in amounts equal to
the amounts of distributions to which the former Manager would otherwise have
been entitled under this Agreement in respect of investments made by the Fund
prior to the date of the removal or other incapacity. Such payments shall be
payable out of the Fund's available cash before any distributions are made to
the Investors pursuant to this Agreement. For purposes of this Section
12.9(b)(1), from and after the date of any such removal or other incapacity: (i)
the former Manager's interest in the Fund attributable to its Management Share
shall be terminated and its Capital Account shall be reduced by the amount which
is attributable to its Management Share and (ii) the former Manager shall
continue to receive its pro rata share of all allocations to Investors provided
in this Agreement that are attributable to Investor Shares acquired by the
Manager.
(2) In the alternative, the former Manager may engage a qualified
independent appraiser and cause the Fund to engage a separate qualified
independent appraiser (at the Fund's expense in each case), who together shall
value the Fund Property as of the date of such removal or other incapacity as if
the Fund Property had been sold at its fair market value so as to include all
unrecognized gains or losses. If the two appraisers cannot agree on a value,
they shall appoint a third independent appraiser (whose cost shall be borne by
the Fund) whose determination, made on the same basis, shall be final and
binding. Based on the appraisal, the Fund shall make allocations to the former
Manager's Capital Account of Profits, Losses and other items as of the date of
such removal or other incapacity as if the Fund's Fiscal Year had ended, solely
for the purpose of determining the former Manager's Capital Account. If the
former Manager has a positive Capital Account after such allocation, the Fund
shall deliver a promissory note of the Fund to the former Manager, with a
principal amount equal to the balance in that Capital Account and which shall
bear interest at a rate per annum equal to the prime rate in effect at Chase
Manhattan Bank, N.A. on the date of removal or other incapacity, with interest
payable annually and principal payable annually only to the extent of 25% of any
available cash before any distributions thereof are made to the Investors under
this Agreement. If the Capital Account of the former Manager has a negative
balance after such allocation, the former Manager shall contribute to the
capital of the Fund, in its discretion, either cash in an amount equal to the
negative balance in its Capital Account or a promissory note to the Fund in such
principal amount maturing five years after the date of such removal or other
incapacity, bearing interest payable annually at the rate
A-29
specified above. For purposes of this Section 12.9(b)(2), from and after the
date of any such removal or other incapacity, the former Manager's Management
Share in the Fund shall be terminated and the former Manager shall no longer
have any interest in the Fund other than the right to receive the promissory
note and payments thereunder as provided above.
(c) In the event that the Manager is removed or no longer serves as a
Manager due to an incapacity enumerated in Section 14.1(c), the former Manager
shall not be entitled to any uncollected fees specified in Article 9 to the
extent not accrued before the date of such removal or other incapacity.
12.10 Indemnification of Placement Agent. (a) The Placement Agent shall not
have any duty, responsibility or obligation to the Fund or any Shareholder as a
consequence of its right to receive any selling commissions or placement agent
fees from the Fund in connection with any offering of Shares, except to the
extent provided under applicable Federal and State law. The Placement Agent has
not assumed, and will not assume, any responsibility with respect to the Fund
nor will it be permitted by the Fund to assume any duties, responsibilities or
obligations regarding the management, operations or any of the business affairs
of the Fund, subsequent to any offering of Shares.
(b) The Placement Agent shall be indemnified and held harmless by the Fund
against any losses, damages, liabilities or costs (including reasonable
attorneys' fees) arising from any threatened, pending or completed action, suit,
claim or proceeding by any Shareholder against the Placement Agent (except as
may be limited by the Act or applicable state statutes), based upon the
assertion that the Placement Agent has any continuing duty or obligation,
subsequent to any offering of Shares, to the Fund or any Shareholder or
otherwise to monitor Fund operations or report to Investors concerning Fund
operations.
12.11 Potential Conflicts of Interest. (a) There are potential conflicts of
interest involved in the operation of the Fund, including but not limited to:
(i) competing demands for management resources of Ridgewood and other
Affiliates;
(ii) conflicts between the interests of Ridgewood and its Affiliates in
receiving compensation from the Fund for investment activities, operating
activities, and divestitures, as well as reimbursement for expenses, and the
interests of the Investors;
(iii) conflicts relating to the allocation of costs and expenses among
Ridgewood's other investment programs;
(iv) conflicts arising from the fact that Ridgewood will not make a capital
contribution in respect of its interest as such in the Fund and that the
Investors will supply all of the capital of the Fund;
A-30
(v) conflicts caused by the fact that Ridgewood shares in gains realized
from the Oil and Gas Projects but does not share in losses realized on such
projects;
(vi) conflicts caused by the fact that Ridgewood has broad discretion to
determine distributions, allocations of profit and loss and other items and that
the entitlements of Ridgewood to fees, distributions and other items can be
increased or decreased as a result of the use of that discretion;
(vii) conflicts caused by the fact that Ridgewood may make subjective
determinations of the value of the Fund's assets, and any such determination
affects the performance record of the Fund;
(viii) conflicts between the interests of the Fund and of other programs
when Ridgewood allocates favorable or unfavorable investment opportunities among
them, and conflicts arising if one program or Fund supplies capital for an
investment and another program or Fund later is allocated a portion of that
investment and returns a proportionate amount of capital to the first;
(ix) conflicts between the interests of the Fund and other programs
sponsored by Ridgewood and its Affiliates;
(x) potential interests of Ridgewood or its Affiliates in competing
investment programs;
(xii) the lack of independent representation of Investors in structuring
this offering and in determining compensation or with respect to material
transactions between the Fund and other programs sponsored by Ridgewood, which
would require only the approval of Ridgewood for authorization; and
(xiii) the Fund's Oil and Gas Projects may be competing against the
projects of other programs sponsored by Ridgewood and, additionally, officers of
Ridgewood and of the Fund may be directors or advisers to competing projects.
(b) In determining a course of action or deciding among various
alternatives, the Manager will consider these and other conflicts that may exist
and exercise reasonable business judgment when determining such action or
choosing among various alternatives. The Manager shall not be liable to
Shareholders hereunder regarding such action unless the Manager exercised bad
faith, gross negligence or willful misconduct.
ARTICLE 13: TRANSFERS OF SHARES
13.1 Transfer or Resignation by a Manager. A Manager shall not sell, assign
or otherwise transfer its Management Share or resign without cause (which cause
shall not include the fact or the determination that continued service would be
unprofitable to the Manager) without first obtaining the consent of a Majority
of the Voting Shares, except that (i) a Manager may pledge its Management Share
for a loan; provided that such pledge does not reduce the cash flow of the Fund
distributable to other Shareholders and (ii) a Manager may waive or assign
compensation or fees payable to it.
A-31
13.2 Transfers by Investors. An Investor may sell, exchange or transfer his
Shares except as restricted by and upon compliance with all applicable laws and
all of the following provisions of this Section 13.2:
(a) Shares may not be transferred to any person or entity if, as determined
by the Fund, such assignment would have adverse regulatory consequences to the
Fund or any Fund Property.
(b) Within 30 days after written notice of a proposed sale or assignment is
received by the Fund from an Investor, the Fund may request in its sole
discretion an opinion of counsel acceptable to the Fund that the proposed
transfer (i) would not invalidate the exemption afforded by Section 4(2) of the
Act or by Regulation D promulgated under the Act and the exemption afforded by
any applicable state securities laws as to any offering of interests in the Fund
and (ii) complies with the exemption afforded by Section 4(1) of the Act and
qualifies for an exemption from registration under any applicable state
securities laws (including any investor suitability standard applicable to the
transferee or the Fund).
(c) The written approval of the Manager must be obtained, the granting or
denial of which shall be within its sole and absolute discretion.
(d) The transferor and transferee must deliver a dated notice in writing
signed by each, confirming that (i) the transferee accepts and agrees to comply
with all the terms of this Agreement and (ii) the transfer was made in
compliance with this Agreement and all applicable laws and regulations.
(e) The transferor, transferee and the Fund must execute all other
certificates, instruments and documents and take all such additional action as
the Fund may deem appropriate.
(f) The Fund may require as a condition to any transfer that may create a
future interest that an opinion of counsel acceptable to the Fund be delivered
to the Fund confirming that the proposed transfer does not have adverse effects
on the Fund under the rule against perpetuities or similar provisions of law.
Transfers shall be effective and recognized upon fulfillment of the requirements
of clauses (a) through (f) above and the transferee shall be an Investor owning
Investor Shares with the same rights as appertained to the transferor. Any
purported sale or transfer consummated without first complying with this Section
13.2 shall be void.
13.3 Assignments by Operation of Law. If any Investor shall die, with or
without leaving a will, or become non compos mentis, bankrupt or insolvent, or
if a corporate, partnership or trust Investor dissolves during the Fund term or
if
A-32
any other involuntary transfer of an Investor's Shares is made, the legal
representatives, heirs and legatees (and spouse, if the Shares have been
community property of such Investor and his or her spouse), bankruptcy
assignees, successors, assigns and corporate, partnership or trust distributees
or such other involuntary transferees shall not become transferees but shall
have (subject to the other terms and provisions hereof) such rights as are
provided with respect to such persons under the law; provided, however, that
such legal representatives, heirs and legatees, spouse, bankruptcy assignees,
successors, assigns and corporate, partnership or trust distributees or
involuntary transferees may become transferees in accordance with the provisions
of Section 13.2.
13.4 Expenses of Transfer. In the sole discretion of the Fund, the person
acquiring Shares pursuant to any of the provisions of this Article 13 may be
required to bear all costs and expenses necessary to effect a transfer of such
Shares including, without limitation, reasonable attorney's fees incurred in
preparing any required amendments to this Agreement and the Certificate to
reflect such transfer or acquisition and the cost of filing such amendments with
the appropriate governmental officials.
13.5 Survival of Liabilities. No sale or assignment of Shares shall release
the transferor from those liabilities to the Fund which survive such assignment
or sale as a matter of law or that are imposed under Section 3.4.
13.6 No Accounting. No transfer of Shares, whether voluntary, involuntary
or by operation of law, shall entitle the transferor or transferee to demand or
obtain immediate valuation, accounting or payment of the transferred Shares.
ARTICLE 14
DISSOLUTION, TERMINATION AND LIQUIDATION
14.1 Dissolution. Unless the provisions of Section 14.2 are elected, the
Fund shall be dissolved and its business shall be wound up upon the decision of
the Manager to withdraw the offering of Shares described in the Memorandum in
accordance with Section 12.4(g) or on the earliest to occur of:
(a) December 31, 2040;
(b) The sale of all or substantially all of the Fund Property;
(c) The death, removal, dissolution, resignation, insolvency, bankruptcy or
other legal incapacity of the Manager or any other event which would legally
disqualify the Manager from acting hereunder;
A-33
(d) The decision of all Investors or the Manager and a Majority of
Investors; or
(e) The occurrence of any other event, which, by law, would require the
Fund to be dissolved.
14.2 Continuation of the Fund. Upon the occurrence of any event of
dissolution described in Sections 14.1 (a) through (e), inclusive, the Fund
shall be dissolved and wound up unless (i) the Manager and a Majority of the
Voting Shares within 90 days after the occurrence of any such event of
dissolution elect to continue the Fund or, (ii) if there are no remaining
Manager within 90 days after the occurrence of any such event of dissolution,
holders of a Majority of the Voting Shares shall elect, in writing, that the
Fund shall be continued on the terms and conditions herein contained and shall
designate one or more persons willing to be substituted as a Manager. In the
event there is no remaining Manager and a Majority of the Voting Shares elects
to continue the Fund, it shall be continued with the new Manager or Manager who
shall succeed to and assume all of the powers, privileges and obligations of the
previous Manager hereunder except as specified in Section 12.9. In the event of
a dissolution under this Section 14.2, the former Manager shall have the rights
specified in Section 12.9.
14.3 Obligations on Dissolution. The dissolution of the Fund shall not
release any of the parties hereto from their contractual obligations under this
Agreement.
14.4 Liquidation Procedure. Upon dissolution of the Fund for any reason:
(a) A reasonable time shall be allowed for the orderly liquidation of the
assets of the Fund and the discharge of liabilities to creditors so as to enable
the Fund to minimize the losses normally attendant to a liquidation;
(b) The Shareholders shall continue to receive Available Cash Flow from
Operations or Available Cash From Dispositions, as the case may be, subject to
the other provisions of this Agreement and to the provisions of subsection (c)
hereof, and shall share Profits and Losses for all tax and other purposes during
the period of liquidation; and
(c) The Manager shall act as liquidating Manager and shall proceed to
liquidate the Fund Properties to the extent that they have not already been
reduced to cash unless the liquidating Manager elects to make distributions in
kind to the extent and in the manner herein provided and such cash, if any, and
property in kind, shall be applied and distributed to the Shareholders to the
extent of, and in proportion to, the positive balances of their Capital Accounts
and then in accordance with Article 8.
A-34
14.5 Liquidating Trustee. (a) If the dissolution of the Fund is caused by
circumstances under which no Manager is available to act as liquidating Manager
or if all liquidating Manager are unable or refuse to act, the holders of a
Majority of the Voting Shares shall appoint a liquidating trustee who shall
proceed to wind up the business affairs of the Fund. If no liquidating trustee
is appointed within 180 days after the event of dissolution, any Shareholder may
petition the Court of Chancery of Delaware to appoint a liquidating trustee. The
liquidating trustee shall have no liability to the Fund or to any Shareholder
for any loss suffered by the Fund which arises out of any action or inaction of
the liquidating trustee if the liquidating trustee, in good faith, determined
that such course of conduct was in the best interests of the Shareholders and
such course of conduct did not constitute negligence or misconduct of the
liquidating trustee. The liquidating trustee shall be indemnified by the Fund
against any losses, judgments, liabilities, expenses and amounts paid in
settlement of any claims sustained by it in connection with the Fund, provided
that the same were not the result of negligence or misconduct of the liquidating
trustee.
(b) Notwithstanding the above, the liquidating trustee shall not be
indemnified and no expenses shall be advanced on its behalf for any losses,
liabilities or expenses arising from or out of an alleged violation of federal
or state securities laws, unless (1) there has been a successful adjudication on
the merits of each count involving alleged securities law violations as to the
particular indemnitee, or (2) such claims have been dismissed with prejudice on
the merits by a court of competent jurisdiction as to the particular indemnitee,
or (3) a court of competent jurisdiction approves a settlement of the claims
against a particular indemnitee.
(c) In any claim for indemnification for federal or state securities law
violations, the party seeking indemnification shall place before the court the
position of the Securities and Exchange Commission and the Massachusetts
Securities Division (if applicable) and the Tennessee Securities Division (if
applicable), or other applicable securities administrators if required, with
respect to the issue of indemnification for securities law violations.
(d) The Fund shall not incur the cost of that portion of any insurance,
other than public liability insurance, which insures any party against any
liability the indemnification of which is herein prohibited.
14.6 Death, Insanity, Dissolution or Insolvency of an Investor. The death,
insanity, dissolution, winding up, insolvency, bankruptcy, receivership or other
legal termination of an Investor who is not a Manager shall have no effect on
the life of the Fund and the Fund shall not be dissolved thereby.
A-35
14.7 Manager's Capital Contributions. Upon or prior to the first
distribution in liquidation, the Manager shall contribute to the capital of the
Fund an amount equal to any deficit in the Capital Account of such Manager
calculated just prior to the date of such distribution, to the extent not
previously contributed. The Manager, in its discretion, may comply with this
Section 14.7 by waiving all or a portion of a distribution or any other
compensation to which it is entitled under this Agreement.
14.8 Withdrawal of Offering. Dissolution of the Fund resulting from
withdrawal of the offering of Shares is governed by Section 1.6(c) and Section
12.4(g).
ARTICLE 15
MISCELLANEOUS
15.1 Notices. Notices or instruments of any kind which may be or are
required to be given hereunder by any person to another shall be in writing and
deposited in the United States Mail, certified or registered, postage prepaid,
or delivered overnight and addressed to the respective person at the address
appearing in the records of the Fund. Any Investor may change his address by
giving notice in writing, stating his new address, to the Fund. Any notice shall
be deemed to have been given effective as of 72 hours, excluding Saturdays,
Sundays and holidays, after the depositing of such notice in an official United
States Mail receptacle. Notice to the Fund may be addressed to its principal
office.
15.2 Meetings of Shareholders. (a) Meetings. The Manager may call meetings
of the Shareholders, the Investors or any subgroup thereof concerning any matter
on which they may vote as provided by this Agreement or by law or to receive and
act upon a report of the Manager on matters pertaining to the Fund's business
and activities. Investors holding 10% or more of the outstanding securities or
Shares entitled to vote on the matter may also call meetings by giving notice to
the Fund demanding a meeting and stating the purposes therefore. After calling a
meeting or within 20 days after receipt of a written request or requests meeting
the requirements of the preceding sentence, the Fund shall mail to all
Shareholders entitled to vote on the matter written notice of the place and
purposes of the meeting, which shall be held on a date not less than 15 days nor
more than 45 days after the Fund mails the notice of meeting to the
Shareholders. Any Shareholder entitled to vote on the matter may appear and vote
or consent at a meeting by proxy, provided that such authority is granted by a
writing signed by the Shareholder and delivered to the Fund at or prior to the
meeting.
(b) Consents. Any consent required by this Agreement or any vote or action
by the Shareholders or any subgroup thereof may be effected without a
A-36
meeting by a consent or consents in writing signed by the persons required to
give such consent, to vote or to take action. The Manager may solicit consents
or Investors holding 10% or more of the outstanding securities or Shares
entitled to vote on the matter may demand a solicitation of consents by giving
notice to the Fund stating the purpose of the consent and including a form of
consent. The Fund shall effect a solicitation of consents by giving those
Shareholders who may vote a notice of solicitation stating the purpose of the
consent, a form of consent and the date on which the consents are to be
tabulated, which shall be not less than 15 days nor more than 45 days after the
Fund transmits the notice of solicitation for consents. If Investors holding 10%
or more of the outstanding securities or Shares entitled to vote on the matter
demand a solicitation, the Fund shall transmit the notice of solicitation not
later than 20 days after receipt of the demand.
(c) General. To the extent not inconsistent with this Agreement, Delaware
law governing stockholders' meetings, proxies and consents for corporations
shall apply as to the procedure, validity and use of meetings, proxies and
consents. Any Shareholder may waive notice of or attendance at any meeting or
notice of any consent, whether before or after any action is taken. The date on
which the Fund transmits the notice of meeting or notice soliciting consents
shall be the record date for determining the right to vote or consent. A list of
the names, addresses and shareholdings of all Shareholders shall be maintained
as part of the Fund's books and records.
(d) Interested Parties. A Shareholder may vote Shares owned by it on any
question permitted under this Agreement regardless of whether that Shareholder,
Affiliates of that Shareholder or other persons associated with or related to
that Shareholder have a personal interest in the subject matter of the
transaction. Delaware law governing the voting of shares in a corporation shall
determine the legal effect of a vote by a Shareholder having an interest
described in the preceding sentence.
15.3 Loan to Fund by Shareholder. If any Shareholder shall, in addition to
his Capital Contribution to the Fund, lend any monies to the Fund, the amount of
any such loan shall not increase his Capital Account nor shall it entitle him to
any increase in his share of the distributions of the Fund, but the amount of
any such loan shall be an obligation on the part of the Fund to such Shareholder
and shall be repaid to him on the terms and at the interest rate negotiated at
the time of the loan, and the loan shall be evidenced by a promissory note
executed by the Fund except that no Shareholder shall be personally obligated to
repay the loan, which shall be payable and collectible only out of the assets of
the Fund.
15.4 Delaware Laws Govern. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware. Each Party hereto
A-37
agrees and consents (i) to be subject to the personal jurisdiction of the courts
of the State of Delaware, (ii) that venue for any litigation between or against
any of the parties hereto may be maintained in New Castle County, Delaware, and
(iii) that service of process may be achieved by mail return receipt requested,
overnight delivery or personal hand delivery.
15.5 Limited Power of Attorney. Each Investor irrevocably constitutes and
appoints the Manager as his true and lawful attorney-in-fact and agents to
effectuate and to act in his name, place and ▇▇▇▇▇, in effectuating the purposes
of the Fund including the execution, verification, acknowledgment, delivery,
filing and recording of this Agreement as well as all authorized amendments
thereto and hereto, all assumed name and doing business certificates, documents,
bills of sale, assignments and other instruments of conveyances, leases,
contracts, loan documents and counterparts thereof, and all other documents
which may be required to effect a continuation of the Fund and which the Fund
deems necessary or reasonably appropriate, including documents required to be
executed in order to correct typographical errors in documents previously
executed by such Investor and all conveyances and other instruments or other
certificates necessary or appropriate to effect an authorized dissolution and
liquidation of the Fund. The power of attorney granted herein shall be deemed to
be coupled with an interest, shall be irrevocable and shall survive the death,
incompetency or legal disability of an Investor.
15.6 Disclaimer. In forming this Fund, all Investors recognize that the
Fund's businesses are highly speculative and that neither the Fund nor the
Manager nor any other Managing Person makes any guaranty or representation to
any Investor as to the probability or amount of gain or loss from the conduct of
Fund business.
15.7 Amendment and Construction of Agreement. (a) This Agreement may be
amended by the Manager, without notice to or the approval of the Investors, from
time to time for the following purposes: (1) to cure any ambiguity, formal
defect or omission or to correct or supplement any provision herein that may be
inconsistent with any other provision contained herein or in the Memorandum or
to effect any amendment without notice to or approval by Investors, as specified
in other provisions of this Agreement; (2) to make such other changes or
provisions in regard to matters or questions arising under this Agreement that
will not materially and adversely affect the interest of any Investor; (3) to
otherwise equitably resolve issues arising under the Memorandum or this
Agreement so long as similarly situated Investors are not treated materially
differently; (4) to maintain the federal tax status of the Fund and any of its
Shareholders (so long as no Investor's liability is materially increased without
his consent) or as provided in Section 4.3(d); (5) as otherwise provided in this
Agreement or (6) to comply with law.
A-38
(b) Other amendments to this Agreement may be proposed by either the
Manager or Investors whose aggregate Capital Contributions constitute 10% or
more of the Capital Contributions, in each case by calling a meeting or
requesting consents under Section 15.2 and specifying the text of the amendment
and the reasons therefore. No amendment under this Section 15.7(b) that
increases any Shareholder's liability, changes the Capital Contributions
required of him or his rights in interest in the Profits, Losses, deductions,
credits, revenues or distributions of the Fund in more than a de minimis manner,
his rights on dissolution, or any voting or management rights set forth in this
Agreement shall become effective as to that Shareholder without his written
approval thereof. Unless otherwise provided herein, all other amendments must be
approved by the holders of a Majority of the outstanding Voting Shares and, if
the terms of a series of Shares or securities so require, by the vote of the
holders of such class, series or group specified therein.
(c) The Manager has power to construe this Agreement and to act upon any
such construction. Its construction of the same and any action taken pursuant
thereto by the Fund or a Managing Person in good faith shall be final and
conclusive.
15.8 Bonds and Accounting. The Manager shall not be required to give bond
or otherwise post security for the performance of their duties and the Fund
waives all provisions of law requiring or permitting the same. No person shall
be entitled at any time to require the Fund or any Shareholder to submit to a
judicial or other accounting or otherwise elect any judicial, administrative or
executive supervisory proceeding applicable to non-business trusts.
15.9 Binding Effect. This Agreement shall be binding upon and shall inure
to the benefit of the Shareholders (and their spouses if the Shares of such
Shareholders shall be community property) as well as their respective heirs,
legal representatives, successors and assigns. This Agreement constitutes the
entire agreement among the Fund and the Shareholders with respect to the
formation and operation of the Fund, other than the Subscription Agreement
entered into between the Fund and each Investor and the Management Agreement.
15.10 Headings. Headings of Articles and Sections used herein are for
descriptive purposes only and shall not control or alter the meaning of this
Agreement as set forth in the text.
15.11 Tax Matters Partner. The Manager is the tax matters partner of the
Fund under Code Section 6221.
RIDGEWOOD ENERGY CORPORATION
A-39
Initial Manager
By:
-------------------------------------
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, President
A-40