STOCK PURCHASE AGREEMENT AMONG IVANHOE ENERGY HOLDINGS INC., AS SELLER, IVANHOE ENERGY INC., AS SELLER PARENT, SENECA SOUTH MIDWAY LLC, AS PURCHASER AND SENECA RESOURCES CORPORATION, AS PURCHASER PARENT

Article I Agreement to Sell and Purchase

Section 1.01 Agreement to Sell and Purchase

Section 1.02 Excluded Assets

 

Article II Purchase Price

Section 2.01 Purchase Price

Section 2.02 Escrow Fund

Section 2.03 Allocated Values

 

Article III Title Matters

Section 3.01 Examination Period

Section 3.02 Defensible Title and Permitted Encumbrances

Section 3.03 Title Defect

Section 3.04 Notice of Title Defects

Section 3.05 Remedies for Title Defects

Section 3.06 Preferential Rights To Purchase

Section 3.07 Consents

Section 3.08 Remedies for Title Benefits

 

Article IV Environmental Matters

Section 4.01 Environmental Review

Section 4.02 Environmental Definitions

Section 4.03 Notice of Environmental Defects

Section 4.04 Remedies for Environmental Defects

 

Article V Representations and Warranties of Seller

Section 5.01 Corporate Organization

Section 5.02 Authority and Enforceability

Section 5.03 Capitalization

Section 5.04 No Violation

Section 5.05 Financial Statements

Section 5.06 Books and Records

Section 5.07 No Undisclosed Liabilities

Section 5.08 Brokers

Section 5.09 Legal Proceedings

Section 5.10 No Bankruptcy; Solvency

Section 5.11 Royalties

Section 5.12 Taxes

Section 5.13 Material Contracts

Section 5.14 Hedging

Section 5.15 Employment and Employee Benefit Matters

Section 5.16 Title

Section 5.17 Compliance and Laws and Permits

Section 5.18 Absence of Certain Changes

Section 5.19 Insurance

Section 5.20 Intellectual Property

Section 5.21 Certain Payments

 

Article VI Representations and Warranties of Purchaser

Section 6.01 Existence

Section 6.02 Authority and Enforceability

Section 6.03 No Violation

Section 6.04 Brokers

Section 6.05 No Bankruptcy; Solvency

Section 6.06 Legal Proceedings

Section 6.07 Investment

Section 6.08 Securities Laws

Section 6.09 Funds

 

Article VII Operation of the Assets; Covenants of the Parties

Section 7.01 Operations Pending Closing

Section 7.02 Limitations on the Operational Obligations and Liabilities of Seller

Section 7.03 Operation of the Assets After the Closing

Section 7.04 Casualty Loss

Section 7.05 Access and Investigation

Section 7.06 Notification

Section 7.07 Release of Existing Indebtedness

Section 7.08 Employee Matters

 

Article VIII Seller’s Conditions to Close

Section 8.01 Representations

Section 8.02 Performance

Section 8.03 Pending Matters

Section 8.04 Purchase Price

Section 8.05 Execution and Delivery of the Closing Documents

 

Article IX Purchaser’s Conditions to Close

Section 9.01 Representations

Section 9.02 Performance

Section 9.03 Pending Matters

Section 9.04 Release of Existing Indebtedness

Section 9.05 Execution and Delivery of the Closing Documents

 

Article X The Closing

Section 10.01 Time and Place of the Closing

Section 10.02 Adjustments to Purchase Price at the Closing

Section 10.03 Closing Statement

Section 10.04 Actions of Seller at the Closing

Section 10.05 Actions of Purchaser at the Closing

 

Article XI Post Closing Obligations

Section 11.01 Allocation of Expense and Revenues

Section 11.02 Gas Imbalances

Section 11.03 Final Accounting Statement

Section 11.04 Further Cooperation

 

Article XII Tax Matters

Section 12.01 Transfer Taxes

Section 12.02 Ad Valorem and Similar Taxes

Section 12.03 Tax Returns

Section 12.04 Tax Cooperation

Section 12.05 Tax Assessments

 

Article XIII Termination

Section 13.01 Right of Termination

Section 13.02 Effect of Termination

Section 13.03 Termination Damages

 

Article XIV Obligations and Indemnification

Section 14.01 Purchaser’s Indemnification

Section 14.02 Seller’s Indemnification — Representations, Warranties and Covenants and Third Party Non-Environmental Claims

Section 14.03 Seller’s Indemnification — Third Party Environmental Claims

Section 14.04 Notices and Defense of Indemnified Matters

 

Article XV Limitations on Representations and Warranties

Section 15.01 Disclaimers of Representations and Warranties

Section 15.02 Survival

 

Article XVI Dispute Resolution

Section 16.01 General

Section 16.02 Senior Management

Section 16.03 Independent Expert

Section 16.04 Limitation on Arbitration

 

Article XVII Miscellaneous

Section 17.01 Consequential Damages

Section 17.02 Names

Section 17.03 Expenses

Section 17.04 Document Retention

Section 17.05 Entire Agreement

Section 17.06 Waiver

Section 17.07 Publicity

Section 17.08 Certain Rules of Construction and Interpretation

Section 17.09 No Third Party Beneficiaries

Section 17.10 Assignment

Section 17.11 Governing Law

Section 17.12 Notices

Section 17.13 Severability

Section 17.14 Counterpart Execution

Exhibit A — Subject Interests (Listing of Leases)

Exhibit B — ▇▇▇▇▇ and Interests

Exhibit C — Allocated Values

Exhibit D — Form of Escrow Agreement

 

Schedule 1.02 — Excluded Assets

Schedule 5.03 — Capitalization

Schedule 5.04 — Preferential Rights to Purchase

Schedule 5.07(a) — Undisclosed Liabilities — General

Schedule 5.07(b) — Undisclosed Liabilities — Indebtedness

Schedule 5.09 — Legal Proceedings

Schedule 5.12 — Tax Matters

Schedule 5.13 — Material Contracts

Schedule 5.15(a) — Employees

Schedule 5.15(c) — Benefit Plans

Schedule 5.19 — Insurance

Schedule 7.08 — Employee Matters

Schedule 10.02(a)(i) — Certain Purchase Price Adjustments

Schedule 11.02 — Gas Imbalances

entitles the Company to receive not less than the percentage set forth in Exhibit B as the Company’s “Net Revenue Interest” of all Hydrocarbons produced, saved and marketed from each well or unit as set forth in Exhibit B, all without reduction, suspension or termination of such interest throughout the productive life of such well or unit, except for carried interests, production payments, reversionary interest or other changes in interest in time as specifically set forth in Exhibit B;

obligates the Company to bear not greater than the percentage set forth in Exhibit B as the Company’s “Working Interest” of the costs and expenses relating to the maintenance, development and operation of each well or unit as set forth in Exhibit B, all without increase throughout the productive life of such well or unit, except for carried interests, production payments, reversionary interest or other changes in interest in time as specifically set forth in Exhibit B; and

is free and clear of all Liens.

The term “Permitted Encumbrances” shall mean any of the following matters to the extent the same are valid and subsisting and affect the Assets:

the Leases and Contracts;

any (A) undetermined or inchoate liens or charges constituting or securing the payment of expenses that were incurred incidental to the maintenance, development, production or operation of the Assets or for the purpose of developing, producing or processing Hydrocarbons therefrom or therein, and (B) materialman’s, mechanics’, repairman’s, employees’, contractors’, operators’ liens or other similar liens or charges for liquidated amounts arising in the Ordinary Course of Business (1) that the Company has agreed to assume or pay pursuant to the terms hereof, or (2) for which the Company is responsible for paying or releasing at the Closing;

any liens for taxes and assessments not yet delinquent or, if delinquent, that are being contested in good faith in the Ordinary Course of Business and for which the Company has agreed to pay pursuant to the terms hereof or which have been prorated pursuant to the terms hereof;

the terms, conditions, restrictions, exceptions, reservations, limitations and other matters contained in (including any liens or security interests created by law or reserved in oil and gas leases for royalty, bonus or rental, or created to secure compliance with the terms of) the agreements, instruments and documents that create or reserve to the Company its interest in the Assets;

any obligations or duties affecting the Assets to any municipality or public authority with respect to any franchise, grant, license or permit and all applicable laws, rules, regulations and orders of any Governmental Authority;

any (A) easements, rights-of-way, servitudes, permits, surface leases and other rights in respect of surface operations, pipelines, grazing, hunting, lodging, canals, ditches, reservoirs or the like, and (B) easements for streets, alleys, highways, pipelines, telephone lines, power lines, railways and other similar rights-of-way on, over or in respect of property owned or leased by the Company or over which the Company owns rights-of-way, easements, permits or licenses, to the extent that same do not materially interfere with the oil and gas operations to be conducted on the Assets;

all lessors’ royalties, overriding royalties, net profits interests, carried interests, production payments, reversionary interests and other burdens on or deductions from the proceeds of production created or in existence as of the Effective Time, whether recorded or unrecorded, provided that such matters do not operate to reduce the Net Revenue Interests of the Company below those set forth in Exhibit B or increase the Working Interests of the Company above those set forth in Exhibit B without a corresponding increase in the Net Revenue Interests;

preferential rights to purchase or similar agreements with respect to which (A) waivers or consents are obtained from the appropriate parties for the transaction contemplated hereby, or (B) required notices have been given for the transaction contemplated hereby to the holders of such rights and the appropriate period for asserting such rights has expired without an exercise of such rights;

required Third Party consents to assignments or similar agreements with respect to which (A) waivers or consents are obtained from the appropriate parties for the transaction contemplated hereby, or (B) required notices have been given for the transaction contemplated hereby to the holders of such rights and the appropriate period for asserting such rights has expired without an exercise of such rights;

all rights to consent by, required notices to, filings with, or other actions by Governmental Authorities in connection with the sale or conveyance of oil and gas leases or interests therein that are customarily obtained subsequent to such sale or conveyance;

production sales contracts; division orders; contracts for sale, purchase, exchange, refining or processing of Hydrocarbons; unitization and pooling designations, declarations, orders and agreements; operating agreements; agreements of development; area of mutual interest agreements; gas balancing or deferred production agreements; processing agreements; plant agreements; pipeline, gathering and transportation agreements; injection, repressuring and recycling agreements; carbon dioxide purchase or sale agreements; salt water or other disposal agreements; seismic or geophysical permits or agreements; and any and all other agreements that have terms that are ordinary and customary to the oil, gas, sulphur and other mineral exploration, development, processing or extraction business or in the business of processing of gas and gas condensate production for the extraction of products therefrom, to the extent the same do not reduce the Net Revenue Interests of the Company below those set forth in Exhibit B or increase the Working Interests of the Company above those set forth in Exhibit B without a corresponding increase in the Net Revenue Interest;

rights reserved to or vested in any Governmental Authority to control or regulate any of the Assets and the applicable laws, rules, and regulations of such Governmental Authorities;

all defects and irregularities affecting the Assets which individually or in the aggregate (A) do not operate to (1) reduce the Net Revenue Interest of the Company, (2) increase the proportionate share of costs and expenses of leasehold operations attributable to or to be borne by the Working Interests of the Company, or (3) otherwise interfere materially with the operation, value or use of the Assets, or (4) that would not be considered material when applying general industry standards; or (B) operate to increase the proportionate share of costs and expenses of leasehold operations attributable to or to be borne by the Working Interest of the Company, so long as there is a proportionate increase in the Company’s Net Revenue Interest; and

Liens which will be released at or prior to Closing.

If Purchaser discovers any Title Defect affecting any Asset, Purchaser shall notify Seller as promptly as possible but no later than the expiration of the Examination Period of such alleged Title Defect. To be effective, such notice must (i) be in writing, (ii) be received by Seller prior to the expiration of the Examination Period, (iii) describe the Title Defect in sufficient, specific detail (including any alleged variance in the Net Revenue Interest), (iv) identify the specific Asset or Assets affected by such Title Defect, and (v) include the value of such Title Defect as determined by Purchaser. Any matters that may otherwise constitute Title Defects, but of which Seller has not been specifically notified by Purchaser in accordance with the foregoing, shall be deemed to have been waived by Purchaser for all purposes and shall constitute Permitted Encumbrances.

Upon the receipt of such effective notice from Purchaser, Seller and Purchaser shall attempt to mutually agree on a resolution including, but not limited to (i) attempt to cure such Title Defect at any time prior to the Closing, or (ii) include the affected Asset in the sale and reduce the Purchase Price by mutually agreed upon value of the Title Defect. Alternatively, Seller shall have the right, in its discretion, to elect to (x) have such Title Defect determined in accordance with Section 3.05(c), or (y) with the prior written consent of the Purchaser (not to be unreasonably withheld) not take any action with respect to the alleged Title Defect and indemnify, defend and hold harmless Purchaser pursuant to Section 14.02 from and against all Damages which Purchaser may incur in connection with same.

The value attributable to each Title Defect (the “Title Defect Value”) that is asserted by Purchaser in the Title Defect notices shall be determined based upon the criteria set forth below:

If the Title Defect is a Lien upon any Asset, the Title Defect Value is the amount necessary to be paid to remove the Lien from the affected Asset.

If the Title Defect asserted is that the Net Revenue Interest attributable to any well or unit is less than that stated in Exhibit B or the Working Interest attributable to any well or unit is greater than that stated in Exhibit B, then the Title Defect Value shall take into account the relative change in the interest from Exhibit B and the appropriate Allocated Value attributed to such Asset.

If the Title Defect represents an obligation, encumbrance, burden or charge upon the affected Asset (including any increase in Working Interest for which there is not a proportionate increase in Net Revenue Interest) for which the economic detriment to Purchaser is unliquidated, the amount of the Title Defect Value shall be determined by taking into account the Allocated Value of the affected Asset, the portion of the Asset affected by the Title Defect, the legal effect of the Title Defect, the potential discounted economic effect of the Title Defect over the life of the affected Asset, and the Title Defect Values placed upon the Title Defect by Purchaser and Seller.

If a Title Defect is not in effect or does not adversely affect an Asset throughout the entire productive life of such Asset, such fact shall be taken into account in determining the Title Defect Value.

The Title Defect Value of a Title Defect shall be determined without duplication of any costs or losses included in another Title Defect Value hereunder.

Notwithstanding anything herein to the contrary, in no event shall a Title Defect Value exceed the Allocated Value of the ▇▇▇▇▇, units or other Assets affected thereby.

Such other factors as are reasonably necessary to make a proper evaluation.

With respect to each Title Defect that is not cured on or before the Closing, except as otherwise provided in Section 3.04(b) or this Section 3.05, the Purchase Price shall be reduced by an amount equal to the Title Defect Value agreed upon in writing by Purchaser and Seller.

If any Title Defect is in the nature of an unobtained consent to assignment or other restriction on assignability, the provisions of Section 3.08 shall apply.

If on or before Closing the Purchaser and Seller have not agreed upon the validity of any asserted Title Defect or have not agreed on the Title Defect Value attributable thereto, either Purchaser or Seller shall have the right to elect to have the validity of such Title Defect and/or such Title Defect Value determined by an Independent Expert pursuant to Section 16.03. If the validity of any asserted Title Defect, or the Title Defect Value attributable thereto, is not determined before Closing, the Purchase Price paid at Closing shall not be reduced by virtue of such disputed Title Defect or Title Defect Value, and upon the final resolution of such dispute the Title Defect Value, if any, found to be attributable to such Title Defect shall, subject to this Section, be promptly refunded by Seller to Purchaser.

Notwithstanding anything to the contrary in this Agreement, (i) if the value of a given individual Title Defect (or individual Title Benefit (as defined in Section 3.08(a))) does not exceed US$25,000, then no adjustment to the Purchase Price shall be made for such Title Defect (or Title Benefit), (ii) if the aggregate adjustment to the Purchase Price determined in accordance with this Agreement for Title Defects (exceeding US$25,000) does not exceed two and one half per cent (2.5%) of the Purchase Price prior to any adjustments thereto, then no adjustment of the Purchase Price shall be made therefor, and (iii) if the aggregate adjustment to the Purchase Price determined in accordance with this Agreement for Title Defects (exceeding US$25,000) does exceed two and one-half per cent (2.5%) of the Purchase Price prior to any adjustments thereto, then the Purchase Price shall only be adjusted by the amount of such excess.

If either Purchaser or Seller discovers any Title Benefit during the Examination Period affecting the Assets, it shall promptly notify the other Party in writing thereof on or before the expiration of the Examination Period. Subject to Section 3.05(d), Seller shall be entitled to an upward adjustment to the Purchase Price pursuant to Section 10.02(a)(iii) with respect to all Title Benefits, in an amount mutually agreed upon by the Parties. For purposes of this Agreement, the term “Title Benefit” shall mean the Company’s interest in any Subject Interest that is greater than or in addition to that set forth in Exhibit B (including, without limitation, a Net Revenue Interest that is greater than that set forth in Exhibit B) or the Company’s Working Interest in any Subject Interest that is less than the Working Interest set forth in Exhibit B (without a corresponding decrease in the Net Revenue Interest). Any matters that may otherwise constitute Title Benefits, but of which Purchaser has not been specifically notified by Seller in accordance with the foregoing, shall be deemed to have been waived by Seller for all purposes.

If with respect to a Title Benefit the Parties are not deemed to have agreed on the amount of the upward Purchase Price adjustment or have not otherwise agreed on such amount prior to the Closing Date, Seller or Purchaser shall have the right to elect to have such Purchase Price adjustment determined by an Independent Expert pursuant to Section 16.03. If the amount of such adjustment is not determined pursuant to this Agreement by the Closing, the undisputed portion of the Purchase Price with respect to the Asset affected by such Title Benefit shall be paid by Purchaser at the Closing and, subject to Section 3.05(d), upon determination of the amount of such adjustment, any unpaid portion thereof shall be paid by Purchaser to Seller.

Purchaser shall have the right to conduct or cause a consultant (“Purchaser’s Environmental Consultant”) to conduct an environmental review of the Assets prior to the expiration of the Examination Period (“Purchaser’s Environmental Review”). The cost and expense of Purchaser’s Environmental Review, if any, shall be borne solely by Purchaser. The scope of work comprising Purchaser’s Environmental Review shall be limited to that mutually agreed by Purchaser and Seller prior to commencement thereof and shall not include any subsurface or

intrusive test or procedure without the express prior written consent of Seller. Purchaser shall (and shall cause Purchaser’s Environmental Consultant to): (i) consult with Seller before conducting any work comprising Purchaser’s Environmental Review, (ii) perform all such work in a safe and workmanlike manner and so as to not unreasonably interfere with Seller’s operations, and (iii) comply with all applicable laws, rules, and regulations. Seller shall cause the Company, with Purchaser’s cooperation, to use reasonable efforts to obtain any Third Party consents that are required in order to allow Purchaser access to the Assets to perform any work comprising Purchaser’s Environmental Review, and Purchaser shall consult with Seller prior to requesting each such Third Party consent. Seller shall have the right to have a representative or representatives accompany Purchaser and Purchaser’s Environmental Consultant at all times during Purchaser’s Environmental Review. With respect to any samples taken in connection with Purchaser’s Environmental Review, Purchaser shall take split samples, providing one of each such sample, properly labeled and identified, to Seller. PURCHASER HEREBY AGREES TO RELEASE, DEFEND, INDEMNIFY AND HOLD HARMLESS SELLER FROM AND AGAINST ALL CLAIMS, LOSSES, DAMAGES, COSTS, EXPENSES, CAUSES OF ACTION AND JUDGMENTS OF ANY KIND OR CHARACTER (INCLUDING THOSE RESULTING FROM SELLER’S SOLE, JOINT, COMPARATIVE OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY) ARISING OUT OF OR RELATING TO PURCHASER’S ENVIRONMENTAL REVIEW.

Unless otherwise required by applicable law, Purchaser shall (and shall cause Purchaser’s Environmental Consultant to) treat confidentially any matters revealed by Purchaser’s Environmental Review and any reports or data generated from such review (the “Environmental Information”), and Purchaser shall not (and shall cause Purchaser’s Environmental Consultant to not) disclose any Environmental Information to any Governmental Authority or other Third Party without the prior written consent of Seller. Unless otherwise required by law, Purchaser may use the Environmental Information only in connection with the transactions contemplated by this Agreement. If Purchaser, Purchaser’s Environmental Consultant, or any Third Party to whom Purchaser has provided any Environmental Information become legally compelled to disclose any of the Environmental Information, Purchaser shall provide Seller with prompt notice sufficiently prior to any such disclosure so as to allow Seller to file any protective order, or seek any other remedy, as it deems appropriate under the circumstances. If this Agreement is terminated prior to the Closing, Purchaser shall deliver the Environmental Information to Seller, which Environmental Information shall become the sole property of Seller. Purchaser shall provide copies of the Environmental Information to Seller without charge.

Environmental Defects. For purposes of this Agreement, the term “Environmental Defect” shall mean, with respect to any given Asset, an individual environmental condition that constitutes a material violation of Environmental Laws in effect as of the date of this Agreement in the jurisdiction in which such Asset is located. Environmental Defect shall not be deemed to include an environmental condition disclosed, pursuant to Seller’s electronic data room or otherwise, in writing to Purchaser prior to the execution of this Agreement.

Environmental Defect Value. For purposes of this Agreement, the term “Environmental Defect Value” shall mean, with respect to any Environmental Defect, the value, as of the Closing Date, of the estimated costs and expenses to correct such Environmental Defect in the most cost-effective manner reasonably available, consistent with Environmental Laws, taking into account that non-permanent remedies (such as mechanisms to contain or stabilize hazardous materials, including monitoring site conditions, natural attenuation, risk-based corrective action, institutional controls or other appropriate restrictions on the use of property, caps, dikes, encapsulation, leachate collection systems, etc.) may be the most cost-effective manner reasonably available.

Environmental Laws. For purposes of this Agreement, the term “Environmental Laws” shall mean all laws, statutes, ordinances, court orders, rules and regulations of any Governmental Authority pertaining to health or the environment as may be interpreted by applicable court decisions or administrative orders, including, without limitation, the Clean Air Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act, as amended, the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act, as amended, the Resources Conservation and Recovery Act, as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendment and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, and comparable state and local laws.

Governmental Authority. For purposes of this Agreement, the term “Governmental Authority” shall mean the United States, any state, county, parish, city and political subdivisions in which such Asset is located and that exercises jurisdiction over such Asset, and any agency, department, board or other instrumentality thereof that exercises jurisdiction over such Asset.

If Purchaser discovers any Environmental Defect affecting the Assets, Purchaser shall notify Seller prior to the expiration of the Examination Period of such alleged Environmental Defect (an “Environmental Defect Notice”); provided, however, if Purchaser’s Environmental Review discovers an environmental condition that Purchaser and Seller mutually and reasonably agree requires additional investigation that would extend beyond the then effective Examination Period in order to determine whether or not such condition is an Environmental Defect, the Examination Period shall be extended an additional thirty (30) days solely with respect to such identified environmental condition. To be effective, an Environmental Defect Notice must: (i) be in writing; (ii) be received by Seller prior to the expiration of the Examination Period (subject to the extension provided above); (iii) describe the Environmental Defect in sufficient, specific detail, including, without limitation, (A) the written conclusion of Purchaser’s Environmental Consultant that an Environmental Defect exists, which conclusion shall be reasonably substantiated by the factual data gathered in Purchaser’s Environmental Review, and (B) a separate specific citation of the provisions of Environmental Laws alleged to be violated and the related facts that substantiate such violation; (iv) identify the specific Assets affected by such Environmental Defect, including, without limitation, a site plan showing the location of all sampling events, boring logs and other field notes describing the sampling methods utilized and the field conditions observed, chain-of-custody documentation and laboratory reports; (v) identify the procedures recommended to correct the Environmental Defect, together with any related recommendations from Purchaser’s Environmental Consultant; and (vi) state Purchaser’s estimate of the Environmental Defect Value, including the basis for such estimate, for which Purchaser would agree to adjust the Purchase Price in order to accept such Environmental Defect if Seller elected Section 4.04(b) as the remedy therefor.

Any matters that may otherwise constitute Environmental Defects, but have not been specifically identified by Purchaser pursuant to an Environmental Defect Notice in accordance with the foregoing, together with any environmental matter that does not constitute an Environmental Defect, shall be deemed to have been waived by Purchaser for all purposes and constitute a Company Obligation (as defined in Section 14.02). Upon the receipt by Seller of an effective Environmental Defect Notice from Purchaser, Seller and Purchaser shall attempt to mutually agree on a resolution including, but not limited to, (i) attempt to cure such Environmental Defect at any time prior to the Closing; or (ii) include the affected Asset in the sale and reduce the Purchase Price by mutually agreed upon value of the Environmental Defect. Alternatively, Seller shall have the right, in its discretion, to elect to (x) exclude the affected Asset from the sale and reduce the Purchase Price by the Allocated Value of such affected Asset and have the value determined in accordance with Section 4.04; or (y) with the prior written consent of the Purchaser (not to be unreasonably withheld) not take any remedial action with respect to the alleged Environmental Defect, and in the case of either (x) or (y) hereof, Seller agrees to indemnify, defend and hold harmless the Purchaser pursuant to Section 14.03 from and against all Damages which Purchaser may incur in connection with same.

If any Environmental Defect described in an Environmental Defect Notice delivered in accordance with Section 4.03 is not cured on or before the Closing, then the Purchase Price shall be reduced by the Environmental Defect Value of such Environmental Defect as and if agreed by the Parties.

If Purchaser and Seller have not agreed as to the validity of any asserted Environmental Defect, or if the Purchaser and Seller have not agreed on the Environmental Defect Value therefor, then on or before three (3) Business Days prior to the Closing Date, either Party shall have the right to elect to have validity of the asserted Environmental Defect, and/or the Environmental Defect Value for such Environmental Defect, determined by an Independent Expert pursuant to Section 16.03. If the validity of any such asserted Environmental Defect or the amount of any such Environmental Defect Value is not determined by the Closing, the Asset affected by such disputed Environmental Defect shall be excluded from the Closing as an Excluded Asset and the Purchase Price paid at Closing shall be reduced by the Allocated Value of that Asset. Upon resolution of such dispute, the Environmental Defect Value, if any, found to be attributable to such Environmental Defect shall, subject to this Section 4.04, be subtracted from the Allocated Value of the Asset, and concurrent with the Purchaser’s payment of such reduced amount the Asset conveyed to the Purchaser, if that is part of the mutually agreed settlement. Notwithstanding the foregoing, either Purchaser or Seller shall have the unilateral right to cause an Asset to be an Excluded Asset if the Environmental Defect Value exceeds the Allocated Value of the Asset(s) affected thereby.

Notwithstanding anything to the contrary in this Agreement, (i) if the Environmental Defect Value for a given individual Environmental Defect does not exceed US$25,000, then no adjustment to the Purchase Price shall be made for such Environmental Defect; (ii) if the aggregate adjustment to the Purchase Price determined in accordance with this Agreement for Environmental Defects (exceeding US$25,000) does not exceed two and one-half per cent (2.5%) of the Purchase Price prior to any adjustments thereto, then no adjustment of the Purchase Price shall be made therefore; and (iii) if the aggregate adjustment to the Purchase Price determined in accordance with this Agreement for Environmental Defects (exceeding US$25,000) does exceed two and one-half per cent (2.5%) of the Purchase Price prior to any adjustments thereto, then the Purchase Price shall only be adjusted by the amount of such excess.

Seller is a corporation, duly organized, validly existing and in good standing under the laws of the State of Nevada. Seller has full legal power, right and authority to carry on its business as such is now being conducted.

The Company is a corporation, duly organized, validly existing and in good standing under the laws of the State of Nevada, and is qualified to conduct business and is in good standing in the States of California and Texas, respectively, and in any other state or jurisdiction where the conduct of the Company’s business requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect. The Company has full legal power, right and authority to carry on its business as such is now being conducted.

Seller Parent is a corporation, duly organized, validly existing and in good standing under the laws of the Yukon, Canada. Seller Parent has full legal power, right and authority to carry on its business as such is now being conducted

Seller has delivered to Purchaser copies of the articles of incorporation and bylaws and any shareholder agreements or other governing documents of the Company, each as currently in effect.

Except as set forth in Schedule 5.07(a) hereof or as reflected or reserved against in the Balance Sheet or the Interim Balance Sheet, the Company has no liabilities or obligations of any nature whether known or unknown and whether absolute, accrued, contingent, or otherwise, except for liabilities or obligations which are not required by GAAP to be disclosed in the financial statements of the Company or current liabilities incurred in the Ordinary Course of Business since the respective dates thereof.

Except as disclosed in Schedule 5.07(b), the Company has no Liability for any Indebtedness which will not be discharged by the Company, Seller or Seller Parent prior to Closing.

The Company has duly filed on a timely basis with the appropriate Governmental Authority all Tax Returns required to be filed for taxable periods ending on or before the Closing. All such Tax Returns are true, correct and complete in all material respects, and all Taxes shown as due on such Tax Returns have been paid. The Company has paid, or made provision for the payment of, all Taxes that have or may have become due pursuant to those Tax Returns or otherwise, or pursuant to any assessment received by Seller or the Company, except such Taxes, if any, as are listed in Schedule 5.12 hereof and are being contested in good faith and as to which adequate reserves (determined in accordance with GAAP) have been provided in the Balance Sheet and the Interim Balance Sheet.

All Taxes that the Company is or was required by Law to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper Governmental Authority or other Person.

All ad valorem, property, production, severance, excise and similar taxes and assessments based on or measured by the ownership of the Assets or the production of Hydrocarbons or the receipt of proceeds therefrom that have become due and payable by the Company have been paid in all material respects.

The Company has made available to the Purchaser complete and correct copies of all Tax Returns that have been filed as of the date hereof (except Tax Returns for periods in respect of which the applicable statutory period of limitations has expired) and copies of all material correspondence with taxing authorities.

No currently unresolved assessments, reassessments, audits, claims, actions, suits, proceedings or investigations exist or have been initiated with regard to any Taxes or Tax Returns of the Company. No assessment, reassessment, audit or investigation by any Governmental Authority is pending or, to the Knowledge of the Seller, threatened or imminent with respect to Taxes for which the Company may be liable, in whole or part.

Except as provided on Schedule 5.12, the Company has not requested or entered into any agreement or other arrangement or executed any waiver providing for any extension of time within which (i) to file any Tax Return in respect of any Taxes for which the Company is or may be liable; (ii) to file any elections, designations or similar filings relating to Taxes for which the Company is or may be liable; (iii) the Company is required to pay or remit any Taxes or amounts on account of Taxes; or (iv) any Governmental Authority may assess or collect Taxes for which the Company is or may be liable.

There are no Liens for Taxes on the Assets of the Company, other than the Permitted Encumbrances.

The Company is not party to, bound by or obligated under any tax sharing agreement, tax indemnification agreement or similar contract or arrangement. The Company is not, nor within the 5-year period preceding the Closing Date has been, an “S” corporation.

Except for the group of which the Company is presently a member, the Company has never been a member of an affiliated group of corporations, within the meaning of Section 1504 of the Code.

The Company has not made or will not make a consent dividend election under Section 565 of the Code. The Company has not agreed to make nor is it required to make any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise.

No Taxes have been incurred by the Company for the period since the date of the Balance Sheet and Interim Balance Sheet other than in the Ordinary Course of Business.

The Seller is not a person other than a United States person within the meaning of the Code. The transaction contemplated herein is not subject to the withholding provisions of Sections 1442, 1445 or 3406 of the Code. The Company does not have and has not had a permanent establishment in any foreign country, as defined in any applicable tax treaty or convention between the United States and such foreign country.

The Company is not a party to any agreement, contract, arrangement, or plan that has resulted or would result, separately or in the aggregate, in the payment of any “excess parachute payments” within the meaning of Section 280G of the Code.

Except as set forth on Schedule 5.12 and/or in joint operating agreements entered into in the Ordinary Course of Business, the Company is not a party to any joint venture, partnership, or other arrangement or contract that could be treated as a partnership for federal income tax purposes.

Seller has provided Purchaser with complete and accurate list of all employees of the Company, their respective positions, dates of hire with the Company, current salaries and a description of other benefits. Except as disclosed on Schedule 5.15(a), the Company is not a party to any written agreements with past or present employees, agents or independent contractors.

The Company is not a party to, nor to the Knowledge of Seller is any employee of the Company covered by a collective bargaining agreement with any labor union.

Except as set forth on Schedule 5.15(c), the Company has never sponsored, maintained or contributed to any “employee benefit plan,” within the meaning of Section 3(3) of ERISA, that is a “multiemployer plan,” within the meaning of Section 3(37) of ERISA, that is covered by Title IV of ERISA or that is subject to the minimum funding requirements of Section 3.02 of ERISA. With respect to any “employee benefit plan,” within the meaning of Section 3(3) of ERISA, that is sponsored, maintained, or contributed to, or has been sponsored, maintained, or contributed to within six (6) years prior to the Closing Date, by the Company or any ERISA Affiliate, (i) no withdrawal liability, within the meaning of Section 4201 of ERISA, has been incurred, which withdrawal liability has not been satisfied, (ii) no liability to the Pension Benefit Guaranty Corporation has been incurred by any such entity, which liability has not been satisfied, (iii) no accumulated funding deficiency, whether or not waived, within the meaning of Section 302 of ERISA or Section 412 of the Code has been incurred, (iv) all contributions (including installments) to such plan required by Section 302 of ERISA and Section 412 of the Code have been timely made, and (v) no condition exists or event or transaction or inaction has occurred with respect to any such plan which could result in the Company incurring any material liability, fine or penalty.

No reportable event (as defined in ERISA Section 4043 and in regulations issued thereunder) has occurred with respect to any “employee benefit plan” within the meaning of Section 3(3) of ERISA.

To the Knowledge of Seller, no facts or circumstances have occurred that may give rise to any liability of the Seller or the Company to the Pension Benefit Guaranty Corporation under Title IV of ERISA.

The Company has good and valid title to the Personal Property included as part of the Assets, free and clear of any and all Liens other than Permitted Encumbrances.

With respect to the Subject Interests, Seller expressly disclaims any warranty of any kind, express, implied or statutory, except, provided Closing occurs, Seller warrants and will defend the Company’s interest in and to the Subject Interest as set forth on Exhibit A against all persons claiming the Subject Interests or any part thereof by, through or under the Company, but not otherwise.

change in the Company’s authorized or issued capital stock (except in connection with the elimination of any intercompany obligations and/or receivables as contemplated by Section 7.01(c)); grant of any stock option or right to purchase shares of capital stock of the Company; issuance of any security convertible into such capital stock; grant of any registration rights; purchase, redemption, retirement, or other acquisition by the Company of any shares of any such capital stock; or declaration or payment of any dividend or other distribution or payment in respect of shares of capital stock

amendment to the articles of incorporation, bylaws or other organizational documents of the Company;

payment or increase by the Company of any bonuses, salaries, or other compensation to any shareholder, director, officer, or (except in the Ordinary Course of Business) employee or entry into any employment, severance, or similar Contracts with any director, officer, or employee;

adoption of, or increase in the payments to or benefits under, any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement, or other employee benefit plan for or with any employees of the Company;

damage to or destruction or loss of any Asset or property of the Company, whether or not covered by insurance, except as would not have a Material Adverse Effect;

entry into, termination of, or receipt of notice of termination of any Material Contract;

sale, lease, or other disposition of any material Asset or property of the Company or mortgage, pledge, or imposition of any Lien or other encumbrance on any material Asset or property of the Company, except in the Ordinary Course of Business;

cancellation or waiver of any claims or rights with a value to the Company in excess of $100,000;

material change in the accounting methods used by the Company; or

agreement, whether oral or written, by the Company to do any of the foregoing.

Seller agrees, from and after the execution date hereof until Closing, except as expressly contemplated by this Agreement, as expressly consented to in writing by Purchaser, or in situations wherein emergency action is taken in the face of risk to life, property or the environment, to:

operate the Company and the Assets in the Ordinary Course of Business;

maintain the books of account and records relating to the Company and the Assets in the Ordinary Course of Business;

not enter into a Material Contract, or materially amend or change the terms of any such Material Contract that would involve individual commitments of more than US$50,000 or aggregate commitments of more than US$250,000;

not plug or abandon any well included as part of the Assets without Purchaser’s prior written consent;

not transfer, sell, mortgage, pledge or dispose of any material portion of the Assets other than the sale and/or disposal of Hydrocarbons in the Ordinary Course of Business and sales of equipment that is no longer necessary in the operation of the Assets or for which replacement equipment has been obtained;

preserve in full force and effect all oil and gas leases, operating agreements, easements, rights-of-way, permits, licenses and agreements that relate to the Assets, other than oil and gas leases which may expire by their respective terms which will not be renewed or extended by the Company without prior consent of the Purchaser;

submit to Purchaser for prior written approval, all requests for operating or capital expenditures relating to the Assets that involve individual commitments of more than US$50,000, unless otherwise contemplated by the Company’s capital expenditure budget previously provided to the Purchaser; and

obtain Purchaser’s written approval prior to voting under any operating, joint venture, partnership or similar agreement.

Purchaser agrees and understands that Seller shall have the right to cause the Company to make dividends or distributions of the Excluded Assets directly or indirectly to Seller at any time prior to the Closing. Such right shall not include the right to declare dividends or distributions prior to the Closing that are payable after the Closing. No action taken in accordance with this Section 7.01(b) shall be considered as a violation of any other provision of this Agreement.

Prior to or on the Closing Date, all intercompany obligations or receivables between the Company and the Seller or any Affiliate of Seller shall be fully satisfied and Seller shall cause the Company and the Assets to be released from any guaranty or Lien relating to any indebtedness of Seller or its Affiliates. Except with respect to charges incurred by Seller or its Affiliates on behalf of the Company to a Third Party and which are allocated specifically to one of the Assets, there shall be no Purchase Price Adjustment in connection with the compliance by Seller of its obligations set forth in this Section 7.01(c).

From and after the date of execution of this Agreement and until the Closing, and subject to the provisions of applicable operating and other agreements, Seller shall use its reasonable efforts to operate the Assets and use its reasonable efforts to cause any other operators to operate and administer the Assets in a manner consistent with its past practices and as a reasonably prudent operator, and shall carry on its business with respect to the Assets in substantially the same manner as before execution of this Agreement.

Purchaser acknowledges that Seller owns undivided interests in some or all of the Assets, and Purchaser agrees that the acts or omissions of the other working interest owners shall not constitute a violation of the provisions of this Article VII, nor shall any action required by a vote of working interest owners constitute such a violation so long as Seller has voted its interests in a manner that complies with the provisions of this Article VII. To the extent that Seller is not the operator of any of the Assets, the obligations of Seller in this Article VII shall be construed to require that Seller use reasonable efforts (without being obligated to incur any expense or institute any cause of action) to cause the operator of such Assets to take such actions or render such performance within the constraints of the applicable operating agreements and other applicable agreements.

Purchaser shall assume all risk of loss with respect to, and any change in the condition of, the Assets from the date of this Agreement until the Closing, including with respect to the depletion of Hydrocarbons, the watering-out of any well, the collapse of casing, sand infiltration of ▇▇▇▇▇, and the depreciation of Personal Property.

If after the execution date of this Agreement and prior to the Closing any part of the Assets shall be damaged or destroyed by fire or other casualty or if any part of the Assets shall be taken in condemnation or under the right of eminent domain or if proceedings for such purposes shall be pending or threatened, this Agreement shall remain in full force and effect notwithstanding any such destruction, taking or proceeding, or the threat thereof and the Parties shall proceed with the transactions contemplated by this Agreement notwithstanding such destruction or taking without reduction of the Purchase Price, but subject to Section 7.04(c).

Notwithstanding Section 7.04(a), in the event of any loss described in Section 7.04(b), at the Closing, Seller shall pay to Purchaser all sums paid to Seller by Third Parties by reason of the destruction or taking of such Assets (up to the Allocated Value thereof), including any sums paid pursuant to any policy or agreement of insurance or indemnity, and shall assign, transfer and set over unto Purchaser all of the rights, title and interest of Seller in and to any claims, causes of action, unpaid proceeds or other payments from Third Parties, including any policy or agreement of insurance or indemnity, arising out of such destruction or taking (up to the Allocated Value thereof). Notwithstanding anything to the contrary in this Section 7.04, Seller shall not be obligated to carry or maintain, and shall have no obligation or liability to Purchaser for its failure to carry or maintain, any insurance coverage with respect to any of the Assets.

At the Closing, the Purchase Price shall be increased by the following amounts:

the amount of all costs, expenses and charges relating to the Assets, or the ownership, use or operation of the Assets, which are paid by Seller or its Affiliates (other than the Company) and are attributable to the period of time from and after the Effective Time, as such amounts are described on Schedule 10.02(a)(i);

the adjustment amount, if any, due Seller as determined pursuant to Section 11.02 with respect to gas imbalances;

all upward Purchase Price adjustments for Title Benefits determined in accordance with Article III;

an estimate of any and all transfer, sales, gross receipts, compensating use or similar taxes, or assessments resulting from the transaction;

any Excess Net Working Capital as of the Effective Time; and

any other amount provided for in this Agreement or agreed upon by Purchaser and Seller.

At the Closing, the Purchase Price shall be decreased by the following amounts:

the Allocated Value of any Subject Interest sold prior to the Closing to the holder of a preferential right pursuant to Section 3.06;

all downward Purchase Price adjustments for Title Defects and Environmental Defects determined in accordance with Article III and Article IV;

the Escrow Fund;

the adjustment amount, if any, due Purchaser as determined pursuant to Section 11.02 with respect to gas imbalances.

any Deficit Net Working Capital as of the Effective Time; and

any other amount provided for in this Agreement or agreed upon by Purchaser and Seller.

The adjustments described in Sections 10.02(a) and (b) are hereinafter referred to as the “Purchase Price Adjustments.”

deliver to Purchaser certificates representing the Purchased Shares, which certificates shall be duly endorsed to Purchaser or accompanied by duly executed stock powers in a form satisfactory to Purchaser;

deliver to Purchaser resignations of the board of directors and officers of the Company;

execute and deliver a certificate by a senior officer of Seller certifying with respect to the matters set forth in Sections 9.01 and 9.02; and

execute, acknowledge and deliver any other instruments or agreements provided for herein or otherwise necessary to effectuate the transactions contemplated hereby.

deliver to Seller the Purchase Price (as adjusted pursuant to the provisions hereof and net of the Escrow Fund) by wire transfer of immediately available funds to an account designated in writing by Seller;

execute and deliver a certificate by a senior officer of Purchaser certifying with respect to the matters set forth in Sections 8.01 and 8.02; and

execute, acknowledge and deliver any other instruments or agreements provided for herein or otherwise necessary to effectuate the transactions contemplated hereby.

Provided that the Closing occurs, appropriate adjustments shall be made between Purchaser and Seller so that (i) Purchaser will receive all proceeds from sales of Hydrocarbons that are produced and saved from and after the Effective Time and any other revenues arising out of the ownership or operation of the Assets from and after the Effective Time, net of all applicable production, severance, and similar taxes, and net of all costs and expenses that are incurred in the ownership or operation of the Assets from and after the Effective Time, including, without limitation, all drilling costs, all capital expenditures, all overhead charges under applicable operating or other agreements (regardless of whether Seller or an affiliate of Seller serves as operator prior to the Closing), and (ii) Seller will receive all proceeds from sales of Hydrocarbons that are produced and saved prior to the Effective Time and any other revenues arising out of the ownership or operation of the Assets prior to the Effective Time, net of all applicable production, severance, and similar taxes, and net of all costs and expenses that are incurred in the ownership or operation of the Assets prior to the Effective Time.

In addition to the foregoing, the Seller will be paid (i) the amount as of the Effective Time of all prepaid ad valorem, property or similar taxes and assessments based upon or measured by ownership of the Assets and any prepaid costs, including rentals and insurance premiums, insofar as such prepaid costs relate to periods of time after the Effective Time, and (ii) the value of all merchantable Hydrocarbons produced prior to the Effective Time but in storage above the inlet connection or upstream of the applicable sales meter on the Closing Date.

In addition to the foregoing, the Purchaser will be paid (i) an amount equal to all unpaid ad valorem, property, production, severance and similar taxes and assessments based upon or measured by the ownership of the Assets that are attributable to periods of time prior to the Effective Time, which amounts shall, to the extent not actually assessed, be computed based on such taxes and assessments for the preceding tax year (such amount to be prorated for the period of Seller’s and Purchaser’s ownership before and after the Effective Time), and (ii) an amount equal to all cash in, or attributable to, suspense accounts relative to the Assets for which Purchaser has assumed responsibility under Section 14.02.

All amounts due under this Section 11.01 will be settled in accordance with final Accounting Statement under Section 11.03, and shall take into account any amounts reflected in Net Working Capital of the Company as of the Effective Time so as to avoid any duplication or double recovery by the Parties.

On or before ninety (90) days after the Closing Date, Seller shall prepare and deliver to Purchaser a post-closing statement setting forth a detailed calculation of all post-Closing adjustments applicable to the period of time between the Effective Time and Closing (“Accounting Statement”). The Accounting Statement shall include any adjustment or payment which was not fully and finally determined as of the Closing Date and the allocation of revenues and expenses as determined in accordance with Section 11.01. To the extent reasonably required by Seller, Purchaser shall assist in the preparation of the Accounting Statement and Purchaser shall provide Seller such data and information as Seller may reasonably request supporting the amounts reflected on the Accounting Statement. The Accounting Statement shall become final and binding upon the Parties on the thirtieth (30th) day following receipt thereof by Purchaser (the “Final Settlement Date”) unless Purchaser gives written notice of its disagreement (a “Notice of Disagreement”) to Seller prior to such date. Any Notice of Disagreement shall specify in detail the dollar amount, nature and basis of any disagreement so asserted. If a Notice of Disagreement is received by Seller in a timely manner, then the Parties shall resolve the Dispute (as defined in Section 16.01) evidenced by the Notice of Disagreement in accordance with Article XVI.

Within five (5) Business Days after the Final Settlement Date, Seller shall pay to Purchaser or Purchaser shall pay to Seller, as applicable, in immediately available funds the net amount due. For purposes of this Agreement, the term “Final Statement” shall mean (i) the revised Statement becoming final pursuant to this Section, or (ii) upon resolution of any Dispute regarding a Notice of Disagreement, the revised Statement reflecting such resolutions, which the Parties shall issue, or cause the Independent Expert or arbitrators to issue, as applicable, following such resolution.

If, at any time, the Company receives from a Governmental Authority an assessment, a reassessment or any other notice in writing relating to an amount to which the representations and warranties relating to Taxes in this Agreement may relate and which in turn could give rise to a claim against the Seller under this Agreement (an “Assessment”), the Purchaser shall cause the Company to deliver to the Seller as soon as practicable, but in any event within thirty (30) days of receiving the Assessment, a copy of the Assessment, together with a statement setting out, to the extent possible based on the information provided in the Assessment, the obligations of the Seller, on the assumption that the Assessment is valid and binding. If at any time the Seller or Seller Parent receives from a Governmental Authority an Assessment, Seller or Seller Parent shall deliver to the Purchaser as soon as practicable, but in any event within thirty (30) days of receiving the Assessment, a copy of the Assessment, together with a statement setting out, to the extent possible based on the information provided in the Assessment, the obligations of the Seller, on the assumption that the Assessment is valid and binding.

The Seller shall have the right, at its own expense and employing counsel of its own choice, to contest any Assessment. In such event, the Seller shall keep the Purchaser reasonably informed of the progress of such contest and the Purchaser shall have the right to retain its own counsel but the fees and expenses of such counsel shall be at the expense of the Purchaser. Except with the consent of the Purchaser, the Seller shall not take any action or agree to any settlement with respect to any Assessment which would result in an increase in the liability of the Company or the Purchaser for any post-Closing Tax period.

The Purchaser undertakes to inform and to cause the Company to inform the Seller of any audit inquiries received with respect to the representations and warranties relating to Taxes in this Agreement which could give rise to a claim against the Seller under this Agreement and to provide the Seller with the sole right to make representations on behalf of the Company prior to an Assessment which relates to such representations and warranties.

All tax-sharing agreements or similar agreements with respect to or involving the Company shall be terminated prior to the Closing Date, and, after the Closing Date, the Company shall not be bound thereby or have any liability thereunder for amounts due in respect of periods prior to the Closing Date.

After the date hereof, neither Seller nor Seller Parent will make any election with respect to Taxes which would have a material effect on the Tax liability of the Company without the written consent of Purchaser (such consent not to be unreasonably withheld).

Seller and Purchaser shall (i) each provide the other, and Purchaser shall cause the Company to provide Seller, with such assistance as may reasonably be requested by any of them in connection with the preparation of any Tax Return, audit, or other examination by any taxing authority or judicial or administrative proceedings relating to liability for Taxes, (ii) each retain and provide the other, and Purchaser shall cause the Company to retain and provide Seller with, any records or other information that may be relevant to such Tax Return, audit or examination, proceeding, or determination, and (iii) each provide the other with any final determination of any such audit or examination, proceeding, or determination that affects any amount required to be shown on any Tax Return of the other for any period. Without limiting the generality of the foregoing, Purchaser shall retain, and shall cause the Company to retain, and Seller shall retain, until the applicable statutes of limitations (including any extensions) have expired, copies of all Tax Returns, supporting work schedules, and other records or information that may be relevant to such returns for all tax periods or portions thereof ending before or including the Closing Date and shall not destroy or otherwise dispose of any such records without first providing the other Party with a reasonable opportunity to review and copy the same.

Seller shall exercise at its expense complete control over the handling, disposition, and settlement of any governmental inquiry, examination, or proceeding that could result in a determination with respect to Taxes due or payable by Purchaser or the Company for which Seller may be liable or against which Seller may be required to indemnify Purchaser or the Company pursuant hereto. Seller shall, however, promptly notify the Company if, in connection with any such inquiry, examination, or proceeding, any Governmental Authority proposes in writing to make any Assessment or adjustment with respect to Tax items of the Company, which Assessments or adjustments could affect the Company following the Closing Date, and shall consult with the Company with respect to any such proposed Assessment or adjustment. Purchaser shall notify Seller in writing promptly upon learning of any such inquiry, examination, or proceeding. Purchaser shall cooperate with Seller, as Seller may reasonably request, in any such inquiry, examination, or proceeding. Neither Seller nor Purchaser shall make any amendments or adjustments to any Tax Returns for any Tax period prior to the Closing Date or any other Tax Return which may affect the Tax liability of the Company or Tax indemnification of Seller under this Agreement without the prior approval of the other Party (such approval not to be unreasonably withheld).

at any time at or prior to the Closing by mutual written consent of the Parties;

by Seller on the Closing Date if the conditions set forth in Article VIII have not been satisfied in all material respects by Purchaser or waived by Seller in writing by the Closing Date;

by Purchaser on the Closing Date if the conditions set forth in Article IX have not been satisfied in all material respects by Seller or waived by Purchaser in writing by the Closing Date;

by Seller or Purchaser if the Closing shall not have occurred on or before August 31, 2009;

by either Seller or Purchaser if any Governmental Authority shall have issued an order, judgment or decree or taken any other action challenging, delaying, restraining, enjoining, prohibiting or invalidating the consummation of any of the transactions contemplated herein;

by either Seller or Purchaser if (i) the aggregate amount of the Purchase Price Adjustments agreed by the Seller and Purchaser or otherwise finally determined pursuant to this Agreement with respect to all uncured Title Defects (net of the aggregate amount of the Purchase Price Adjustments for all Title Benefits agreed by the Seller and Purchaser), plus (ii) the aggregate amount of the Environmental Defect Values agreed by the Seller and Purchaser or otherwise finally determined pursuant to this Agreement with respect to all Environmental Defects, plus (iii) the aggregate amount of all casualty losses not covered by insurance (including any deductions or self-insured retentions) exceeds twenty percent (20%) percent of the unadjusted Purchase Price; or

as otherwise expressly provided herein;

If all conditions precedent to the obligations of Purchaser set forth in Article VIII have been met and the transactions contemplated by this Agreement are not consummated on or before the Closing Date because of (i) the failure of Purchaser to perform any of its obligations hereunder in any material respect or (ii) any representation or warranty of Purchaser contained herein that are qualified by materiality are not true and correct in all respects and/or if such representation or warranty is not qualified by materiality is not true and correct in all material respects, then Seller shall have the option to terminate this Agreement, in which case Seller shall have the right to receive the Escrow Fund as liquidated damages, which remedy shall be the sole and exclusive remedy available to Seller for Purchaser’s failure to perform or breach. Purchaser and Seller acknowledge and agree that (i) Seller’s actual damages upon the event of such a termination are difficult to ascertain with any certainty, (ii) that the Escrow Fund is a reasonable estimate of such actual damages and (iii) such liquidated damages do not constitute a penalty.

If this Agreement is terminated by the mutual written agreement of Purchaser and Seller, or if the Closing does not occur on or before the Closing Date, for any reason other than as set forth in this Section 13.03, then Seller shall direct that the Escrow Fund be returned to Purchaser in immediately available funds within three (3) Business Days after such termination. Purchaser and Seller shall thereupon have the rights and obligations set forth elsewhere herein.

shall only apply if Purchaser has provided Seller and Seller Parent with written notice of a good faith claim for indemnification within one (1) year of the Closing, except for Damages arising out of any breach or inaccuracy of the representations and warranties of the Seller set forth in Sections 5.12 and 5.15 and the obligations of the Seller and Seller Parent in Article XII which shall survive until the expiration of the applicable statute of limitations; and

shall be limited to amounts in the aggregate in excess of two and one-half percent (2.5%) of the Purchase Price (the “Basket Amount”) up to a maximum aggregate liability of thirty percent (30%) of the Purchase Price, except that Damages arising out of any breach of the representations and warranties set forth in Sections 5.01, 5.02, 5.03, 5.07(b), 5.08, 5.12 and 5.15 and the obligations of the Seller and Seller Parent in Section 7.08 and Article XII shall not be subject to the Basket Amount and in which event the maximum aggregate liability of Seller and Parent with respect to all such claims shall not exceed the Purchase Price.

shall only apply if Purchaser has provided Seller and Seller Parent with written notice of a good faith claim for indemnification within one (1) year of the Closing, and

shall be limited to amounts in the aggregate in excess of two and one-half percent (2.5%) of the Purchase Price up to a maximum aggregate liability of thirty percent (30%) of the Purchase Price.

Each of Purchaser and Seller shall have the right to submit Disputes regarding title issues, environmental issues, or calculation of the Accounting Statement or revisions thereto, to an independent expert appointed in accordance with this Section 16.03 (each, an “Independent Expert”), who shall serve as sole arbitrator. The Independent Expert shall be appointed by mutual agreement of such Parties from among candidates with experience and expertise in the area that is the subject of such Dispute, and failing such agreement, such Independent Expert for such Dispute shall be selected in accordance with the Rules (as defined in Subsection (b) of this Section 16.03).

Disputes to be resolved by an Independent Expert shall be resolved in accordance with mutually agreed procedures and rules and failing such agreement, in accordance with the rules and procedures of the Texas Arbitration Act and the Rules of the American Arbitration Association to the extent such Rules do not conflict with such Texas Arbitration Act or the provisions of this Agreement The Independent Expert shall be instructed by the Purchaser and Seller to resolve such Dispute as soon as reasonably practicable in light of the circumstances. The decision and award of the Independent Expert shall be binding upon all Parties as an award under the Federal Arbitration Act and final and nonappealable to the maximum extent permitted by law, and judgment thereon may be entered in a court of competent jurisdiction and enforced by any Party as a final judgment of such court. In no event shall the Independent Expert have any authority to award any punitive, indirect or consequential damages.

The charges and expenses of the arbitrator shall be shared equally by Seller and Purchaser.

Any arbitration hearing held pursuant to Section 16.03 shall be held in Houston, Texas.

The captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement. The Parties acknowledge that they have participated jointly in the negotiation and drafting of this Agreement and as such the Parties agree that if an ambiguity or question of intent or interpretation arises hereunder, this Agreement shall not be construed more strictly against one Party than another on the grounds of authorship.

Time is of the essence in and of this Agreement.

Unless otherwise specified, time periods within or following which any payment is to be made or act is to be done shall be calculated by excluding the day on which the period commences and including the day on which the period ends. Where the last day of any such time period is not a Business Day, such time period shall be extended to the next Business Day following the day on which it would otherwise end.

Whenever any action to be taken or payment to be made pursuant to this Agreement would otherwise be required to be made on a day that is not a Business Day, such action shall be taken or such payment shall be made on the first Business Day following such day.

Unless otherwise specified, all references to amounts of money in this Agreement refer to the lawful currency of the United States of America.

Including — Where the word “including” or “includes” is used in this Agreement, it means “including without limitation” or “includes without limitation”.

The use of words in the singular or plural, or referring to a particular gender, shall not limit the scope or exclude the application of any provision of this Agreement to such persons or circumstances as the context otherwise permits.

Any reference to a statute shall mean the statute in force as at the date of this Agreement (together with all regulations promulgated thereunder), as the same may be amended, re-enacted, consolidated or replaced from time to time, and any successor statute thereto, unless otherwise expressly provided.

Any reference to an action taken by a Person in the ordinary course means that such action is consistent with past practices of such Person and is taken in the ordinary course of the normal operations of such Person.

Seller:

Seller Parent:

 

Purchaser:

 

Purchaser Parent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the leasehold estates in and to the oil, gas and mineral leases described or referred to in Exhibit A (the “Leases”) and any overriding royalty interests in and to the lands covered by the Leases, assignments and other documents of title described or referred to in Exhibit A, all as more specifically described in Exhibit A (collectively, the “Subject Interests,” or singularly, a “Subject Interest”);

all rights incident to the Subject Interests, including, without limitation, (i) all rights with respect to the use and occupation of the surface of and the subsurface depths under the Subject Interests; (ii) all rights with respect to any pooled, communitized or unitized acreage by virtue of any Subject Interest being a part thereof, including all Hydrocarbons (as defined in Subsection (d) below) production after the Effective Time (as hereinafter defined) attributable to the Subject Interests or any such pool or unit allocated to any such Subject Interest;

all easements, rights-of-way, surface leases, servitudes, and other estates or similar rights and privileges directly related to or used solely in connection with the Subject Interests (the “Easements”), including, without limitation, the Easements described or referred to in Exhibit A;

all personal property, equipment, fixtures, inventory and improvements located on or used in connection with the Subject Interests and the Easements or with the production, treatment, sale, or disposal of oil, gas or other hydrocarbons (collectively, “Hydrocarbons”), byproducts or waste produced therefrom or attributable thereto, including, without limitation, all ▇▇▇▇▇ located on the lands covered by the Subject Interests or on lands with which the Subject Interests may have been pooled, communitized or unitized (whether producing, shut in or abandoned, and whether for production, injection or disposal), including, without limitation, the ▇▇▇▇▇ described in Exhibit B, wellhead equipment, pumps, pumping units, flowlines, gathering systems, piping, tanks, buildings, treatment facilities, injection facilities, disposal facilities, compression facilities, and other materials, supplies, equipment, facilities and machinery (collectively, “Personal Property”);

all contracts, agreements and other arrangements that directly relate to the Subject Interests, the Leases or the Easements, including, without limitation, production sales contracts, farmout agreements, operating agreements, service agreements and similar arrangements (collectively, the “Contracts”);

all books, records, files, muniments of title, reports and similar documents and materials, including, without limitation, minute books, corporate, tax, legal, financial and other books and records of the Company (but excluding employee files), and all lease records, well records, division order records, well files, title records (including abstracts of title, title opinions and memoranda, and title curative documents related to the Assets), contracts and contract files, correspondence, that relate to the foregoing interests in the possession of, and maintained by, Seller (collectively, the “Records”); and

all geological and geophysical data relating to the Subject Interests, other than such data that is interpretive in nature or which cannot be transferred without the consent of or payment to any Third Party.

any Company Contract involving consideration with a total value in excess of US$100,000, which is not cancelable by the Company upon notice of sixty (60) days or less without liability for further payment other than nominal penalty, pursuant to which the Company acquires any material portion of the raw materials, supplies or services used or consumed by the Company in the operation of its business (unless such raw materials, supplies or services are readily available to the Company from other sources on comparable terms);

any Company Contract that can reasonably be expected to result in aggregate payments by the Company of more than Fifty Thousand Dollars (US$50,000) during the current or any subsequent fiscal year of the Company (based solely on the terms thereof and without regard to any expected increase in volumes or revenues);

any Company Contract that can reasonably be expected to result in aggregate revenues to the Company of more than Fifty Thousand Dollars (US$50,000) during the current or any subsequent fiscal year of the Company (based solely on the terms thereof and without regard to any expected increase in volumes or revenues);

any marketing, sales, transportation, processing or similar Company Contract that is not terminable without penalty on sixty (60) Days or less notice;

any indenture, mortgage, loan, credit or sale-leaseback or similar Company Contract that can reasonably be expected to result in aggregate payments by the Company of more than Fifty Thousand Dollars (US$50,000) during the current or any subsequent fiscal year of the Company;

any Company Contract that constitutes a lease, under which the Company is the lessor or the lessee of real or personal property which lease (i) cannot be terminated by the Company without penalty upon sixty (60) days or less notice and (ii) involves an annual base rental of more than Fifty Thousand Dollars (US$50,000);

any Company Contract with an Affiliate of Seller that will not be terminated prior to Closing;

any licensing agreement or other Company Contract with respect to Intellectual Property (but excluding “off the shelf” or “shrink-wrap” software with a value of less than Two Thousand Dollars (US$2,500), including agreements with current or former employees, consultants, or contractors regarding the appropriation or the non-disclosure of any Intellectual Property;

any collective bargaining agreement and other Company Contract to or with any labor union or other employee representative of a group of employees;

any joint venture, partnership, and other Company Contract (however named) involving a sharing of profits, losses, costs, or liabilities by the Company with any other Person;

any Company Contract containing covenants that in any way purport to restrict the business activity of the Company or any Affiliate of the Company or limit the freedom of the Company or any Affiliate of the Company to engage in any line of business or to compete with any Person;

any Company Contract providing for payments to or by any Person based on sales, purchases, or profits, other than direct payments for goods;

any power of attorney that is currently effective and outstanding relating to the Company or the Assets;

any Company Contract entered into other than in the Ordinary Course of Business that contains or provides for an express undertaking by the Company to be responsible for consequential damages;

any written warranty, guaranty, and or other similar undertaking with respect to contractual performance extended by the Company other than in the Ordinary Course of Business; and

any amendment, supplement, and modification (whether oral or written) in respect of any of the foregoing.

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