CONTRIBUTION AGREEMENT BY AND AMONG FLATONIA ENERGY, LLC PARALLEL RESOURCE PARTNERS, LLC AND SABINE RIVER ENERGY, LLC OAK VALLEY OPERATING, LLC OAK VALLEY RESOURCES, LLC AND EARTHSTONE ENERGY, INC. __________________________________________ EXECUTION DATE: October16,2014 __________________________________________ TABLE OF CONTENTS

Section 1.1 Defined Terms.  In addition to the terms defined in the introductory paragraph and the Recitals of this Agreement, for purposes hereof, capitalized terms used herein and not otherwise defined shall have the meanings set forth in Appendix A.

 

Section 1.2 References and Rules of Construction.  All references in this Agreement to Exhibits, Schedules, Appendices, Articles, Sections, subsections, clauses and other subdivisions refer to the corresponding Exhibits, Schedules, Appendices, Articles, Sections, subsections, clauses and other subdivisions of or to this Agreement unless expressly provided otherwise.  Titles appearing at the beginning of any Exhibits, Schedules, Appendices, Articles, Sections, subsections, clauses and other subdivisions of this Agreement are for convenience only, do not constitute any part of this Agreement and shall be disregarded in construing the language hereof.  The words “this Agreement,” “herein,” “hereby,” “hereunder” and “hereof,” and words of similar import, refer to this Agreement as a whole and not to any particular Article, Section, subsection, clause or other subdivision unless expressly so limited.  The words “this Article,” “this Section,” “this subsection,” “this clause” and words of similar import refer only to the Article, Section, subsection and clause hereof in which such words occur.  The words “including” and “includes” (in their various forms) means “including without limitation” and corresponding derivative expressions.  The words “shall” and “will” are used interchangeably and have the same meaning.  All references to “$” or “dollars” shall be deemed references to United States dollars.  Each accounting term not defined herein will have the meaning given to it under GAAP as interpreted as of the date of this Agreement.  Unless expressly provided to the contrary, the word “or” is not exclusive.  Pronouns in masculine, feminine or neuter genders shall be construed to state and include any other gender, and words, terms and titles (including

terms defined herein) in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires.  Appendices, Exhibits and Schedules referred to herein are attached to and by this reference incorporated herein for all purposes.  Reference herein to any federal, state, local or foreign Law shall be deemed to also refer to all rules and regulations promulgated thereunder, unless the context requires otherwise, and reference herein to any agreement, instrument or Law means such agreement, instrument or Law as from time to time amended, modified or supplemented, including, in the case of agreements or instruments, by waiver or consent and, in the case of Laws, by succession of comparable successor Laws.  References to a Person are also to its permitted successors and permitted assigns.

Section 2.1 The Contribution.  At the Closing, upon the terms and subject to the conditions of this Agreement, Flatonia shall contribute, convey, assign, transfer and deliver the Assets to Sabine, substantially in the form of the Conveyance, and Sabine’s acquisition and acceptance of the Assets in consideration for Earthstone’s issuance of the Earthstone Contribution Shares and Sabine’s assumption of the Assumed Sabine Obligations (together, the “Contribution Consideration”).  It is the intent of Flatonia and Sabine that, as a result of the Conveyance delivered by Flatonia to Sabine pursuant to this Agreement, from and after the Effective Time, the total amount of right, title and interest owned by Flatonia and Sabine in the Assets shall be owned 50% by Flatonia and 50% by Sabine.

 

Section 2.2 Assets.  As used herein, the term “Assets” means, subject to the terms and conditions of this Agreement, an undivided 28.57142857% of all of Flatonia’s right, title and interest in and to the following (but excepting and excluding, in all such instances, the Excluded Assets):

 

(a) The oil and gas leases; subleases and other leaseholds; interests in fee; carried interests; reversionary interests; net profits interests; royalty interests; overriding royalty interests; forced pooled interests; farmout rights; options; mineral interests and other properties and interests described on Exhibit A-1, subject to the depth limitations and other restrictions as may be set forth in such Exhibit A-1 or in documents of record affecting same (collectively, the “Leases”);

 

(b) All oil, gas, water or injection wells located on the lands covered by the Leases or lands pooled therewith (collectively, the “Lands”), whether producing, shut-in, or temporarily abandoned, including the wells shown on Exhibit A-2 attached hereto (collectively, the “Wells”);

 

(c) All leasehold interests of Flatonia in or to any currently existing pooled units covering any of the Lands or all or a part of any Leases, or which include any Wells, including those pooled units related to the properties and associated with the Wells shown on Exhibit A-2 (the “Units”; the Units, together with the Leases, Lands and Wells, being hereinafter referred to as the “Properties”);

(d) all contracts, agreements and instruments by which the Properties are bound or subject, or that relate to or are otherwise applicable to the Properties, but only to the extent applicable to the Properties (rather than Flatonia’s or any of its Affiliates’ other properties), including operating agreements, unitization, pooling and communitization agreements, declarations and orders, joint venture agreements, farmin and farmout agreements, exploration agreements, participation agreements, area of mutual interest agreements, exchange agreements, transportation or gathering agreements, and agreements for the sale and purchase of oil, gas or casinghead gas and processing agreements, to the extent applicable to the Properties or the production of Hydrocarbons produced in association therewith from the Properties (collectively, the “Contracts”), but excluding any contracts, agreements and instruments to the extent transfer would result in a violation of applicable Law, or is restricted by a Third Party agreement, and provided that “Contracts” shall not include the instruments constituting the Leases;

 

(e) All easements (including subsurface easements), permits, licenses, servitudes, rights-of-way, surface leases and other surface rights (collectively, the “Surface Agreements”) appurtenant to, and used or held for use in connection with, the Properties, whether part of the premises covered by the Leases or Units or otherwise, but excluding any permits and other rights to the extent transfer would result in a violation of applicable Law, or is restricted by a Third Party agreement;

 

(f) All treatment and processing plants and equipment, machinery, fixtures and other tangible personal property and improvements located on the Properties or used or held for use in connection with the operation of the Properties (the “Equipment”);

 

(g) All flowlines, pipelines, gathering systems and appurtenances thereto located on the Properties or used or held for use in connection with the operation of the Properties;

 

(h) All Hydrocarbons produced from or attributable to the Leases, Lands, Wells and Units from and after the Effective Time, together with and subject to Imbalances associated with the Properties; and

 

(i) To the extent transferable, and subject to payment by Sabine of all Third Party transfer and license fees, all geological and geophysical data (including all seismic data, as well as reprocessed data) related exclusively to the Properties.

 

Section 2.3 Excluded Assets.  Notwithstanding anything to the contrary, the Assets shall not include, and there is excepted, reserved and excluded from this transaction, the Excluded Assets.  In the event Sabine comes into possession of any Excluded Assets, it shall deliver such Excluded Assets, as promptly as possible, to or as directed by Flatonia.

 

Section 2.4 Effective Time; Proration of Costs and Revenues.

 

(a) Sabine shall be entitled to (i) all production of Hydrocarbons from or attributable to the Assets after 7:01 a.m., Central Time, on July 1, 2014 (the “Effective Time”), and all products and proceeds attributable thereto and (ii) all other income, proceeds, receipts and

credits earned with respect to the Assets after the Effective Time, and Sabine shall be responsible for all Property Costs incurred or attributable to the period after the Effective Time.

 

(b) Flatonia shall be entitled to (i) all production of Hydrocarbons from or attributable to the Assets prior to and at the Effective Time, and all products and proceeds attributable thereto and (ii) all other income, proceeds, receipts and credits earned with respect to the Assets prior to and at the Effective Time, and Flatonia shall be responsible for, and entitled to any refunds with respect or attributable to (including, for the avoidance of doubt, any Tax benefit (including refunds, credits or rebates), any reduction in severance Taxes that may be realized after the Effective Time but that results from payments or production for periods prior to and at the Effective Time), and all Property Costs incurred or attributable to the period prior to and at the Effective Time.

 

(c) Should Sabine receive after the Closing any proceeds or other income to which Flatonia is entitled under Section 2.4(b), Sabine shall fully disclose, account for and promptly remit the same to Flatonia.  If, after the Closing, Flatonia receives any proceeds or other income with respect to the Assets to which Sabine is entitled under Section 2.4(a), Flatonia shall fully disclose, account for, and promptly remit same to Sabine.

 

(d) Should Sabine pay after the Closing any Property Costs for which Flatonia is responsible under Section 2.4(b), Flatonia shall reimburse Sabine promptly after receipt from Sabine of an invoice, accompanied by copies of the relevant vendor or other invoice and proof of payment, with respect to such Property Costs.  Should Flatonia pay after the Closing any Property Costs for which Sabine is responsible under Section 2.4(a), Sabine shall reimburse Flatonia promptly after receipt from Flatonia of an invoice, accompanied by copies of the relevant vendor or other invoice and proof of payment, with respect to such Property Costs.

 

(e) Notwithstanding the foregoing, Flatonia shall have no further entitlement to amounts earned from the sale of Hydrocarbons produced from or attributable to the Assets and other income earned with respect to the Assets and no further responsibility for Property Costs (other than Property Taxes specifically allocated to Flatonia as provided in Article 14) incurred with respect to the Assets following the final determination and payment of the Cash Settlement in accordance with Section 11.5(b).

 

(f) Right-of-way fees, insurance premiums and other Property Costs (other than Property Taxes) that are paid periodically shall be prorated based on the number of days in the applicable period falling before and the number of days in the applicable period falling on or after the day of the Effective Time.  Property Taxes shall be prorated as set forth in Section 14.2.  In each case, Sabine shall be responsible for the portion allocated to the period after the Effective Time, and Flatonia shall be responsible for the portion allocated to the period before the Effective Time.

 

Section 2.5 Procedures.

 

(a) For purposes of allocating production and accounts receivable with respect thereto under Section 2.4, (i) liquid Hydrocarbons shall be deemed to be “from or attributable to” the Properties when they pass through the inlet flange of the pipeline connecting into the storage

facilities into which they are run or, if there are no such storage facilities, when they pass through the LACT meters or similar meters at the point of entry into the pipelines through which they are transported from the field and (ii) gaseous Hydrocarbons shall be deemed to be “from or attributable to” the Properties when they pass through the delivery point sales meters on the pipelines through which they are transported (or whichever meter is closest to the well).  Sabine shall utilize reasonable interpolative procedures to arrive at an allocation of production when exact meter readings or gauging and strapping data is not available.  Sabine shall provide to Flatonia evidence of all meter readings and all gauging and strapping procedures conducted on or about the Effective Time in connection with the Assets, together with all data necessary to support any estimated allocation, for purposes of establishing the Cash Settlement pursuant to Section 3.4.  The terms “earned” and “incurred” shall be interpreted in accordance with GAAP and Council of Petroleum Accountants Society (“COPAS”) standards, and expenditures which are incurred pursuant to an operating agreement, unit agreement or similar agreement shall be deemed incurred when expended by the operator of the applicable Property in accordance with such operator’s practice as of the time before the Execution Date.

 

(b) Sabine shall handle all joint interest audits and other audits of Property Costs covering the period for which Sabine or Flatonia is in whole or in part responsible under Section 2.4, except that any Tax Audits shall be handled as provided in Article 14; provided, however, that, except with respect to any Tax Audits that are handled as provided in Article 14, Sabine shall not agree to any adjustments to previously assessed costs for which Flatonia is liable, or any compromise of any audit claims to which Flatonia would be entitled, without the prior written consent of Sabine, which consent shall not be unreasonably withheld.  Each Party shall provide the other Party with a copy of all applicable audit reports and written audit agreements received by such Party or its Affiliates and relating to periods for which any such Party is partially responsible.

Section 3.1 Consideration for the Contribution.  Immediately following the consummation of the transactions contemplated by the Exchange Agreement and prior to the consummation of the Contribution, Sabine will be a single member limited liability company that is wholly owned by Earthstone.  In consideration for the Contribution, (x) Earthstone shall issue the Earthstone Contribution Shares to Flatonia in accordance with Section 3.2, and (y) Sabine shall assume the Assumed Sabine Obligations.  The parties intend for the transfer of the Assets by Flatonia to Sabine to be a transfer to Earthstone for U.S. federal income tax purposes (and for purposes of any state or local taxes that follow the federal treatment), in light of the treatment of Sabine as disregarded as an entity separate from Earthstone under Treasury Regulations Section ###-###-####-3(b).

 

Section 3.2 Issuance by Earthstone of the Earthstone Contribution Shares to Flatonia.  At the Closing, in partial consideration for Flatonia’s contribution of the Assets to Sabine, Earthstone will issue to Flatonia a number of fully paid and non-assessable shares of Earthstone Common Stock equal to the Earthstone Share Amount (the “Earthstone Contribution Shares”).  The “Earthstone Share Amount” is such that, after giving effect to the transactions contemplated by the Exchange Agreement and after giving effect to the issuance by Earthstone to Flatonia of

the Earthstone Contribution Shares, Flatonia will own, beneficially and of record, 21.4% of the Earthstone Common Stock, on an as-converted, as-exercised basis (rounded to the nearest whole share).

 

Section 3.3 Allocation of Contribution Consideration.

 

(a) The “Allocated Value” for any Asset equals the value allocated to such Asset on Section 3.3 of the Oak Valley Disclosure Schedule.  Notwithstanding anything to the contrary in this Agreement, Flatonia has accepted such Allocated Values for purposes of this Agreement and the transactions contemplated hereby but makes no representation or warranty as to the accuracy of such values.

 

(b) For U.S. federal income Tax purposes (and for purposes of any state or local taxes that follow the federal treatment), Earthstone and Flatonia agree that the Post-Closing Payment, if any, paid by Sabine to Flatonia will be allocated among the Assets transferred to Sabine in accordance with the principles of Revenue Ruling 68-55, 1968-1 C.B. 140, and in a manner reasonably consistent with the Allocated Values.  Such allocation will be set forth in a separate schedule delivered by Flatonia to Sabine within 90 days after the Closing (the “Tax Allocations”).  Earthstone and Flatonia agree that (i) the Tax Allocations, as may be subsequently adjusted by Flatonia to reflect any additional payment obligations of the Parties hereunder or as otherwise determined appropriate by agreement of the Parties, shall be used by Flatonia and Earthstone as the basis for reporting asset values and other items for purposes of all federal, state and local Tax returns and (ii) they will not take positions inconsistent with such Tax Allocations in filing Tax Returns, notices to Governmental Bodies, audit or other proceedings with respect to Taxes or in other documents or notices relating to the transactions contemplated by this Agreement, except as otherwise required by applicable Laws following a final determination by the relevant Governmental Body.

 

Section 3.4 Cash Settlement to Reflect Effective Time.  In addition to the issuance of the Earthstone Contribution Shares to Flatonia and the assumption by Sabine of the Assumed Sabine Obligations, Flatonia or Sabine shall make a cash settlement to the other (the “Cash Settlement”) (x) in accordance with the terms of this Agreement and, to the extent not inconsistent with this Agreement, in accordance with GAAP and COPAS as consistently applied in the oil and gas industry in Texas and (y) as set forth in Section 3.4(a) and Section 3.4(b), for amounts identified on or before the 180th day after the Closing (the “Cut-off Date”).  If the amount calculated in Section 3.4(a) exceeds the amount calculated in Section 3.4(b), Sabine shall make a payment to Flatonia in the amount of such excess in accordance with Section 11.5.  If the amount calculated in Section 3.4(b) exceeds the amount calculated in Section 3.4(a), Flatonia shall make a payment to Sabine in the amount of such excess in accordance with Section 11.5.

 

(a) In connection with the calculation of the Cash Settlement, the amount described in this Section 3.4(a) shall be equal to the sum of the following amounts, without duplication:

 

(i) an amount equal to all Property Costs and other costs attributable to the Assets, or the production of Hydrocarbons therefrom, incurred or attributable to the period after the Effective Time (or apportioned to Sabine or Earthstone pursuant to

Article 14) but paid by Flatonia, as is consistent with Section 2.4(a) and Section 2.4(b), but excluding any amounts previously reimbursed to Flatonia pursuant to Section 2.4(d);

 

(ii) an amount equal to all proceeds to which Flatonia is entitled pursuant to Section 2.4(b), to the extent that such proceeds have been received by Sabine and not remitted or paid to Flatonia;

 

(iii) an amount equal to all Property Costs and other expenses attributable to the Assets and incurred after the Effective Time (or apportioned to Sabine or Earthstone pursuant to Article 14), and which have been paid by Flatonia, including  bonuses, rentals, cash calls and advances to Third Party operators, in each case for expenses not yet incurred but paid by Flatonia, and an amount equal to any Tax benefit (including refunds, credits or rebates) as of the Cut-off Date agreed by the Parties to be attributable to any reduction in severance Taxes that may be realized after the Effective Time but that results from payments or production for periods prior to or at the Effective Time;

 

(iv) to the extent that proceeds for the associated production prior to and at the Effective Time have not been received by or remitted to Flatonia, an amount equal to the aggregate volumes of Hydrocarbons stored in stock tanks, pipelines, line fill or other storage as of the Effective Time and the volume of Hydrocarbons contained in gathering lines associated with production from the Properties and applicable pipelines (including any line fill) as of the Effective Time, in each case, from or attributable to the Assets or the production of Hydrocarbons therefrom multiplied by the applicable contract price for such volumes at the Effective Time;

 

(v) without duplication of Section 3.4(a)(iii), an amount equal to 28.57142857% of the total amount of all outstanding Prepayments as of the Closing Date; and

 

(vi) any other amount provided for elsewhere in this Agreement or otherwise agreed upon in writing by the Parties as an increase in the amount due to Flatonia in connection with the Cash Settlement.

 

(b) In connection with the calculation of the Cash Settlement, the amount described in this Section 3.4(b) shall be equal to the sum of the following amounts, without duplication:

 

(i) an amount equal to all Property Costs and other costs attributable to the Assets or the production of Hydrocarbons therefrom that are incurred or attributable to the period prior to and at the Effective Time (or apportioned to Flatonia pursuant to Article 14) but paid by Sabine, as is consistent with Section 2.4(a) and Section 2.4(b), but excluding any amounts previously reimbursed to Sabine pursuant to Section 2.4(d);

 

(ii) an amount equal to all proceeds to which Sabine is entitled pursuant to Section 2.4(a), to the extent that such amounts have been received by Flatonia and not remitted or paid to Sabine;

(iii) the amount of (a) any reduction in value of the Assets caused by Casualty Losses, as set forth in Section 4.2(a) or (b) the Allocated Value for any portion of the Assets taken in condemnation or under right of eminent domain, as set forth in Section 4.2(b);

 

(iv) an amount equal to the Allocated Value, if any, of any Assets excluded from this transaction pursuant to Section 4.1; and

 

(v) any other amount provided for elsewhere in this Agreement or otherwise agreed upon in writing by the Parties as an increase in the amount due to Sabine in connection with the Cash Settlement.

Section 4.1 Consents to Assignment and Preferential Rights to Purchase.  Sabine will, at the earliest practicable date, use reasonable efforts, consistent with industry practices in transactions of this type, to identify, with respect to all Properties, (a) all preferential rights to purchase (“Preferential Rights”) and requirements that consents to assignment (“Consents”) be obtained that would be applicable to the assignment of the Assets to Sabine and (b) the names and addresses of parties holding such rights (“Sabine Consent Parties”), and provide a list of same to Flatonia.  Likewise, Flatonia will, at the earliest practicable date, use reasonable efforts, consistent with industry practices in transactions of this type, to identify, with respect to all Properties, (i) all Preferential Rights and requirements that Consents be obtained that would be applicable to the transactions contemplated hereby under contracts or agreements to which Sabine or any of its Affiliates are not a party and (ii) the names and addresses of parties holding such rights (“Flatonia Consent Parties”), and provide a list of same to Sabine.  In attempting to identify such Preferential Rights and Consents, and the names and addresses of such parties holding the same, Sabine and Flatonia shall in no event be obligated to go beyond their respective records.  Sabine will promptly request from the Sabine Consent Parties, and Flatonia will promptly request from the Flatonia Consent Parties, in each case, in accordance with the documents creating such rights, execution of the Consents and/or waivers of Preferential Rights so identified, and Sabine and Flatonia shall provide copies of such requests to the other, as applicable; provided, however, that neither Sabine nor Flatonia shall have an obligation to ensure that such Consents or waivers of Preferential Rights are obtained.  If a party from whom a waiver of a Preferential Right is requested exercises its Preferential Right, Sabine or Flatonia, as applicable, shall so notify the other, and Flatonia will tender to such party the required interest in the Property at a price equal to its Allocated Value, proportionately reduced if less than the entire Property must be tendered (the “PR Value”), and if such interest in such Property is actually sold to such party so exercising such right, such interest in such Property will be excluded from the transaction contemplated hereby and the amount calculated under Section 3.4(b) will be increased by such Allocated Value or PR Value, as applicable.  Except for Consents in documents that state that such Consent cannot be unreasonably withheld (or words similar thereto), if a Person from whom a Consent is requested refuses to give such Consent, unless otherwise agreed by the Parties, the interest in the Property affected by such Consent will be excluded from the transaction contemplated hereby and the amount calculated under Section 3.4(b) will be increased by the Allocated Value of such excluded interest.

Section 4.2 Casualty Loss or Condemnation.

 

(a) If prior to the Closing Date any portion of the Properties is destroyed or taken as a result of a Casualty (a “Casualty Loss”), Sabine will nevertheless be required to complete the transactions contemplated hereby, and such Casualty Loss shall be treated as an increase in the amount calculated under Section 3.4(b) equal to the lesser of: (i) the Allocated Value of the Property affected by such Casualty and (ii) the amount of such Casualty Loss.  Flatonia will not voluntarily compromise, settle or adjust any Casualty Loss without prior consultation with Sabine.  In such event, all rights to insurance proceeds and claims against third parties related to such Casualty Loss shall belong to Flatonia.

 

(b) If after the Execution Date, but prior to the Closing Date, any portion of the Assets is taken in condemnation or under right of eminent domain by any Governmental Body, (i) the affected Asset shall be excluded from the Assets conveyed at Closing and shall be deemed an Excluded Asset and (ii) the amount calculated under Section 3.4(b) shall be increased by the Allocated Value for such Asset, if any.  If any action for condemnation or taking under right of eminent domain is pending or threatened with respect to any portion of the Assets after the Execution Date, but no taking of such Asset occurs prior to the Closing Date, Flatonia shall, at the Closing, sell, assign and convey to Sabine or subrogate Sabine to Flatonia’s right, title and interest (if any) in such taking, including any insurance claims, unpaid awards and other rights against Third Parties (other than Persons within the Flatonia Group) arising out of the taking, insofar as they are attributable to the Assets (or portions thereof) threatened to be taken.

Section 5.1 Generally.

 

(a) Any representation or warranty qualified to “PRP’s Knowledge” or with any similar knowledge qualification is limited to matters within the Actual Knowledge of the individuals listed in Section 5.1 of the Flatonia Disclosure Schedule.

 

(b) Subject to the foregoing provisions of this Section 5.1, the disclaimers and waivers contained in this Agreement and the other terms and conditions of this Agreement, PRP represents and warrants as of the Execution Date the matters set out in Section 5.2 through Section 5.7.

 

Section 5.2 Existence and Qualification.  PRP is a limited liability company, validly existing and in good standing under the Laws of its jurisdiction of organization and is duly qualified to do business in, and is in good standing in, the jurisdictions in which the conduct or nature of its business or the ownership, leasing, holding or operating of its properties makes such qualification necessary, except such jurisdictions where the failure to be so qualified or in good standing, individually or in the aggregate, would not have a Flatonia Material Adverse Effect.

 

Section 5.3 Authorization and Enforceability.  PRP has the requisite limited liability company power, authority and capacity to execute and deliver this Agreement and the other instruments and agreements to be executed and delivered by it as contemplated hereby and to consummate the transactions contemplated hereby and thereby.  The execution, delivery and

performance of this Agreement and all documents required to be executed and delivered by PRP at the Closing, and the performance of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary limited liability company action on the part of PRP.  This Agreement has been duly executed and delivered by PRP (and all documents required hereunder to be executed and delivered by PRP at the Closing will be duly executed and delivered by PRP) and this Agreement constitutes, and at the Closing such documents will constitute, the valid and binding obligations of PRP, enforceable in accordance with their terms, subject to any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other Laws, now or hereafter in effect, relating to or limiting creditors’ rights generally and to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at Law).

 

Section 5.4 No Conflicts.  The execution, delivery and performance of this Agreement by PRP, and consummation of the transactions contemplated by this Agreement, will not (a) violate any provision of the organizational documents of PRP, (b) conflict with or result in a violation of any provision of, or constitute (with or without the giving of notice or the passage of time or both) a default under, or give rise (with or without the giving of notice or the passage of time or both) to any right of termination, cancellation or acceleration under, any bond, debenture, note, mortgage, indenture, lease, contract, agreement or other instrument or obligation to which PRP is a party or by which PRP or any of its properties may be bound, (c) violate any Law applicable to PRP or (d) result in the creation or imposition of any claims, liens, mortgages, security interests and deeds of trust upon the properties of PRP, except any matters described in clauses (b), (c) or (d) of this Section 5.4 that, individually or in the aggregate, would not have or reasonably be expected to have a Flatonia Material Adverse Effect.

 

Section 5.5 Liability for Brokers’ Fees.  No Party other than PRP or Flatonia shall directly or indirectly have any responsibility, liability or expense, as a result of undertakings or agreements of PRP entered into in connection with this Agreement, for brokerage fees, finder’s fees, agent’s commissions or other similar forms of compensation in connection with this Agreement or any agreement or transaction contemplated hereby.

 

Section 5.6 Litigation.  There are no actions, suits or proceedings that are pending, or to PRP’s Knowledge, threatened in writing, before any Governmental Body against PRP that would not have or reasonably be expected to have a Flatonia Material Adverse Effect.

 

Section 5.7 Consents, Approvals or Waivers.  PRP’s execution, delivery and performance of this Agreement (and any document required to be executed and delivered by PRP at the Closing) is not and will not be subject to any consent, approval, or waiver from any Governmental Body or other Third Party.

 

Section 5.8 Bankruptcy.  There are no bankruptcy, insolvency, reorganization or receivership proceedings pending against, being contemplated by, or to PRP’s Knowledge, threatened against PRP.

Section 6.1 Generally.

 

(a) Any representation or warranty qualified to “Flatonia’s Knowledge” or with any similar knowledge qualification is limited to matters within the Actual Knowledge of the individuals listed in Section 6.1 of the Flatonia Disclosure Schedule.

 

(b) Subject to the foregoing provisions of this Section 6.1, the disclaimers and waivers contained in this Agreement and the other terms and conditions of this Agreement, Flatonia represents and warrants as of the Execution Date the matters set out in Section 6.2 through Section 6.12.

 

Section 6.2 Existence and Qualification.  Flatonia (a) is a limited liability company, validly existing and in good standing under the Laws of its jurisdiction of organization and is duly qualified to do business in, and is in good standing in, the jurisdictions in which the conduct or nature of its business or the ownership, leasing, holding or operating of its properties makes such qualification necessary, except such jurisdictions where the failure to be so qualified or in good standing, individually or in the aggregate, would not have a Material Adverse Effect on Flatonia and (b) has all requisite corporate power and authority to own, lease, operate and use the assets and properties currently owned, leased, operated and owned by it, including the Assets.

 

Section 6.3 Authorization and Enforceability.  Flatonia has the requisite limited liability company power, authority and capacity to execute and deliver this Agreement and the other instruments and agreements to be executed and delivered by it as contemplated hereby and to consummate the transactions contemplated hereby and thereby.  The execution, delivery and performance of this Agreement and all documents required to be executed and delivered by Flatonia at the Closing, and the performance of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary limited liability company action on the part of Flatonia.  This Agreement has been duly executed and delivered by Flatonia (and all documents required hereunder to be executed and delivered by Flatonia at the Closing will be duly executed and delivered by Flatonia) and this Agreement constitutes, and at the Closing such documents will constitute, the valid and binding obligations of Flatonia, enforceable in accordance with their terms, subject to any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other Laws, now or hereafter in effect, relating to or limiting creditors’ rights generally and to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at Law).

 

Section 6.4 No Conflicts.  Except as set forth on Section 6.4 of the Flatonia Disclosure Schedule, the execution, delivery and performance of this Agreement by Flatonia, and the consummation of the transactions contemplated by this Agreement, will not (a) violate any provision of the organizational documents of Flatonia, (b) conflict with or result in a violation of any provision of, or constitute (with or without the giving of notice or the passage of time or both) a default under, or give rise (with or without the giving of notice or the passage of time or both) to any right of termination, cancellation or acceleration under, any bond, debenture, note, mortgage, indenture, lease, contract, agreement or other instrument or obligation to which

Flatonia is a party or by which Flatonia or any of the Assets may be bound, (c) violate any Law applicable to Flatonia or any of the Assets or (d) result in the creation or imposition of any claims, liens, mortgages, security interests and deeds of trust upon the Assets other than a Permitted Encumbrance, except any matters described in clause (b), (c) or (d) of this Section 6.4 that, individually or in the aggregate, would not have or reasonably be expected to have a Flatonia Material Adverse Effect.

 

Section 6.5 Liability for Brokers’ Fees.  No Party other than PRP or Flatonia shall directly or indirectly have any responsibility, liability or expense, as a result of undertakings or agreements of Flatonia entered into in connection with this Agreement, for brokerage fees, finder’s fees, agent’s commissions or other similar forms of compensation in connection with this Agreement or any agreement or transaction contemplated hereby.

 

Section 6.6 Litigation.  Except as disclosed on Section 6.6 of the Flatonia Disclosure Schedule, there are no actions, suits or proceedings pending, or to Flatonia’s Knowledge, threatened in writing, before any Governmental Body that would have or reasonably be expected to have a Flatonia Material Adverse Effect.

 

Section 6.7 Taxes and Assessments.  Except as disclosed on Section 6.7 of the Flatonia Disclosure Schedule; provided, however, to the extent any of the following representations are made with respect to Property Taxes, such representations are made to Flatonia’s Knowledge:

 

(a) Flatonia has paid all Taxes due and payable by it that could give rise to a lien (other than a Permitted Encumbrance) on any of the Assets;

 

(b) Flatonia has timely filed all Tax Returns required to be filed by it as a result of the ownership of the Assets or the production of Hydrocarbons therefrom, and all such Tax Returns are true, correct and complete in all material respects;

 

(c) there is no action, suit, proceeding or audit currently pending (or threatened in writing) with respect to any such Taxes or any such Tax Returns;

 

(d) Flatonia has not agreed to extend the statute of limitations for assessment of any such Taxes;

 

(e) none of the Assets is properly reportable as owned by a partnership subject to Subchapter K of the Code for U.S. federal income tax purposes; and

 

(f) Flatonia is not a “foreign person” as defined in Section 1445(f)(3) of the Code.

Section 6.8 Material Contracts.

 

(a) Section 6.8 of the Flatonia Disclosure Schedule sets forth a list of the following Contracts affecting or relating to Flatonia’s interest in the Properties and to which Sabine, or an Affiliate of Sabine, is not a party or is not bound (the “Material Contracts”):

 

(i) Any Contract that can be reasonably expected to result in aggregate payments or receipts of revenue by Flatonia of more than $1,000,000 during the current or any subsequent year, including any transportation and processing or similar contract or Hydrocarbon sales contract, in each case, that is not terminable without penalty on 60 days’ or less notice (but specifically excluding customary joint operating agreements);

 

(ii) Any mortgage, deed of trust or security interest encumbering any Asset (other than Permitted Encumbrances) that will not be terminated at or prior to the Closing;

 

(iii) Any Contracts with Affiliates of Flatonia that will be binding on the Assets or Sabine after the Closing;

 

(iv) Any hedges, swaps or other derivatives Contracts that will be binding on the Assets or Sabine after the Closing; and

 

(v) Any Contract that constitutes an area of mutual interest agreement or any other agreement that purports to restrict, limit or prohibit the manner in which, or the locations in which, Flatonia conducts business within or adjacent to the Properties that will be binding on the Assets or Sabine after the Closing.

 

(b) Except as disclosed on Section 6.8 of the Flatonia Disclosure Schedule, each Material Contract set forth (or required to be set forth) on Section 6.8 of the Flatonia Disclosure Schedule is a legal, valid and binding obligation against Flatonia and, to the knowledge of Flatonia, each other party thereto, is enforceable in accordance with its terms against Flatonia, and to the Knowledge of Flatonia, each other party thereto and is in full force and effect, subject to any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other Laws, now or hereafter in effect, relating to or limiting creditors’ rights generally and to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at Law).  Neither Flatonia nor, to the Knowledge of Flatonia, any other party thereto, is in default under any Material Contract, and no event, occurrence, condition or act has occurred that, with the giving of notice, the lapse of time or the happening of any other event or condition, would become a default or event of default by Flatonia or, to the Knowledge of Flatonia, any other party thereto, that in each case would have or  reasonably be expected to have, individually or in the aggregate, a Flatonia Material Adverse Effect.

 

Section 6.9 Bonds and Letters of Credit.  Section 6.9 of the Flatonia Disclosure Schedule lists all bonds, letters of credit, guarantees and other similar commitments held by Flatonia that are required by Third Parties in order for Flatonia to own the Assets (the “Flatonia Financial Assurances”), excluding, however, any bonds, letters of credit, guarantees and other

similar commitments required by any Governmental Bodies in order for Flatonia or its Affiliates to own or operate the Assets.

 

Section 6.10 Bankruptcy.  There are no bankruptcy, insolvency, reorganization or receivership proceedings pending against, being contemplated by, or to Flatonia’s Knowledge, threatened against Flatonia.

 

Section 6.11 No Plan or Intention to Dispose.  Flatonia has no present plan or intention to dispose of the Earthstone Contribution Shares.

 

Section 6.12 Securities Law Investment Representation.  Flatonia is acquiring the securities representing the Earthstone Contribution Shares for its own account for investment purposes only and not with a view to the distribution thereof.  Flatonia is an accredited investor as that term is defined in Regulation D promulgated by the SEC under the Securities Act.  Flatonia understands and agrees that the Earthstone Contribution Shares have not been registered under the Securities Act or any state securities Laws, and that accordingly, they will not be fully transferable except as permitted under various exemptions contained in the Securities Act and applicable state securities Laws, or upon satisfaction of the registration and prospectus delivery requirements of the Securities Act and applicable state securities Laws.  Flatonia acknowledges that it must bear the economic risk of its investment in the Earthstone Contribution Shares for an indefinite period of time (subject, however, to the terms and conditions of the Registration Rights Agreement) since they have not been registered under the Securities Act and applicable state securities Laws and therefore cannot be sold unless they are subsequently registered or an exemption from registration is available. Absent an effective registration statement under the Securities Act and applicable state securities Laws covering the disposition of the Earthstone Contribution Shares, Flatonia will not sell, transfer, assign, pledge, hypothecate or otherwise dispose of any or all of the Earthstone Contribution Shares, absent a valid exemption from the registration and prospectus delivery requirements of the Securities Act and the registration or qualification requirements of any applicable state securities Laws.  Flatonia acknowledges that a legend setting forth the foregoing restrictions will be included on each of the certificates evidencing the Earthstone Contribution Shares.

 

Section 6.13 Defensible Title.  The Assets are free and clear of any liens, encumbrances, burdens, claims and other defects arising by, through or under Flatonia that would cause Flatonia not to have Defensible Title to the Assets.

 

Section 6.14 Certain Disclaimers

 

(a) .  THE EXPRESS REPRESENTATIONS AND WARRANTIES OF FLATONIA CONTAINED ABOVE IN THIS ARTICLE 6 (OR IN ANY CONVEYANCE EXECUTED PURSUANT TO THIS AGREEMENT) ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AND FLATONIA EXPRESSLY DISCLAIMS ANY AND ALL SUCH OTHER REPRESENTATIONS AND WARRANTIES.  WITHOUT LIMITATION OF THE FOREGOING, THE ASSETS SHALL BE CONVEYED PURSUANT HERETO WITHOUT ANY WARRANTY OR REPRESENTATION, WHETHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, RELATING TO TITLE TO THE ASSETS (EXCEPT AS SET FORTH IN THE CONVEYANCE EXECUTED PURSUANT TO THIS AGREEMENT) OR RELATING TO THE CONDITION, QUANTITY, QUALITY,

 

 

 

 

Section 7.1 Generally.

 

(a) Any representation or warranty qualified to the “knowledge of the Oak Valley Entities” or with any similar knowledge qualification is limited to matters within the Actual Knowledge of the individuals listed in Section 7.1 of the Oak Valley Disclosure Schedule.

 

(b) Subject to the foregoing provisions of this Section 7.1, the disclaimers and waivers contained in this Agreement and the other terms and conditions of this Agreement, each of Oak Valley Entity hereby jointly and severally represents and warrants as of the Execution Date the matters set out in Section 7.2 through Section 7.12.

Section 7.2 Existence and Qualification.  Each Oak Valley Entity is a limited liability company, validly existing and in good standing under the Laws of the state of its formation and is duly qualified to do business in, and is in good standing in, the jurisdictions in which the conduct or nature of its business or the ownership, leasing, holding or operating of its properties makes such qualification necessary, except such jurisdictions where the failure to be so qualified or in good standing, individually or in the aggregate, would not have a Material Adverse Effect on such Oak Valley Entity.

 

Section 7.3 Authorization and Enforceability; Ownership of Sabine and Oak Valley Operator.

 

(a) Each Oak Valley Entity has the requisite limited liability company power, authority and capacity to execute and deliver this Agreement and the other instruments and agreements to be executed and delivered by it as contemplated hereby and to consummate the transactions contemplated hereby and thereby.  The execution, delivery and performance of this Agreement and all documents required to be executed and delivered by each Oak Valley Entity at the Closing, and the performance of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary limited liability company action on the part of such Oak Valley Entity.  This Agreement has been duly executed and delivered by each Oak Valley Entity (and all documents required hereunder to be executed and delivered by such Oak Valley Entity at the Closing will be duly executed and delivered by such Oak Valley Entity) and this Agreement constitutes, and at the Closing such documents will constitute, the valid and binding obligations of each Oak Valley Entity, enforceable in accordance with their respective terms, subject to any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other Laws, now or hereafter in effect, relating to or limiting creditors’ rights generally and to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at Law).

 

(b) All of the issued and outstanding limited liability company interests of each of Sabine and Oak Valley Operator are held beneficially and of record by Oak Valley.  The limited liability company agreement of each of Sabine and Oak Valley Operator has been duly authorized, executed and delivered by Oak Valley and is, and will be at the Closing, a valid and legally binding agreement, enforceable against Sabine or Oak Valley Operator, as applicable, and its sole member in accordance with its terms.

 

Section 7.4 No Conflicts.  Except as disclosed on Section 7.4 of the Oak Valley Disclosure Schedule, the execution, delivery and performance of this Agreement by each Oak Valley Entity, and the transactions contemplated by this Agreement, will not (a) violate any provision of the organizational documents of any Oak Valley Entity, (b) conflict with or result in a violation of any provision of, or constitute (with or without the giving of notice or the passage of time or both) a default under, or give rise (with or without the giving of notice or the passage of time or both) to any right of termination, cancellation or acceleration under, any bond, debenture, note, mortgage, indenture, lease, contract, agreement or other instrument or obligation to which any Oak Valley Entity is a party or by which any Oak Valley Entity or any of its properties may be bound, (c) violate any Law applicable to such Oak Valley Entity or (d) result in the creation or imposition of any claims, liens, mortgages, security interests and deeds of trust upon the properties of each Oak Valley Entity, except any matters described in clause (b), (c) or

 (d) of this Section 7.4 that, individually or in the aggregate, would not have or reasonably be expected to have a Material Adverse Effect on any Oak Valley Entity.

 

Section 7.5 Liability for Brokers’ Fees.  No Party other than one or more Oak Valley Entities shall directly or indirectly have any responsibility, liability or expense, as a result of undertakings or agreements of any Oak Valley Entity, for brokerage fees, finder’s fees, agent’s commissions or other similar forms of compensation in connection with this Agreement or any agreement or transaction contemplated hereby.

 

Section 7.6 Litigation.  There are no actions, suits or proceedings pending, or to the knowledge of the Oak Valley Entities, threatened in writing, before any Governmental Body that would have or reasonably be expected to have a Material Adverse Effect on any Oak Valley Entity.

 

Section 7.7 Securities Law Compliance.  Sabine is acquiring the Assets for investment and not with a view toward, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling such Assets within the meaning of the Securities Act and applicable state securities Laws.

 

Section 7.8 Independent Evaluation.

 

(a) Sabine is knowledgeable of the oil and gas business (including the exploration and production and gathering segments thereof) and of the usual and customary practices of Persons involved in such business, including those in the areas where the Assets are located.  Sabine is capable of making such investigation, inspection, review and evaluation of the Assets as a prudent purchaser would deem appropriate under the circumstances including with respect to all matters relating to the Assets, their value, operation and suitability for investment.  Sabine has conducted its own investigation, inspection, review and evaluation of the Assets and acknowledges that as a result of its current partial ownership of the Assets, Sabine has full access to the Assets and to the appropriate personnel, premises and records for such purpose to its satisfaction.

 

(b) In making the decision to enter into this Agreement and to consummate the transactions contemplated hereby, each Oak Valley Entity acknowledges that it (i) has not relied upon any statements, representations (whether oral or written), or any information provided by PRP or Flatonia, (ii) has relied solely on the basis of its own independent due diligence investigation of the Assets and the terms and conditions of this Agreement, except to the limited extent of the representations,  warranties and covenants of PRP and Flatonia set forth in Article 5 and Article 6, respectively, and in each other document required to be executed and delivered by PRP and Flatonia at the Closing.

 

Section 7.9 Consents, Approvals or Waivers.  Except for Customary Post-Closing Consents and as set forth on Section 7.9 of the Oak Valley Disclosure Schedule, the execution, delivery and performance of this Agreement by each Oak Valley Entity (and any document required to be executed and delivered by any Oak Valley Entity at the Closing) is not and will not be subject to any consent, approval, or waiver from any Governmental Body or other Third Party.

Section 7.10 Bankruptcy.  There are no bankruptcy, insolvency, reorganization or receivership proceedings pending against, being contemplated by, or to the knowledge of the Oak Valley Entities, threatened against any Oak Valley Entity.

 

Section 7.11 Exchange Agreement Representations.  Except as disclosed on Section 7.11 of the Oak Valley Disclosure Schedule: (a) the representations and warranties made by Oak Valley in Sections 4.1, 4.2 and 4.3 of the Exchange Agreement are true and correct and (b) all other representations and warranties made by Oak Valley in the Exchange Agreement are true and correct in all material respects.

 

Section 7.12 No Plan or Intention to Dispose.  Oak Valley has no present plan or intention to dispose of the Earthstone Common Stock received pursuant to the Exchange Agreement.

 

Section 7.13 Limitation.  Each Oak Valley Entity acknowledges the following: THE ASSETS HAVE BEEN USED FOR EXPLORATION, DEVELOPMENT AND PRODUCTION OF HYDROCARBONS, AND THERE MAY BE PETROLEUM, PRODUCED WATER, WASTE, OR HAZARDOUS SUBSTANCES OR MATERIALS LOCATED IN, ON OR UNDER THE PROPERTIES OR ASSOCIATED WITH THE ASSETS.  EQUIPMENT AND SITES INCLUDED IN THE ASSETS MAY CONTAIN ASBESTOS, NORM OR OTHER HAZARDOUS SUBSTANCES.  NORM MAY AFFIX OR ATTACH ITSELF TO THE INSIDE OF WELLS, MATERIALS AND EQUIPMENT AS SCALE, OR IN OTHER FORMS.  THE WELLS, MATERIALS AND EQUIPMENT LOCATED ON THE PROPERTIES OR INCLUDED IN THE ASSETS MAY CONTAIN NORM AND OTHER WASTES OR HAZARDOUS SUBSTANCES.  NORM CONTAINING MATERIAL AND/OR OTHER WASTES OR HAZARDOUS SUBSTANCES MAY HAVE COME IN CONTACT WITH VARIOUS ENVIRONMENTAL MEDIA, INCLUDING WATER, SOILS OR SEDIMENT.  SPECIAL PROCEDURES MAY BE REQUIRED FOR THE ASSESSMENT, REMEDIATION, REMOVAL, TRANSPORTATION OR DISPOSAL OF ENVIRONMENTAL MEDIA, WASTES, ASBESTOS, NORM AND OTHER HAZARDOUS SUBSTANCES FROM THE ASSETS.

 

 

 

Section 8.1 Generally.

 

(a) Any representation or warranty qualified to “Earthstone’s Knowledge” or with any similar knowledge qualification is limited to matters within the Actual Knowledge of the individuals listed in Section 8.1 of the Earthstone Disclosure Schedule.

 

(b) Subject to the foregoing provisions of this Section 8.1, the disclaimers and waivers contained in this Agreement and the other terms and conditions of this Agreement, Earthstone represents and warrants as of the Execution Date the matters set out in Section 8.2 through Section 8.11.

Section 8.2 Existence and Qualification.  Earthstone is a corporation, validly existing and in good standing under the Laws of the State of Delaware and is duly qualified to do business in, and is in good standing in, the jurisdictions in which the conduct or nature of its business or the ownership, leasing, holding or operating of its properties makes such qualification necessary, except such jurisdictions where the failure to be so qualified or in good standing, individually or in the aggregate, would not have a Material Adverse Effect on Earthstone.

 

Section 8.3 Authorization and Enforceability.  Subject to the receipt of the Earthstone Stockholder Approval, (a) Earthstone has the requisite corporate power, authority and capacity to execute and deliver this Agreement and the other instruments and agreements to be executed and delivered by it as contemplated hereby and to consummate the transactions contemplated hereby and thereby; (b) the execution, delivery and performance of this Agreement and all documents required to be executed and delivered by Earthstone at the Closing, and the performance of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action on the part of Earthstone; and (c) this Agreement has been duly executed and delivered by Earthstone (and all documents required hereunder to be executed and delivered by Earthstone at the Closing will be duly executed and delivered by Earthstone) and this Agreement constitutes, and at the Closing such documents will constitute, the valid and binding obligations of Earthstone, enforceable in accordance with their terms, subject to any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other Laws, now or hereafter in effect, relating to or limiting creditors’ rights generally and to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at Law).

 

Section 8.4 Capitalization of Earthstone.

 

(a) All of the outstanding shares of Earthstone Common Stock have been duly authorized and validly issued in accordance with the Certificate of Incorporation, are fully paid and nonassessable, and, as of the respective dates of the SEC Filings and Earthstone Financial Statements (in each case, as defined in the Exchange Agreement, but determined as of the Execution Date), were issued and held as described therein.  On the date hereof, there are 1,737,420 issued and outstanding shares of Earthstone Common Stock. On the date hereof, Earthstone has no preferred stock or other equity securities issued or outstanding.

 

(b) Subject to the receipt of the Earthstone Stockholder Approval, the shares of Earthstone Common Stock to be issued pursuant to this Agreement will be duly authorized in accordance with the Certificate of Incorporation, and, when issued and delivered pursuant to this Agreement in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and will be issued free and clear of any lien, claim or encumbrance.

 

(c) Except for the shares of Earthstone Common Stock constituting the Earthstone Contribution Shares and outstanding options, warrants or other rights to purchase Earthstone Common Stock set forth in the Earthstone Annual Report (as defined in the Exchange Agreement) or as provided in the Earthstone Rights Agreement or the Exchange Agreement, there are no preemptive rights or other rights to subscribe for or to purchase any shares of Earthstone Common Stock.  Except for the shares of Earthstone Common Stock to be issued

pursuant to this Agreement or the Exchange Agreement (as set forth on Section 8.4 of the Earthstone Disclosure Schedule), as of the date hereof, there are no shares of Earthstone Common Stock or shares of Earthstone preferred stock held in the treasury of Earthstone, there are no outstanding options, warrants or other rights to purchase, agreements or other obligations to issue, or rights to convert any obligations into or exchange any securities for, shares of Earthstone Common Stock or other securities of Earthstone.

 

(d) Subject to the receipt of the Earthstone Stockholder Approval, Earthstone has all requisite power and authority to issue, exchange and deliver the Earthstone Contribution Shares in accordance with and upon the terms and conditions set forth in this Agreement.  As of the Closing Date, all corporate action for the authorization, issuance, exchange and delivery of the Earthstone Contribution Shares shall have been validly taken, and no other authorization by any of such parties is required therefor.

 

Section 8.5 No Conflicts

 

(a) .  Except for the receipt of the Earthstone Stockholder Approval, the required approval of NYSE MKT and as otherwise indicated on Section 8.5 of the Earthstone Disclosure Schedule, the execution, delivery and performance by Earthstone of this Agreement and the consummation by Earthstone of the transactions contemplated hereby do not and will not (a) conflict with or result in a violation of any provision of its Certificate of Incorporation or bylaws, (b) conflict with or result in a violation of any provision of, or constitute (with or without the giving of notice or the passage of time or both) a default under, or give rise (with or without the giving of notice or the passage of time or both) to any right of termination, cancellation or acceleration under, any bond, debenture, note, mortgage, indenture, lease, contract, agreement or other instrument or obligation to which Earthstone is a party or by which Earthstone or any of its properties may be bound, (c) violate any Law applicable to Earthstone or (d) result in the creation or imposition of any claims, liens, mortgages, security interests and deeds of trust upon the properties of Earthstone, except any matters described in clause (b), (c) or (d) of this Section 8.5 that, individually or in the aggregate, would not have or reasonably be expected to have a Material Adverse Effect on Earthstone.

 

Section 8.6 Liability for Brokers’ Fees

 

(a) .  No Party other than Earthstone shall directly or indirectly have any responsibility, liability or expense, as a result of undertakings or agreements of Earthstone, for brokerage fees, finder’s fees, agent’s commissions or other similar forms of compensation in connection with this Agreement or any agreement or transaction contemplated hereby.

 

Section 8.7 Litigation.  There are no actions, suits or proceedings pending, or to Earthstone’s Knowledge, threatened in writing, before any Governmental Body that would have or reasonably be expected to have a Material Adverse Effect on Earthstone.

 

Section 8.8 Governmental Approvals.  To the Knowledge of Earthstone, no material consent, approval, order or authorization of, or declaration, filing or registration with, any Governmental Body is required to be obtained or made by Earthstone in connection with the execution, delivery or performance by Earthstone of this Agreement or the consummation by it of the transactions contemplated hereby, other than (a) compliance with any applicable federal or state securities or takeover Laws, including the filing of the Proxy Statement, as well as the filing of such other forms, notices and other documents as required under federal securities and state

blue sky Laws and (b) filings with Governmental Bodies to occur in the ordinary course following the consummation of the transactions contemplated hereby.

 

Section 8.9 Securities Laws.  Assuming the representations of Flatonia contained in Section 6.11 of this Agreement are true and correct, the offer and sale of the shares comprising the Earthstone Contribution Shares (a) are and will be exempt from the registration and prospectus delivery requirements of the Securities Act, (b) have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws, and (c) are and will be accomplished in conformity with all other federal and applicable state securities Laws.

 

Section 8.10 Earthstone Rights Agreement.  Other than under the Earthstone Rights Agreement, Earthstone does not have any outstanding rights or “poison pills” other than any such rights or “poison pills” that will expire or terminate (without payment of any consideration by any Party) prior to the Closing Date.  In furtherance of the foregoing, the Earthstone Board has taken appropriate action such that in connection with the consummation of the transactions contemplated by this Agreement (a) none of Oak Valley and any of its “Affiliates” or “Associates” (as each such term is defined in the Earthstone Rights Agreement) and PRP and Flatonia and any of their respective “Affiliates” or “Associates” are “Beneficial Owners” (as defined in the Earthstone Rights Agreement), (b) none of Oak Valley and any of its “Affiliates” or “Associates” and PRP and Flatonia and any of their respective “Affiliates” or “Associates” are “Acquiring Persons” (as defined in the Earthstone Rights Agreement”); (c) no “Distribution Date” or “Shares Acquisition Date” (each as defined in the Earthstone Rights Agreement) will be triggered as a result of the execution of this Agreement or the consummation pursuant to this Agreement of the acquisition of the Assets and the issuance of the Earthstone Contribution Shares and the other transactions contemplated by this Agreement pursuant to the terms hereof; and (d) the Earthstone Rights Agreement has been amended to exempt this Agreement and the transactions contemplated hereby and thereby from the application of the Earthstone Rights Agreement.

 

Section 8.11 Exchange Agreement Representations

 

Section 8.12 .  Except as disclosed on Section 8.11 of the Earthstone Disclosure Schedule: (a) the representations and warranties made by Earthstone in Sections 3.1, 3.2, 3.3 and 3.34 of the Exchange Agreement are true and correct and (b) all other representations and warranties made by Earthstone in the Exchange Agreement are true and correct in all material respects.

 

 

 

Section 9.1 Access

 

(a) From and after the Execution Date until the Closing, upon reasonable notice and subject to applicable Laws relating to the exchange of information, each Party shall, and shall cause each of its Subsidiaries to afford to the other Parties and their respective Representatives reasonable access during normal business hours (and, with respect to books and records, the right to copy) to all of its and its Subsidiaries’ properties, commitments, books, contracts, records and correspondence (in each case, whether in physical or electronic form),

officers, employees, accountants, counsel, financial advisors and other Representatives, in each case, to the extent reasonably related to the transactions contemplated by this Agreement.  Each Party shall furnish promptly to each other Party (i) a copy of each report, schedule and other document filed or submitted by it pursuant to the requirements of federal or state securities laws and a copy of any communication (including “comment letters”) received by such Party from the SEC concerning compliance with securities Laws and (ii) all other information concerning its and its Subsidiaries’ business, properties and personnel as the other Parties may reasonably request.  Except for disclosures permitted by the terms of this Agreement, each Party and its Representatives shall hold information received from each other Party pursuant to this Section 9.1 in confidence in accordance with the terms of Section 9.3(b).

 

(b) This Section 9.1 shall not require any Party to permit any access, or to disclose any information, that in the reasonable, good faith judgment of such Party would reasonably be expected to result in (i) any violation of any contract or applicable Law to which such Party or its Subsidiaries is a party or is subject or cause any privilege (including attorney-client privilege) that such Party or any of its Subsidiaries would be entitled to assert to be undermined with respect to such information and such undermining of such privilege could in such Party’s good faith judgment adversely affect in any material respect such Party’s position in any pending or, what such Party believes in good faith could be, future litigation or (ii) if such Party or any of its Subsidiaries, on the one hand, and any of the other Parties or any of their Subsidiaries, on the other hand, are adverse parties in a litigation, such information being reasonably pertinent thereto; provided, however, that, in the case of clause (i), the Parties shall cooperate in seeking to find a way to allow disclosure of such information (including by entering into a joint-defense or similar agreement) to the extent doing so (1) would not (in the good faith belief of the Party being requested to disclose the information) reasonably be likely to result in the violation of any such contract or applicable Law or reasonably be likely to cause such privilege to be undermined with respect to such information or (2) could reasonably (in the good faith belief of the Party being requested to disclose the information) be managed through the use of customary “clean-room” arrangements pursuant to which appropriately designated Representatives of the other Parties shall be provided access to such information; provided, further that the Party being requested to disclose the information shall (x) notify the other Parties that such disclosures are reasonably likely to violate its or its Subsidiaries’ obligations under any such contract or applicable Law or are reasonably likely to cause such privilege to be undermined, (y) communicate to the other Parties in reasonable detail the facts giving rise to such notification and the subject matter of such information (to the extent it is able to do so in accordance with the first proviso in this Section 9.1(b)) and (z) in the case where such disclosures are reasonably likely to violate its or its Subsidiaries’ obligations under any contract, use reasonable commercial efforts to seek consent from the applicable third party to any such contract with respect to the disclosures prohibited thereby (to the extent not otherwise expressly prohibited by the terms of such contract).

 

(c) No investigation, or information received, pursuant to this Section 9.1 will modify any of the representations and warranties of the Parties.

 

Section 9.2 Government Reviews.  In a timely manner, the Parties shall (a) make all required filings, prepare all required applications and conduct negotiations with each Governmental Body as to which such filings, applications or negotiations are necessary or

appropriate in the consummation of the transactions contemplated hereby and (b) provide such information as each may reasonably request to make such filings, prepare such applications and conduct such negotiations.  Each Party shall reasonably cooperate with and use reasonable efforts to assist the other with respect to such filings, applications, and negotiations.

 

Section 9.3 Public Announcements; Confidentiality.

 

(a) The initial press release with respect to the execution of this Agreement shall be a joint press release to be reasonably agreed upon by the Parties.  Thereafter, no Party shall issue or cause the publication of any press release or other public announcement (to the extent previously issued or made in accordance with this Agreement) with respect to this Agreement or the transactions contemplated hereby without the prior consent of the other Parties (which consent shall not be unreasonably withheld or delayed), except as may be required by applicable Law or by any applicable listing agreement with the NYSE MKT as determined in the good faith judgment of Earthstone (in which case Earthstone shall not issue or cause the publication of such press release or other public announcement without prior consultation with the other Parties); provided, however, that Earthstone shall not be required by this Section 9.3(a) to consult with any other Party with respect to a public announcement in connection with the receipt and existence of an Alternative Proposal (as defined in the Exchange Agreement) that the Earthstone Board believes is bona fide and matters related thereto or an Adverse Recommendation Change (as defined in the Exchange Agreement) but nothing in this proviso shall limit any obligation of Earthstone under Section 5.3(c) of the Exchange Agreement to advise and inform Oak Valley or under Section 9.3(c) to advise and inform PRP; provided further, that each Party and their respective controlled affiliates may make statements that are consistent with statements made in previous press releases, public disclosures or public statements made by the Parties in compliance with this Section 9.3(a).

 

(b) Notwithstanding anything in Section 9.3(a) to the contrary, the Parties shall keep all information and data relating to this Agreement and the transactions contemplated hereby strictly confidential except for disclosures to Representatives of the Parties and any disclosures required to perform this Agreement; provided, however, that the foregoing shall not restrict disclosures that (i) are necessary for a Party to perform this Agreement (including such disclosure to Governmental Bodies or Third Parties holding Preferential Rights, rights of consent or other rights that may be applicable to the transactions contemplated by this Agreement as is reasonably necessary to provide notices, seek waivers, amendments or termination of such rights, or seek such consents); (ii) are required (upon advice of counsel) by applicable securities or other Laws or the applicable rules of any stock exchange having jurisdiction over the Parties or their respective Affiliates; or (iii) are otherwise subject to an undertaking of confidentiality from each Person receiving such information in form reasonably acceptable to the non-disclosing Parties.

 

(c) Earthstone and Oak Valley shall promptly advise PRP, orally and in writing, and in no event later than three (3) business days after receipt, if any proposal, offer, inquiry is received by or any discussions or negotiations are sought to be initiated with, Earthstone in respect of any Alternative Proposal and shall, in any such notice to PRP, indicate the identity of the Person making such proposal, offer or inquiry and the terms and conditions of any proposals or offers or the nature of any inquiries, and thereafter shall promptly keep PRP reasonably informed of all material developments affecting the status and terms of any such

proposals, offers, inquiries or requests and of the status of any such discussions or negotiations; provided, however, that no such notice shall be required in the event that such proposal, offer or inquiry does not and could not reasonably be expected to adversely affect Flatonia or PRP or to delay or impair the consummation of the transactions contemplated by this Agreement.

 

Section 9.4 Operation of Business.  Except as to (a) the matters set forth on Section 9.4 of the Flatonia Disclosure Schedule and (b) any other matters approved by the Oak Valley Entities, from the Execution Date until the Closing Date, Flatonia:

 

(i) will conduct its business related to the Assets in the ordinary course consistent with recent practices;

 

(ii) will not voluntarily terminate, materially amend, execute or extend any Material Contract;

 

(iii) will not transfer, sell, swap, hypothecate, encumber or otherwise dispose of any Assets, except for sales and dispositions of Hydrocarbon production in the ordinary course of business consistent with recent practices;

 

(iv) will pay, when due, expenses, taxes, revenues, and other obligations with respect to the Assets, and will not waive any rights of substantial value with respect to any of the Assets; and

 

(v) will not enter into an agreement with respect to any of the foregoing.

 

Section 9.5 Further Assurances.  After Closing, the Parties agree to take such further actions and to execute, acknowledge and deliver all such further documents as are reasonably requested by any other Party for carrying out the purposes of this Agreement or of any document delivered pursuant to this Agreement.

 

Section 9.6 Operating Agreement.  At Closing, Sabine, Oak Valley Operator and Flatonia shall execute the form of Joint Operating Agreement attached hereto as Exhibit C-1 (the “Amended Operating Agreement”) and the form of Memorandum of Operating Agreement attached hereto as Exhibit C-2 (the “Memorandum of Operating Agreement”).

 

Section 9.7 Proxy Statement; Earthstone Stockholder Meeting; Exchange Agreement.  Subject to Section 5.3 of the Exchange Agreement, Earthstone and Oak Valley agree to comply with the provisions of Section 5.1 of the Exchange Agreement and, in connection therewith, will include in the Proxy Statement (as defined in the Exchange Agreement) (x) the solicitation of proxies from Earthstone’s stockholders of the stockholder approval required under applicable Law in connection with the issuance of the Earthstone Contribution Shares hereunder and (y) the Earthstone Board’s unanimous recommendation that Earthstone’s stockholders vote in favor of granting such stockholder approval (the “Earthstone Contribution Board Recommendation”).  In the event of an Adverse Recommendation Change (as defined in the Exchange Agreement), the Earthstone Board may withdraw, modify or qualify, or propose publicly to withdraw, modify or qualify, the Earthstone Contribution Board Recommendation.  Earthstone and Oak Valley agree that they will not amend, modify or waive any provision under the Exchange Agreement in a

manner that would, or could be reasonably expected to, adversely affect PRP or Flatonia or delay or impair the consummation of the transactions contemplated by this Agreement without the prior written consent of PRP, and each reference in this Agreement to the Exchange Agreement (and any document the form of which is specified as an attachment to the Exchange Agreement) shall refer to the Exchange Agreement (and any such other document in the form attached to the Exchange Agreement) executed on May 15, 2014, as amended on September 26, 2014.

 

Section 9.8 Registration Rights.  At the Closing, Earthstone, Flatonia, PRP and Oak Valley will execute and deliver a Registration Rights Agreement relating to the Earthstone Contribution Shares substantially in the form attached hereto as Exhibit D (the “Registration Rights Agreement”).

 

Section 9.9 Listing of the Earthstone Contribution Shares.  Earthstone shall use its reasonable best efforts to cause the Earthstone Contribution Shares to be approved for listing on the NYSE MKT prior to the Closing, subject to official notice of issuance.

 

Section 9.10 Flatonia’s Right to Designate a Board Member and Board Observer Rights.

 

(a) From and after the Closing Date, Earthstone and Oak Valley shall, upon the request of Flatonia, take all required action to (a) increase the size of the Earthstone Board to at least 8 directors and (b) appoint one individual designated in writing by the Flatonia Board of Managers to serve as a member of the Earthstone Board, which director will be designated as a Class III director of Earthstone (the “Flatonia Designee”).  Subject to the provisions of the last sentence of this Section 9.10(a), the Board of Managers of Flatonia will continue to have the right to designate a Flatonia Designee to serve as a director of Earthstone, and Earthstone and the Earthstone Board will cause each such Flatonia Designee to be nominated to serve as a director and will recommend that Earthstone’s stockholders vote in favor of the election of such Flatonia Designee.  If the Flatonia Designee ceases to serve as a member of the Earthstone Board for any reason, then Flatonia shall have the right to designate a successor in accordance with this Section 9.10(a).   Any voting securities of Earthstone held by Oak Valley or any of its Affiliates will be voted (which term will include the execution of a written consent of stockholders) in favor of the election of the Flatonia Designee and will not be voted in favor of any action that is inconsistent with the rights set forth in this Section 9.10(a).  Flatonia (and any assignee permitted under this sentence) will have the right to assign all, but not less than all, of its rights under this Section 9.10(a) to PRP or to any Affiliate of PRP.  Notwithstanding the foregoing provisions of this Section 9.10(a), Flatonia’s rights under this Section 9.10(a) shall be extinguished if at any time PRP and its Affiliates collectively own less than 7.5% of the issued and outstanding shares of Earthstone Common Stock.

 

(b) During any period in which Flatonia has the right to designate a Flatonia Designee to the Earthstone Board as set forth in Section 9.10(a) but (x) a Flatonia Designee is not serving on the Earthstone Board and (y) Flatonia has elected not to designate a Flatonia Designee, Flatonia may designate one individual who will not be a member of the Earthstone Board, but who may attend and act as an observer (the “Flatonia Observer”) at any meeting (whether in person, telephonic, electronic or otherwise) of the Earthstone Board.  The Flatonia Observer will not count as a member of the Earthstone Board for any purpose, including, without

limitation, for voting purposes or for purposes of determining whether a quorum exists.  The Flatonia Observer will execute a confidentiality agreement on a mutually agreeable form with Earthstone as a condition to being permitted to attend such meetings.  Earthstone shall give the Flatonia Observer at least two days’ prior written notice of each such meeting.

 

Section 9.11 Notice Required by Rule 14f-1 under Exchange Act.  Any notice required under Rule 14f-1 under the Exchange Act concerning the changes in the composition of the Earthstone Board as herein provided shall be made on a timely basis.

 

Section 9.12 Section 16 Matters.  Prior to the Closing Date, Earthstone, Oak Valley, PRP and Flatonia shall take all such steps as may be required (to the extent permitted under applicable Law) to cause any acquisitions of Earthstone Contribution Shares resulting from the transactions contemplated by this Agreement by each person who is subject to the reporting requirements of Section 16(a) of the Exchange Act, or will become subject to such reporting requirements, with respect to Earthstone, to be exempt under Rule 16b-3 promulgated under the Exchange Act.

 

Section 9.13 Tax Treatment of the Transaction.  For U.S. federal income tax purposes (and for purposes of any state or local taxes that follow the federal treatment), the Parties hereto shall, and shall cause their Affiliates to, treat the following as a single integrated transaction qualifying (in whole or in part) for nonrecognition of gain or loss pursuant to Section 351 of the Code: (a) the Contribution and any Post-Closing Payment or other payment payable by Flatonia to Sabine pursuant to Section 11.5, Article 13 or Article 14 in exchange for the Earthstone Contribution Shares and (b) the “Exchange” (as defined and set forth in the Exchange Agreement) by Oak Valley of the membership interests of Oak Valley Operator, EF Non-Op, LLC and Sabine to Earthstone in exchange for Earthstone Common Stock.  The Parties (or their respective members or stockholders) shall not take any position inconsistent with such treatment on any Tax Return unless otherwise required by Law following a final determination as defined in Section 1313 of the Code.  Any Post-Closing Payment or other payment payable by Sabine to Flatonia in cash pursuant to Section 11.5, Article 13 or Article 14 shall be treated as money received by Flatonia in such transaction as described in Section 351(b) of the Code.

 

Section 9.14 Post-Closing Actions of Sabine.  From and after the closing of the transactions contemplated by the Exchange Agreement, Earthstone shall cause Sabine to comply with its covenants, agreements and obligations under this Agreement and any document delivered in connection with the Closing pursuant to this Agreement.

 

Section 9.15 Earthstone Voting Agreement.  Contemporaneously with the execution of this Agreement, Ray Singleton and Flatonia will enter into an amended and restated voting agreement pursuant to which Ray Singleton, as a stockholder of Earthstone Common Stock, will vote his shares of Earthstone Common Stock in favor of the transactions contemplated by the Exchange Agreement and this Agreement, including the issuance of the Earthstone Contribution Shares to Flatonia.

Section 10.1 Mutual Conditions to Closing.  The obligations of each Party to consummate the transactions contemplated by this Agreement are subject to the satisfaction (or waiver by such Party) on or prior to the Closing of each of the following conditions precedent:

 

(a) No Injunction.  On the Closing Date, no Order restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement shall have been issued and remain in force, and no suit, action or other proceeding by any Governmental Body seeking to restrain, enjoin or otherwise prohibit the consummation of the transactions contemplated by this Agreement shall be pending before any Governmental Body;

 

(b) Governmental Consents.  All material consents and approvals of any Governmental Body required for the consummation of the transactions contemplated under this Agreement, except Customary Post-Closing Consents, shall have been granted, or the necessary waiting period shall have expired, or early termination of the waiting period shall have been granted;

 

(c) Closing of the Transactions Contemplated by the Exchange Agreement.  The transactions contemplated by the Exchange Agreement shall have been consummated in accordance with the Exchange Agreement without any waiver or modification thereof except as permitted pursuant to Section 9.7.

 

(d) Earthstone Stockholder Approval of Earthstone Contribution Shares.  The Earthstone Stockholder Approval shall have been obtained in accordance with the General Corporation Law of the State of Delaware, the Certificate of Incorporation and the Bylaws of Earthstone; and

 

(e) Listing of Earthstone Contribution Shares.  The Earthstone Contribution Shares deliverable to Flatonia as contemplated by this Agreement shall have been approved for listing on the NYSE MKT, subject to official notice of issuance.

 

Section 10.2 Flatonia’s and PRP’s Conditions to Closing.  In addition to the conditions set forth in Section 10.1, the obligations of PRP and Flatonia to consummate the transactions contemplated by this Agreement are subject to the satisfaction (or waiver by PRP and Flatonia) on or prior to the Closing of each of the following conditions precedent:

 

(a) Representations.

 

(i) (A) The representations and warranties of the Oak Valley Entities set forth in Section 7.2 and Section 7.3, shall be true and correct in all respects, in each case both when made and at and as of the Closing Date, as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date); and (B) all other representations and warranties of the Oak Valley Entities set forth herein shall be true and correct both when made and at and as of the Closing Date, as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date), except, in the case of this clause (B), where the failure of such

representations and warranties to be so true and correct (without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth in any individual such representation and warranty) does not have, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; and

 

(ii) (A) the representations and warranties of Earthstone set forth in Section 8.2, Section 8.3 and Section 8.4 of this Agreement shall be true and correct in all respects, in each case both when made and at and as of the Closing Date as though made on and as of such time (other than representations and warranties that refer to a specified date which need only be true and correct on and as of such specified date) and (B) all other representations and warranties of Earthstone set forth herein shall be true and correct both when made and at and as of the Closing Date, as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date), except, in the case of this clause (B), where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth in any individual such representation and warranty) does not have, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; and

 

(b) Performance of Covenants.

 

(i) The Oak Valley Entities shall have performed and observed, in all material respects, all covenants and agreements to be performed or observed by them under this Agreement prior to or on the Closing Date; and

 

(ii) Earthstone shall have performed and observed, in all material respects, all covenants and agreements to be performed or observed by it under this Agreement prior to or on the Closing Date.

 

Section 10.3 Oak Valley Entities’ Conditions to Closing.  In addition to the conditions set forth in Section 10.1, the obligations of the Oak Valley Entities to consummate the transactions contemplated by this Agreement are subject to the satisfaction (or waiver by the Oak Valley Entities) on or prior to the Closing of each of the following conditions precedent:

 

(a) Representations.

 

(i) (A) The representations and warranties of PRP and Flatonia set forth in Sections 5.2 and 5.3 and Sections 6.2 and 6.3, respectively, shall be true and correct in all respects, in each case both when made and at and as of the Closing Date, as if made at and as of such time; and (B) all other representations and warranties of PRP and Flatonia set forth herein shall be true and correct both when made and at and as of the Closing Date, as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date), except, in the case of this clause (B), where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth in any individual such representation and warranty) does not have, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; and

(ii) (A) the representations and warranties of Earthstone set forth in Section 8.2, Section 8.3 and Section 8.4 shall be true and correct in all respects, in each case both when made and at and as of the Closing Date, as if made at and as of such time; and (B) all other representations and warranties of Earthstone set forth herein shall be true and correct both when made and at and as of the Closing Date, as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date), except, in the case of this clause (B), where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth in any individual such representation and warranty) does not have, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; and

 

(b) Performance.

 

(i) PRP and Flatonia shall have performed and observed, in all material respects, all covenants and agreements to be performed or observed by them under this Agreement prior to or on the Closing Date; and

 

(ii) Earthstone shall have performed and observed, in all material respects, all covenants and agreements to be performed or observed by it under this Agreement prior to or on the Closing Date.

 

Section 10.4 Earthstone’s Conditions to Closing.  In addition to the conditions set forth in Section 10.1, the obligations of Earthstone to consummate the transactions contemplated by this Agreement are subject to the satisfaction (or waiver by Earthstone) on or prior to the Closing of each of the following conditions precedent:

 

(a) Representations.

 

(i) (A) The representations and warranties of PRP and Flatonia set forth in Sections 5.2 and 5.3 and Sections 6.2 and 6.3, respectively, shall be true and correct in all respects, in each case both when made and at and as of the Closing Date, as if made at and as of such time; and (B) all other representations and warranties of PRP and Flatonia set forth herein shall be true and correct both when made and at and as of the Closing Date, as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date), except, in the case of this clause (B), where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth in any individual such representation and warranty) does not have, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; and

 

(ii) (A) the representations and warranties of the Oak Valley Entities set forth in Section 7.2 and Section 7.3, shall be true and correct in all respects, in each case both when made and at and as of the Closing Date, as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date); and (B) all other representations and warranties of the Oak Valley Entities set forth herein shall be true and correct both when made and at and as of the Closing Date, as if made at

and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date), except, in the case of this clause (B), where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth in any individual such representation and warranty) does not have, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; and

 

(b) Performance.

 

(i) PRP and Flatonia shall have performed and observed, in all material respects, all covenants and agreements to be performed or observed by them under this Agreement prior to or on the Closing Date; and

 

(ii) the Oak Valley Entities shall have performed and observed, in all material respects, all covenants and agreements to be performed or observed by it under this Agreement prior to or on the Closing Date.

 

Section 10.5 Frustration of Closing Conditions.  No Party hereto may rely on the failure of any condition set forth in Section 10.1, 10.2, 10.3 or 10.4, as the case may be, to be satisfied if the failure of such condition to be satisfied was caused by such Party’s failure to use its reasonable best efforts to consummate the transactions contemplated hereby, or other breach of or noncompliance with this Agreement.

Section 11.1 Time and Place of Closing.  Consummation of the contribution transaction as contemplated by this Agreement (the “Closing”), shall, unless otherwise agreed to in writing by the Parties, take place at the offices of Davis Graham & Stubbs, LLP, 1550 Seventeenth Street, Suite 500, Denver, Colorado 80202, immediately following closing of the Exchange Agreement, or if all conditions in Article 10 to be satisfied prior to the Closing have not yet been satisfied or waived by such date, within five Business Days of such conditions having been satisfied or waived (in each case, excluding any conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment or waiver of such conditions), subject to the Parties’ rights to terminate this Agreement under Article 12.  The date on which the Closing occurs is herein referred to as the “Closing Date.”

 

Section 11.2 Obligations of PRP and Flatonia at Closing.  At the Closing, upon the terms and subject to the conditions of this Agreement, and subject to the simultaneous performance by the other Parties of their respective obligations pursuant to Section 11.3 and Section 11.4, PRP and Flatonia shall deliver or cause to be delivered:

 

(a) to Sabine, counterparts of the Conveyance, in sufficient duplicate originals to allow recording in all appropriate jurisdictions and offices, duly executed by Flatonia and acknowledged before a notary public;

 

(b) to Sabine and Oak Valley Operator, counterparts of the Amended Operating Agreement, duly executed by Flatonia and acknowledged before a notary public;

(c) to Sabine and Oak Valley Operator, counterparts of the Memorandum of Operating Agreement, duly executed by Flatonia and acknowledged before a notary public;

 

(d) to Earthstone and Oak Valley, counterparts of the Flatonia Registration Rights Agreement, duly executed by Flatonia;

 

(e) to the Oak Valley Parties, a certificate duly executed by an authorized executive officer of PRP and an authorized executive officer of Flatonia, dated as of the Closing Date, certifying on behalf of PRP and Flatonia that the conditions set forth in Sections 10.3(a)(i) and 10.3(b)(i) have been fulfilled;

 

(f) to Earthstone, a certificate duly executed by an authorized executive officer of PRP and an authorized executive officer of Flatonia, dated as of the Closing Date, certifying on behalf of PRP and Flatonia that the conditions set forth in Sections 10.4(a)(i) and 10.4(b)(i) have been fulfilled;

 

(g) to Sabine, an executed statement described in Treasury Regulation § 1.1445-2(b)(2) certifying that Flatonia is not a “foreign person” within the meaning of Section 1445(f)(3) of the Code;

 

(h) to the Oak Valley Parties and Earthstone, with respect to any approvals received by PRP or Flatonia pursuant to a filing or application under Section 9.2, copies of those approvals;

 

(i) if applicable, to Sabine, a wire transfer in immediately available funds of the Closing Payment to the account designated by Sabine, which designation shall be furnished to Flatonia no later than two days prior to the Closing Date;

 

(j) to Sabine, a partial release of liens, mortgages, security interests, pledges, restrictions or any other type of burden or encumbrance (i) covering the interest in the Assets being assigned by Flatonia in the Conveyance, and (ii) arising under or created pursuant to the WF Deed of Trust, in a form reasonably satisfactory to Sabine; and

 

(k) all other instruments, documents and other items reasonably necessary to effectuate the terms of this Agreement as may be reasonably requested by the other Parties.

 

Section 11.3 Obligations of the Oak Valley Entities at Closing.  At the Closing, upon the terms and subject to the conditions of this Agreement, and subject to the simultaneous performance by the other Parties of their respective obligations pursuant to Section 11.2 and Section 11.4, the Oak Valley Entities shall deliver or cause to be delivered:

 

(a) if applicable, to Flatonia, a wire transfer in immediately available funds of the Closing Payment to the account designated by Flatonia, which designation shall be furnished to Sabine no later than two days prior to the Closing Date;

 

(b) to Flatonia, counterparts of the Conveyance, in sufficient duplicate originals to allow recording in all appropriate jurisdictions and offices, duly executed by Sabine and acknowledged before a notary public;

(c) to Flatonia, counterparts of the Amended Operating Agreement, duly executed by Sabine and Oak Valley Operator and acknowledged before a notary public;

 

(d) to Flatonia, counterparts of the Memorandum of Operating Agreement, duly executed by Sabine and Oak Valley Operator and acknowledged before a notary public;

 

(e) to Earthstone and Flatonia, counterparts of the Flatonia Registration Rights Agreement, duly executed by Oak Valley;

 

(f) to PRP and Flatonia, a certificate duly executed by an authorized executive officer of each Oak Valley Entity, dated as of the Closing Date, certifying on behalf of such Oak Valley Entity that the conditions set forth in Section 10.2(a)(i) and 10.2(b)(i) have been fulfilled;

 

(g) to Earthstone, a certificate duly executed by an authorized executive officer of each Oak Valley Entity, dated as of the Closing Date, certifying on behalf of such Oak Valley Entity that the conditions set forth in Section 10.4(a)(ii) and 10.4(b)(ii) have been fulfilled;

 

(h) to the other Parties, with respect to any approvals received by Earthstone pursuant to a filing or application under Section 9.2, copies of those approvals; and

 

(i) all other instruments, documents and other items reasonably necessary to effectuate the terms of this Agreement as may be reasonably requested by the other Parties.

 

Section 11.4 Obligations of Earthstone at Closing.  At the Closing, upon the terms and subject to the conditions of this Agreement, and subject to the simultaneous performance by the other Parties of their respective obligations pursuant to Section 11.2 and Section 11.3, Earthstone shall deliver or cause to be delivered:

 

(a) to Flatonia, the Earthstone Contribution Shares;

 

(b) to Flatonia and Oak Valley, counterparts of the Flatonia Registration Rights Agreement, duly executed by Earthstone;

 

(c) to PRP and Flatonia, a certificate duly executed by an authorized executive officer of Earthstone, dated as of the Closing Date, certifying on behalf of Earthstone that the conditions set forth in Section 10.2(a)(ii) and 10.2(b)(ii) have been fulfilled;

 

(d) to the Oak Valley Entities, a certificate duly executed by an authorized executive officer of Earthstone, dated as of the Closing Date, certifying on behalf of Earthstone that the conditions set forth in Section 10.3(a)(ii) and 10.3(b)(ii) have been fulfilled;

 

(e) to the other Parties, with respect to any approvals received by Earthstone pursuant to a filing or application under Section 9.2, copies of those approvals; and

 

(f) all other instruments, documents and other items reasonably necessary to effectuate the terms of this Agreement as may be reasonably requested by the other Parties.

Section 11.5 Closing and Post-Closing Cash Settlement.

 

(a) Not later than five Business Days prior to the Closing Date, Sabine shall prepare and deliver to Flatonia, using the best information available to Sabine and Oak Valley Operator, a preliminary settlement statement estimating the initial amount of the Cash Settlement as set forth in Section 3.4.  Such preliminary settlement statement shall set forth the initial amounts calculated pursuant to Section 3.4(a) and pursuant to Section 3.4(b), and shall net such amounts to reflect the total positive amount due by Flatonia to Sabine, or by Sabine to Flatonia, as applicable (in either case, the “Closing Payment”).

 

(b) As soon as reasonably practicable after the Closing but not later than the 180th day following the Closing Date, Sabine shall prepare and deliver to Flatonia a statement setting forth the final calculation of the amounts described in Section 3.4(a) and Section 3.4(b), showing the calculation of each amount, based, to the extent possible, on actual credits, charges, receipts and other items before and after the Effective Time.  Sabine shall, at Flatonia’s request, supply documentation in reasonable detail available to support any credit, charge, receipt or other item.  As soon as reasonably practicable but not later than the 30th day following receipt of Sabine’s statement hereunder, Flatonia shall deliver to Sabine a written report containing any changes that Flatonia proposes be made to such statement.  Sabine may deliver a written report to Flatonia during this same period reflecting any changes that Sabine proposes to be made to such statement as a result of additional information received after the statement was prepared, and if Sabine delivers such a report, Flatonia shall have an additional 30 days following receipt of such report to propose any changes to the initial statement or such subsequent report.  The Parties shall undertake to agree on the final statement of the Cash Settlement no later than 240 days after the Closing Date.  In the event that the Parties cannot reach agreement within such period of time, either Party may refer the remaining matters in dispute to the Houston, Texas office of Ernst & Young LLP for review and final determination by arbitration.  The accounting firm shall conduct the arbitration proceedings in Houston, Texas in accordance with the Commercial Arbitration Rules of the American Arbitration Association, to the extent such rules do not conflict with the terms of this Section 11.5.  The Parties shall instruct the accounting firm to deliver to the Parties a written determination within 30 days after submission of the matters in dispute, which shall be final and binding on both Parties, without right of appeal.  In determining the proper amount of any item in the Cash Settlement, the accounting firm shall not increase the amounts proposed by Flatonia or Sabine, as applicable.  The accounting firm shall act as an independent neutral expert for the limited purpose of determining the specific disputed matters submitted by the Parties and may not award Damages, interest or penalties to the Parties with respect to any matter.  Flatonia and Sabine shall each bear its own legal fees and other costs of presenting its case.  Flatonia shall bear one-half and Sabine shall bear one-half of the costs and expenses of the accounting firm.  Within ten days after the earlier of (i) the expiration of Flatonia’s 30-day review period without delivery of any written report by Flatonia and (ii) the date on which the Parties finally determine the Cash Settlement or the accounting firm finally determines the disputed matters submitted to it, as applicable, Flatonia shall net (1) the final amount owing to Flatonia with the final amount owing to Sabine (the “Final Netted Amount”), and (2) the Final Netted Amount with the Closing Payment, taking into account, in each case, the Party owing and the Party entitled to each such amount (such final netted amount, the “Post-Closing Payment”), and the Party owing the Post-Closing Payment shall pay the other Party such

amount.  Any Post-Closing Payment owing pursuant to this Section 11.5(b) shall bear interest from the Closing Date to the date of payment at the Prime Rate.

 

(c) Flatonia shall assist Sabine in the preparation of the final statement of the Cash Settlement under Section 11.5(b) by furnishing invoices, receipts and such other assistance as may be reasonably requested by Sabine to facilitate such process post-Closing.

 

(d) All payments made or to be made under this Agreement to Flatonia shall be made by electronic transfer of immediately available funds to the account designated by Flatonia.  All payments made or to be made hereunder to Sabine shall be made by electronic transfer of immediately available funds to the account designated by Sabine.

Section 12.1 Termination.  This Agreement may be terminated at any time prior to the Closing:

 

(a) by the mutual written consent of Flatonia, Sabine and Earthstone;

 

(b) by any Party if the Closing has not occurred on or before February 28, 2015 or such later date as shall be mutually agreed; provided, however, that no Party shall be entitled to terminate this Agreement under this clause (b) if the Closing has failed to occur because such Party negligently or willfully failed to perform or observe in any material respect its covenants or agreements hereunder;

 

(c) by any Party, if the Exchange Agreement is terminated pursuant to Section 7.1 of the Exchange Agreement;

 

(d) by PRP and Flatonia, upon delivery of written notice to the other Parties at any time prior to the Closing in the event that any Party other than PRP and Flatonia has breached in any material respect any representation, warranty or covenant contained in this Agreement such that any of the conditions to closing in Sections 10.1 or 10.2 would not be satisfied, PRP and Flatonia have notified the other Parties of the breach in writing, and the breach has continued without cure for a period of 30 days after the written notice of breach;

 

(e) by the Oak Valley Entities, upon delivery of written notice to the other Parties at any time prior to the Closing in the event that any Party other than the Oak Valley Entities has breached in any material respect any representation, warranty or covenant contained in this Agreement such that any of the conditions to closing in Sections 10.1 or 10.3 would not be satisfied, the Oak Valley Entities have notified the other Parties of the breach in writing, and the breach has continued without cure for a period of 30 days after the written notice of breach; and

 

(f) by Earthstone, upon delivery of written notice to the other Parties at any time prior to the Closing in the event that any other Party has breached in any material respect any representation, warranty or covenant contained in this Agreement such that any of the conditions to closing in Sections 10.1 or 10.4 would not be satisfied, Earthstone has notified the

other Parties of the breach in writing, and the breach has continued without cure for a period of 30 days after the written notice of breach.

 

Section 12.2 Ability to Terminate

 

(a) .  No Party shall be entitled to terminate this Agreement under Section 12.1 if the Closing has failed to occur because such Party negligently or willfully failed to perform or observe in any material respect its covenants or agreements hereunder; provided that this Section 12.2 shall not limit in any manner the ability of Earthstone or Oak Valley to terminate this Agreement without fault pursuant to Section 12.1(c) following the termination of the Exchange Agreement pursuant to Section 7.1(b)(iii), 7.1(c)(i) or 7.1(d)(i) thereof.

 

Section 12.3 Effect of Termination.  If this Agreement is terminated pursuant to Section 12.1, this Agreement shall become void and of no further force or effect, except for the provisions of Section 9.3, this Article 12, Article 15 and Appendix A, which shall continue in full force and effect, and Flatonia shall be free immediately to enjoy all rights of ownership of the Assets and to sell, transfer, encumber or otherwise dispose of the Assets to any Person without any restriction under this Agreement.  Notwithstanding anything to the contrary in this Agreement, the termination of this Agreement under Section 12.1 shall not relieve either Party, subject to Section 15.11, from liability for any prior willful or deliberate failure to perform or observe in any material respect any of its agreements or covenants contained herein that are to be performed or observed at or prior to the Closing; provided that Earthstone shall have no liability under this Agreement pursuant to this Section 12.3 or otherwise in the event this Agreement is terminated pursuant to Section 12.1(c) following the termination of the Exchange Agreement pursuant to Section 7.1(b)(iii), 7.1(c)(i) or 7.1(d)(i) thereof.

Section 13.1 Assumption by Sabine.           Without limiting the Oak Valley Entities’ rights to indemnity under Section 13.2, Sabine shall assume and hereby agrees to fulfill, perform, pay and discharge (or cause to be timely fulfilled, performed, paid or discharged) all of the Assumed Sabine Obligations.

 

Section 13.2 Indemnification.

 

(a) From and after the Closing, Earthstone shall indemnify, defend and hold harmless the Flatonia Group from and against all Damages incurred, suffered by or asserted against such Persons caused by or arising out of or resulting from the Assumed Sabine Obligations (including, for purposes of certainty, Environmental Liabilities under CERCLA and other Environmental Laws), EVEN IF SUCH DAMAGES ARE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE (WHETHER SOLE, JOINT OR CONCURRENT), STRICT LIABILITY OR OTHER LEGAL FAULT OF THE FLATONIA GROUP.

 

(b) From and after the Closing, Flatonia shall indemnify, defend and hold harmless Earthstone and Sabine from and against all Damages incurred, suffered by or asserted against such Persons caused by or arising out of or resulting from the Retained Flatonia Obligations, EVEN IF SUCH DAMAGES ARE CAUSED IN WHOLE OR IN PART BY

(c) Except for the Conveyance or the remedies set forth in Section 13.2(a), 13.2(b), 12.3 and 15.16, notwithstanding anything to the contrary contained in this Agreement, this Section 13.2 contains the Parties’ exclusive remedies against each other for any reason arising under this Agreement, including with respect to breaches of the representations, warranties of the Parties in Article 5, Article 6, Article 7 and Article 8 and the covenants and agreements of the Parties in this Agreement and the affirmations of such representations, warranties, covenants and agreements contained in the certificate delivered by each Party at the Closing.  Except for the Conveyance or the remedies set forth in Section 13.2(a), 13.2(b), 12.3 and 15.16, if the Closing occurs, EACH PARTY RELEASES, REMISES AND FOREVER DISCHARGES THE OTHER PARTIES AND THEIR RESPECTIVE AFFILIATES AND ALL SUCH PARTIES’ OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ADVISORS AND OTHER REPRESENTATIVES FROM ANY AND ALL SUITS, LEGAL OR ADMINISTRATIVE PROCEEDINGS, CLAIMS, DEMANDS, DAMAGES, LOSSES, COSTS, LIABILITIES, INTEREST, OR CAUSES OF ACTION WHATSOEVER, IN LAW OR IN EQUITY, KNOWN OR UNKNOWN, WHICH SUCH PARTIES MIGHT NOW OR SUBSEQUENTLY MAY HAVE, BASED ON, RELATING TO OR ARISING OUT OF (i) THIS AGREEMENT, (ii) FLATONIA’S OWNERSHIP, USE OR OPERATION OF THE ASSETS, (iii) THE CONDITION, QUALITY, STATUS OR NATURE OF THE ASSETS, INCLUDING RIGHTS TO CONTRIBUTION UNDER CERCLA OR ANY OTHER ENVIRONMENTAL LAW, (iv) BREACHES OF STATUTORY OR IMPLIED WARRANTIES, (v) NUISANCE OR OTHER TORT ACTIONS, (vi) RIGHTS TO PUNITIVE DAMAGES AND COMMON LAW RIGHTS OF CONTRIBUTION AND (vii) RIGHTS UNDER INSURANCE MAINTAINED BY FLATONIA OR ANY PERSON WHO IS AN AFFILIATE OF FLATONIA, EVEN IF CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE (WHETHER SOLE, JOINT OR CONCURRENT), STRICT LIABILITY OR OTHER LEGAL FAULT OF ANY RELEASED PERSON.

 

(d) The indemnity of each Party provided in this Section 13.2 shall be for the benefit of and extend to each Person included in the Flatonia Group and the Earthstone Group, as applicable; provided, however, that any claim for indemnity under this Section 13.2 by any such Person must be brought and administered by a Party to this Agreement.  No Indemnified Person shall have any rights against any Party under the terms of this Section 13.2 except as may be exercised on its behalf by a Party, as applicable, pursuant to this Section 13.2(d).  Each Party may elect to exercise or not exercise indemnification rights under this Section 13.2 on behalf of the other Indemnified Persons affiliated with it in its sole discretion and shall have no liability to any such other Indemnified Persons for any action or inaction under this Section 13.2.

 

Section 13.3 Indemnification Actions.  Except as provided in Article 14, all claims for indemnification under Section 13.2 shall be asserted and resolved as follows:

 

(a) For purposes hereof, (i) the term “Indemnifying Person” when used in connection with particular Damages means the Party having an obligation to indemnify another Person or Persons with respect to such Damages pursuant to this Article 13 and (ii) the term

“Indemnified Person” when used in connection with particular Damages means the Person or Persons having the right to be indemnified with respect to such Damages by another Person or Persons pursuant to this Article 13.

 

(b) To make a claim for indemnification under Section 13.2, an Indemnified Person shall notify the Indemnifying Person of its claim under this Section 13.3, including the specific details of and specific basis under this Agreement for its claim (the “Claim Notice”).  In the event that the claim for indemnification is based upon a claim by a Third Party against the Indemnified Person (a “Third Person Claim”), the Indemnified Person shall provide its Claim Notice promptly after the Indemnified Person has actual knowledge of the Third Person Claim and shall enclose a copy of all papers (if any) served with respect to the Third Person Claim; provided, however, that the failure of any Indemnified Person to give notice of a Third Person Claim as provided in this Section 13.3 shall not relieve the Indemnifying Person of its obligations under Section 13.2 except to the extent such failure results in insufficient time being available to permit the Indemnifying Person to effectively defend against the Third Person Claim or otherwise prejudices the Indemnifying Person’s ability to defend against the Third Person Claim.  In the event that the claim for indemnification is based upon an inaccuracy or breach of a representation, warranty, covenant or agreement, the Claim Notice shall specify the representation, warranty, covenant or agreement which was inaccurate or breached.

 

(c) In the case of a claim for indemnification based upon a Third Person Claim, the Indemnifying Person shall have 30 days (or such lesser time as is required to respond to such Third Person Claim) from its receipt of the Claim Notice to notify the Indemnified Person whether it intends to assume the defense of such Third Person Claim under this Article 13.  If the Indemnifying Person does not notify the Indemnified Person within such 30-day (or lesser) period whether the Indemnifying Person intends to assume the defense of such Third Person Claim, it shall be conclusively deemed to have declined the right to assume the defense of such Third Person Claim.  The Indemnified Person is authorized, prior to and during such 30-day (or lesser) period, to file any motion, answer or other pleading that it shall deem necessary or appropriate to protect its interests or those of the Indemnifying Person and that is not prejudicial to the Indemnifying Person.

 

(d) If the Indemnifying Person so timely elects to assume the defense under Section 13.3(c), it shall have the right and obligation to diligently defend at its sole cost and expense the Indemnified Person against the Third Person Claim.  The Indemnifying Person shall have full control of such defense and proceedings, including any compromise or settlement thereof.  If requested by the Indemnifying Person, the Indemnified Person agrees to cooperate in contesting any Third Person Claim which the Indemnifying Person elects to contest; provided, however, that the Indemnified Person shall not be required to bring any counterclaim or cross-complaint against any Person.  The Indemnified Person may at its own expense participate in, but not control, any defense or settlement of any Third Person Claim controlled by the Indemnifying Person pursuant to this Section 13.3(d).  An Indemnifying Person shall not, without the written consent of the Indemnified Person, compromise or settle any Third Person Claim or consent to the entry of any judgment with respect thereto that (i) does not result in a final resolution of the Indemnified Person’s liability with respect to the Third Person Claim, including in the case of a settlement an unconditional written release of the Indemnified Person

or (ii) may materially and adversely affect the Indemnified Person other than as a result of money Damages covered by the indemnity.

 

(e) If the Indemnifying Person does not assume the defense of such Third Person Claim, or following such assumption, fails to diligently defend, prosecute or settle the Third Person Claim, then the Indemnified Person shall have the right to defend against the Third Person Claim, at the sole cost and expense of the Indemnifying Person, if the Indemnified Person is entitled to indemnification hereunder, with counsel of the Indemnified Person’s choosing, subject to the right of the Indemnifying Person to indemnify against the applicable Third Person Claim at any time prior to settlement or final determination thereof.  If the Indemnifying Person has not yet admitted its obligation to provide indemnification with respect to a Third Person Claim, the defense of which has been assumed by the Indemnified Person, the Indemnified Person shall send written notice to the Indemnifying Person of any proposed settlement and the Indemnifying Person shall have the option for 10 days following receipt of such notice to (i) admit in writing its obligation to provide indemnification with respect to the Third Person Claim and (ii) if its obligation is so admitted, consent to or reject, in its reasonable judgment, the proposed settlement.  If the Indemnified Person settles any Third Person Claim over the objection of the Indemnifying Person after the Indemnifying Person has timely admitted its obligation in writing in accordance with this clause (e) and assumed the defense of a Third Person Claim, the Indemnified Person shall be deemed to have waived any right to indemnity therefor.  Failure by the Indemnifying Person to timely respond to such notice shall be deemed a consent to the settlement, but not an admission of its obligation to provide indemnification.

 

(f) In the case of a claim for indemnification not based upon a Third Person Claim, the Indemnifying Person shall have 30 days from its receipt of the Claim Notice to (i) cure the Damages complained of, (ii) admit its obligation to provide indemnification with respect to such Damages or (iii) dispute the claim for such indemnification.  If the Indemnifying Person does not notify the Indemnified Person within such 30-day period that it has cured the Damages or that it disputes the claim for such indemnification, the Indemnifying Person shall be conclusively deemed obligated to provide such indemnification hereunder.

 

Section 13.4 Limitation on Actions.

 

(a) The representations, warranties, covenants and agreements in this Agreement shall terminate at the Closing or, except as otherwise provided in Section 12.3, upon the termination of this Agreement pursuant to Section 12.1, as the case may be, except that the covenants and agreements set forth in Section 9.5, 9.14 and Article 13 and any other agreement in this Agreement that contemplates performance after the Closing shall survive the Closing, the covenants and agreements in Sections 3.3(b) and 9.13 shall survive the Closing until 30 days after the expiration of the applicable statute of limitations, and those set forth in Section 9.3, Article 12, this Article 13, Article 15 and Appendix A shall survive termination of this Agreement.

 

(b) The amount of any Damages for which an Indemnified Person is entitled to indemnity under this Article 13 shall be reduced by the amount of insurance proceeds or Tax benefits, if any, actually realized by the Indemnified Person or its Affiliates with respect to such Damages within 12 months after the Closing Date, net of any collection costs and excluding the

 proceeds of any insurance policy issued or underwritten by the Indemnified Person or its Affiliates.

 

(c) Earthstone and Sabine shall not be entitled to indemnification or any other remedy under this Agreement with respect to any Damages or other liability, loss, cost, expense, claim, award or judgment attributable to or arising out of the actions of Oak Valley Operator as operator of any of the Properties.

 

(d) Notwithstanding anything herein to the contrary, in no event will Flatonia Group or Earthstone Group be entitled to duplicate recovery under this Article 13 with respect to any adjustments to the Cash Settlement pursuant to Section 3.4 or Section 11.5.

Section 14.1 Responsibility for Tax Filings and Payment.  After the Closing Date, Sabine and Earthstone shall be responsible for paying any and all Property Taxes due with respect to the ownership and operation of the Assets or the production of Hydrocarbons therefrom and shall file with the appropriate Governmental Body any and all Tax Returns required to be filed with respect to such Property Taxes.  To the extent a Tax Return for which Sabine or Earthstone is responsible hereunder relates to a Tax period that ends before or includes the Effective Time, Sabine or Earthstone shall prepare such Tax Return in a manner consistent with Flatonia’s past practice except as otherwise required by applicable Laws, and shall submit such Tax Return to Flatonia for its review and comment no fewer than 30 days prior to the due date therefor.  Earthstone shall cause such Tax Return to be timely filed, incorporating any reasonable comments received from Flatonia prior to the due date therefor.

 

Section 14.2 Apportionment of Property Taxes.  For purposes of this Agreement, Property Taxes due with respect to the ownership and operation of the Assets or the production of Hydrocarbons therefrom, but excluding Property Taxes that are based on the quantity or value of production of Hydrocarbons, shall be apportioned between Flatonia, on the one hand, and Sabine and Earthstone, on the other hand, as of the Effective Time with (a) Flatonia being responsible for all such Property Taxes for Tax periods ending prior to the Effective Time and a proportionate share of the actual amount of such Taxes for a Tax period in which the Effective Time occurs (a “Current Tax Period”) determined by multiplying such actual Taxes by a fraction, the numerator of which is the number of days in the Current Tax Period prior to the day that includes the Effective Time and the denominator of which is the total number of days in the Current Tax Period and (b) Sabine and Earthstone being responsible for all such Property Taxes for Tax periods beginning on or after the day that includes the Effective Time and a proportionate share of the actual amount of such Taxes for a Current Tax Period determined by multiplying such actual Taxes by a fraction, the numerator of which is the number of days in the Current Tax Period on and after the day that includes the Effective Time and the denominator of which is the total number of days in the Current Tax Period.  Property Taxes that are based on the quantity of or the value of production of Hydrocarbons shall be apportioned between Flatonia, on the one hand, and Sabine and Earthstone, on the other hand, based on the number of units or value of production actually produced, as applicable, before and at, with regards to Flatonia, or after, with regards to Sabine and Earthstone, the Effective Time.

Section 14.3 Refunds.  Sabine and Earthstone agree to pay to Flatonia the amount of any refund, credit against Tax or other Tax benefit (including any refunds, credits or rebates) together with any interest thereon received from a Governmental Body after the Closing by Sabine, Earthstone or their Affiliates in respect of any Property Taxes due with respect to the ownership and operation of the Assets, or the production of Hydrocarbons therefrom (including, for the avoidance of doubt, any Tax benefit or amount attributable to a reduction in severance Taxes that may be realized after the Effective Time but that results from payments or production for periods prior to or at the Effective Time), prior to or at the Effective Time (determined in the manner described in Section 14.2) to the extent not otherwise taken into account under Section 2.4 or as a Post-Closing Payment under Section 11.5, within five days after such refund, credit or other benefit is actually received or realized by Sabine, Earthstone or their Affiliates. Payments to Flatonia under this Section 14.3 shall be net of (1) any reasonable out-of-pocket costs associated in obtaining such refund, credit against Tax or other Tax benefit, (2) any Tax required to be withheld on such payment, and (3) any Taxes imposed on Sabine, Earthstone or any of their Affiliates as a result of such refunds (net of any Tax benefit resulting from such payment).  If there is a subsequent reduction by a Governmental Body (or by virtue of a change in applicable Tax law), of any amounts with respect to which a payment has been made to Flatonia pursuant to this Section 14.3, then Flatonia shall pay Earthstone an amount equal to such reduction plus any interest or penalties imposed by a Governmental Body with respect to such reduction.  Notwithstanding anything to the contrary in this Section 14.3, Sabine, Earthstone and their Affiliates shall be entitled to any Property Tax refund, credit or benefit arising as a result of the carryback of a Tax attribute from a taxable period (or portion thereof) that begins after the Effective Time.

 

Section 14.4 Audits.  From and after the Closing, each of Sabine and Earthstone, on the one hand, and Flatonia, on the other hand (the “Tax Indemnified Person”), shall notify the other Party in writing within 15 days of receipt by the Tax Indemnified Person of written notice of any pending or threatened audits, adjustments, claims, examinations, assessments or other proceedings with respect to any Taxes that are likely to affect the liability of such other Party under this Agreement (a “Tax Audit”). If the Tax Indemnified Person fails to give such timely notice to the other Party, it shall not be entitled to indemnification or reimbursement for any Taxes arising in connection with such Tax Audit to the extent such failure to give notice actually and materially adversely affects the other Party. If such Tax Audit relates to Taxes for which Flatonia is responsible (in whole or in part) hereunder, Flatonia shall be entitled to conduct and control the defense and settlement of such Tax Audit, but (a) Sabine and Earthstone shall be entitled to participate in any such Tax Audit relating to Taxes for which they may be responsible hereunder at their own expense and (b) Flatonia shall not settle, compromise or concede any portion of any Tax Audit that is reasonably likely to adversely affect the Tax liability of Sabine or Earthstone without the consent of Sabine or Earthstone, which consent shall not be unreasonably withheld, delayed or conditioned.

 

Section 14.5 Transfer Taxes, Recording Fees & Transaction Fees.  Sabine and Earthstone shall bear any sales, use, excise, real property transfer or gain, gross receipts, goods and services, registration, recording fees, capital, documentary, stamp or similar Taxes (including any penalties, interest or additional amounts which may be imposed with respect thereto but not including any income or franchise taxes) (collectively, “Transfer Taxes”) imposed upon, or with respect to, the transfer of the Assets or other transactions contemplated

hereby, including any fees or payments to lessors with respect to such transfers or other transactions under the Leases (if any).  Sabine, Earthstone and Flatonia shall cooperate in good faith to minimize the incurrence of any such Transfer Taxes, fees or payments, including the filing or submission of an appropriate certificate or other evidence of exemption by Sabine or Earthstone.  Except as otherwise provided herein, all costs and expenses (including legal and financial advisory fees and expenses) incurred in connection with, or in anticipation of, this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such expenses.

Section 15.1 Counterparts.  This Agreement may be executed in counterparts, each of which shall be deemed an original instrument, but all such counterparts together shall constitute but one agreement.  Any Party’s delivery of an executed counterpart signature page by facsimile or email is as effective as executing and delivering this Agreement in the presence of the other Party.  No Party shall be bound until such time as all of the Parties have executed counterparts of this Agreement.

 

Section 15.2 Notices.  All notices and other communications that are required or may be given pursuant to this Agreement must be given in writing, in English and delivered personally, by courier, by facsimile or email or by registered or certified mail, postage prepaid, as follows:

Any Party may change its address for notice by providing notice to the other Parties in the manner set forth above.  All notices shall be deemed to have been duly given and the receiving Party charged with notice (a) if personally delivered, when received, (b) if sent by facsimile during normal business hours of the recipient, upon confirmation of transmission, or if sent by facsimile after normal business hours of the recipient, on the next Business Day, (c) if sent by email during normal business hours of the recipient, upon having obtained electronic delivery confirmation thereof, or if sent by email after normal business hours of the recipient, on the next Business Day, (d) if mailed, two Business Days after the date of mailing to the address below or (e) if sent by overnight courier, one day after sending.

 

Section 15.3 Certain Fees.  Except as otherwise provided herein, all costs and expenses (including legal and financial advisory fees and expenses) incurred in connection with, or in anticipation of, this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such expenses.

 

Section 15.4 Governing Law; Jurisdiction.

 

(a) THIS AGREEMENT AND THE LEGAL RELATIONS BETWEEN THE PARTIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW WHICH WOULD PERMIT OR REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.

 

(b) THE PARTIES HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA OR THE CIVIL DISTRICT COURTS OF THE STATE OF TEXAS LOCATED IN HARRIS COUNTY, TEXAS AND APPROPRIATE APPELLATE COURTS THEREFROM, AND EACH PARTY HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY DISPUTE, CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY DOCUMENT DELIVERED IN CONNECTION HEREWITH MAY BE HEARD AND DETERMINED IN SUCH COURTS.  THE PARTIES HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAWS, ANY OBJECTION WHICH THEY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH DISPUTE, CONTROVERSY OR CLAIM BROUGHT IN ANY SUCH COURT OR ANY DEFENSE OF INCONVENIENT FORUM FOR THE MAINTENANCE OF SUCH DISPUTE, CONTROVERSY OR CLAIM.  EACH PARTY AGREES THAT A JUDGMENT IN ANY SUCH DISPUTE MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY APPLICABLE LAW.

(c) EACH OF THE PARTIES HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY DOCUMENT DELIVERED IN CONNECTION HEREWITH.  EACH PARTY ACKNOWLEDGES THAT IT HAS HAD AN OPPORTUNITY TO CONSULT WITH INDEPENDENT COUNSEL AND THAT IT HAS KNOWINGLY AND VOLUNTARILY AGREED TO THIS WAIVER OF ITS RIGHT TO TRIAL BY JURY.

 

Section 15.5 Waivers.  Any failure by any Party to comply with any of its obligations, agreements or conditions herein contained may be waived by the Party to whom such compliance is owed by an instrument signed by such Party and expressly identified as a waiver, but not in any other manner.  No waiver of, or consent to a change in, any of the provisions of this Agreement shall be deemed or shall constitute a waiver of, or consent to a change in, other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided.

 

Section 15.6 Assignment.  No Party shall assign all or any part of this Agreement, nor shall any Party assign or delegate any of its rights or duties hereunder, without the prior written consent of the other Parties, which consent may be withheld for any reason, and any assignment or delegation made without such consent shall be void.  Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns.

 

Section 15.7 Entire Agreement.  This Agreement (including, for purposes of certainty, the Appendices, Exhibits and Schedules attached hereto), the documents to be executed hereunder and the Conveyances constitute the entire agreement among the Parties pertaining to the subject matter hereof, and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, of the Parties pertaining to the subject matter hereof.

 

Section 15.8 Amendment.  This Agreement may be amended or modified only by an agreement in writing executed by all Parties and expressly identified as an amendment or modification.

 

Section 15.9 No Third Party Beneficiaries.  Nothing in this Agreement shall entitle any Person other than a Party to any claim, cause of action, remedy or right of any kind, except the rights expressly provided in Section 13.2 to the Persons described therein.

 

Section 15.10 Construction.  The Parties acknowledge that (a) each Party has had the opportunity to exercise business discretion in relation to the negotiation of the details of the transaction contemplated hereby, (b) this Agreement is the result of arms-length negotiations from equal bargaining positions and (c) each Party and its counsel participated in the preparation and negotiation of this Agreement.  Any rule of construction that a contract be construed against the drafter shall not apply to the interpretation or construction of this Agreement.

 

Section 15.11 Limitation on Damages.  NOTWITHSTANDING ANYTHING TO THE CONTRARY, EXCEPT IN CONNECTION WITH ANY DAMAGES INCURRED BY THIRD PARTIES FOR WHICH INDEMNIFICATION IS SOUGHT UNDER THE

 

Section 15.12 Recording.  As soon as practicable after the Closing, Sabine shall record the Conveyances and the Memorandum of Operating Agreement delivered at the Closing in the appropriate counties as well as with any appropriate Governmental Bodies, and Sabine shall provide Flatonia with copies of all recorded or approved instruments.

 

Section 15.13 Conspicuous.  THE PARTIES AGREE THAT, TO THE EXTENT REQUIRED BY APPLICABLE LAW TO BE EFFECTIVE, THE PROVISIONS IN THIS AGREEMENT IN BOLD-TYPE ALL CAPS FONT ARE “CONSPICUOUS” AND COMPLY WITH THE EXPRESS NEGLIGENCE RULE FOR THE PURPOSE OF ANY APPLICABLE LAW.

 

Section 15.14 Time of Essence.  This Agreement contains a number of dates and times by which performance or the exercise of rights is due, and the Parties intend that each and every such date and time be the firm and final date and time, as agreed.  For this reason, each Party hereby waives and relinquishes any right it might otherwise have to challenge its failure to meet any performance or rights election date applicable to it on the basis that its late action constitutes substantial performance, to require the other Parties to show prejudice, or on any equitable grounds.  Without limiting the foregoing, time is of the essence in this Agreement.  If the date specified in this Agreement for giving any notice or taking any action is not a Business Day (or if the period during which any notice is required to be given or any action taken expires on a date which is not a Business Day), then the date for giving such notice or taking such action (and the expiration date of such period during which notice is required to be given or action taken) shall be the next day that is a Business Day.

 

Section 15.15 Severability.  The invalidity or unenforceability of any term or provision of this Agreement in any situation or jurisdiction shall not affect the validity or enforceability of the other terms or provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction, and the remaining terms and provisions shall remain in full force and effect unless doing so would result in an interpretation of this Agreement that is manifestly unjust.

 

Section 15.16 Specific Performance.  The Parties agree that if any of the provisions of this Agreement were not performed in accordance with their specific terms, irreparable damage

would occur, no adequate remedy at Law would exist and damages would be difficult to determine, and the Parties shall be entitled to specific performance of the terms hereof and immediate injunctive relief, without the necessity of proving the inadequacy of money damages as a remedy, in addition to any other remedy available at Law or in equity.

“Actual Knowledge” means (a) with respect to PRP and Flatonia, information personally known by the individuals set forth on Sections 5.1 and 6.1, as applicable, of the Flatonia Disclosure Schedule, (b) with respect to the Oak Valley Entities, information personally known by the individuals set forth on Section 7.1 of the Oak Valley Disclosure Schedule and (c) with respect to Earthstone, information personally known by the individuals set forth on Section 8.1 of the Earthstone Disclosure Schedule.

 

“Affiliate” means, with respect to any Person, any Person that directly or indirectly Controls, is Controlled by or is under common Control with such Person.

 

“Agreement” has the meaning set forth in the Preamble of this Agreement.

 

“Allocated Leasehold” means (a) the portion of the leased premises under a Lease that would be held by production or drilling operations on a Well if the Lease were otherwise to terminate and (b) if in the case of any Well clause (a) is not applicable, a portion of the leased premises under the applicable Lease comprising (i) in the case of a vertical Well, 80 acres, in the form of a square with the wellbore in the center and (ii) in the case of a horizontal Well, (A) the acreage included within the proration unit plat for the Well as filed by the operator of such Well with the Texas Railroad Commission or (B) the acreage prescribed by the applicable field rules or orders.

 

“Allocated Value” has the meaning set forth in Section 3.3(a).

 

“Amended Operating Agreement” has the meaning set forth in Section 9.6.

 

“Asbestos and Related Liabilities” means any and all Damages, obligations and responsibilities relating to or arising from, directly or indirectly, the existence or alleged existence of any one or more of asbestos, NORM, polychlorinated biphenyls, chromium and/or lead-based paint at, on or within the Properties, including any contamination resulting therefrom.

 

“Assets” has the meaning set forth in Section 2.2.

 

“Assumed Sabine Obligations” means (a) all obligations and liabilities of Flatonia (including Environmental Liabilities), known or unknown, with respect to or arising from the Assets, other than the Retained Flatonia Obligations, regardless of whether such obligations or liabilities arose prior to, on or after the Effective Time, including obligations and liabilities relating in any manner to the use, ownership or operation of the Assets, including (i) obligations to furnish makeup gas and/or settle Imbalances attributable to the Assets according to the terms of applicable gas sales, processing, gathering or transportation Contracts, (ii) obligations to pay Working Interests, royalties, overriding royalties and other interest owners’ revenues or proceeds

attributable to sales of Hydrocarbons produced from the Assets and any Suspense Funds, (iii)  Decommissioning and Asbestos and Related Liabilities, (iv) any obligations to abandon, clean up, restore and/or remediate the premises covered by or related to the Assets in accordance with applicable Contracts and Laws and (v) all obligations applicable to or imposed on the lessee, owner, or operator under the Leases, Surface Agreements and Contracts, or as required by any applicable Law, including the payment of all Taxes for which Sabine is responsible hereunder; (b) all obligations under the Leases, Contracts and Surface Agreements; and (c) Sabine’s obligations under Article 14; but excluding, in all such instances, prior to the Cut-off Date, the amount of the Cash Settlement, which will be exclusively settled and accounted for pursuant to the terms of Section 3.4(b) and Section 11.5.

political subdivision thereof, or any quasi-governmental or private body exercising any administrative, executive, judicial, legislative, police, regulatory, taxing, importing or other governmental or quasi-governmental body.

 

“Hazardous Substances” means any pollutants, contaminants, toxic or hazardous substances, materials, wastes, constituents, compounds or chemicals that are regulated by, or may form the basis of liability under any Laws, including asbestos-containing materials (but excluding any NORM).

 

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

 

“Imbalances” means any imbalance (a) at the wellhead between the amount of Hydrocarbons produced from a Well and allocated to the interest of Flatonia therein and the shares of production from the relevant Well to which Flatonia was entitled or (b) at the pipeline flange between the amount of Hydrocarbons nominated by or allocated to Flatonia and the Hydrocarbons actually delivered on behalf of Flatonia at that point.

 

“Indemnified Person” has the meaning set forth in Section 13.3(a).

 

“Indemnifying Person” has the meaning set forth in Section 13.3(a).

 

“Jointly-Owned Properties” has the meaning set forth in the Recitals to this Agreement.

 

“Lands” has the meaning set forth in Section 2.2(b).

 

“Laws” means all Permits, statutes, rules, regulations, ordinances, Orders, and codes of Governmental Bodies.

 

“Leases” has the meaning set forth in Section 2.2(a).

 

“Material Adverse Effect” means, when used with respect to a Person, any change, effect, event or occurrence that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of such Person and its Subsidiaries, taken as a whole; provided, however, that any adverse changes, effects, events or occurrences resulting from or due to any of the following shall be disregarded in determining whether there has been a Material Adverse Effect:  (i) changes, effects, events or occurrences generally affecting the United States or global economy, the financial, credit, debt, securities or other capital markets or political, legislative or regulatory conditions or changes in the industries in which such Person operates; (ii) the announcement or pendency of this Agreement or the transactions contemplated hereby or the performance of this Agreement; (iii) any change in the market price or trading volume of Earthstone Common Stock (it being understood and agreed that the foregoing shall not preclude any other Party to this Agreement from asserting that any facts or occurrences giving rise to or contributing to such change that are not otherwise excluded from the definition of Material Adverse Effect should be deemed to constitute, or be taken into account in determining whether there has been, or would reasonably be expected to be, a Material Adverse Effect); (iv) acts of war or terrorism (or the escalation of the foregoing) or natural disasters or other force majeure

events; (v) changes in any applicable Laws or regulations applicable to such Person or applicable accounting regulations or principles or the interpretation thereof; (vi) any legal proceedings commenced by or involving any current or former member, partner or stockholder of such Person (on their own or on behalf of such Person) arising out of or related to this Agreement or the transactions contemplated hereby; and (vii) changes, effects, events or occurrences generally affecting the prices of oil, gas, natural gas, natural gas liquids or other commodities; provided, however, that changes, effects, events or occurrences referred to in clauses (i), (iv) and (v) above shall be considered for purposes of determining whether there has been or would reasonably be expected to be a Material Adverse Effect if and to the extent such state of affairs, changes, effects, events or occurrences has had or would reasonably be expected to have a disproportionate adverse effect on such Person and its Subsidiaries, as compared to other companies operating in the industries in which such Person and its Subsidiaries operate.

“Permits” means any permits, approvals or authorizations by, or filings with, Governmental Bodies.

 

“Permitted Encumbrances” means any or all of the following:

 

(a) royalties and any overriding royalties, net profits interests, free gas arrangements, production payments, reversionary interests and other similar burdens on production to the extent that the net cumulative effect of such burdens does not reduce Flatonia’s Net Revenue Interest below that shown in the applicable Exhibit for a Well or increase Flatonia’s Working Interest above that shown in the applicable Exhibit for a Well without a proportionate increase in the Net Revenue Interest of Flatonia;

 

(b) all unit agreements, pooling agreements, operating agreements, farmout agreements, Hydrocarbon production sales contracts, division orders and other contracts, agreements and instruments applicable to the Properties, to the extent that the net cumulative effect of such instruments does not reduce Flatonia’s Net Revenue Interest below that shown in the applicable Exhibit for a Well or increase Flatonia’s Working Interest above that shown in the applicable Exhibit for a Well without a proportionate increase in the Net Revenue Interest of Flatonia;

(k) any lien or trust arising in connection with workers’ compensation, unemployment insurance, pension or employment Laws or regulations;

 

(l) the terms and conditions of the Contracts;

 

(m) any lien or encumbrance created by a lessor;

 

(n) liens, mortgages, security interests, pledges, restrictions or any other type of burden or encumbrance arising under or created pursuant to the WF Deed of Trust;

 

(o) liens created by Law or retained in Leases to secure the obligation of the lessee to pay royalty or royalties (provided that any such liens arise in the ordinary course for amounts not yet delinquent); and

 

(p) all other liens, charges, encumbrances, defects or irregularities that do not, individually or in the aggregate, materially detract from the value of or materially interfere with the use or ownership of the Wells, Undeveloped Leases or Units subject thereto or affected thereby (as currently used or owned), which would be accepted by a reasonably prudent purchaser engaged in the business of owning and operating oil and gas properties in the United States, and which do not reduce Flatonia’s Net Revenue Interest below that shown in the applicable Exhibit for a Well or increase Flatonia’s Working Interest above that shown in the applicable Exhibit for a Well without a proportionate increase in the Net Revenue Interest of Flatonia.

 

“Person” means any individual, firm, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization, Governmental Body or any other entity.

 

“Post-Closing Payment” has the meaning set forth in Section 11.5(b).

 

“PR Value” has the meaning set forth in Section 4.1.

 

“Preferential Rights” has the meaning set forth in Section 4.1.

 

“Prepayments” means all prepayments, cash call and advances made by Flatonia to Oak Valley Operator, as Operator, pursuant to the Operating Agreement, for expenses, as of the applicable date, not yet incurred.

 

“Prime Rate” means the rate of interest published from time to time as the “Prime Rate” in the “Money Rates” section of The Wall Street Journal.

 

“Properties” has the meaning set forth in Section 2.2(c).

 

“Property Costs” means (a) all operating and production expenses, including costs of insurance, rentals, shut-in payments and royalty payments; title examination and curative actions; Property Taxes (but not income or franchise Taxes) attributable to the ownership or operation of the Assets or the production of Hydrocarbons therefrom; and gathering, processing and transportation costs in respect of Hydrocarbons produced from the Properties, and capital

expenditures, including bonuses, broker fees, acquisition costs of royalty interests or other burdens on production, and other lease or other royalty acquisition, extension or renewal costs, costs of drilling and completing wells and costs of acquiring equipment, incurred in the ownership and operation of the Assets in the ordinary course of business and (b) overhead costs charged to the Assets under the applicable operating agreement.