PURCHASE AND SALE AGREEMENT BETWEEN ELEMENT PETROLEUM, LP AND CROWNROCK, LP AS SELLERS AND LINN ENERGY HOLDINGS, LLC AS PURCHASER Executed on June 30, 2010

Execution Version

 

Section 1.7

Suspense Funds.

 

At Closing, each of the Sellers shall deliver to Purchaser all amounts in such Seller's possession due to owners of working interests, royalties, overriding royalties and other interests in the Properties that are held in suspense by such Seller as of the Closing Date (the “Suspense Funds”).

 

Section 2.1

Purchase Price.

 

The purchase price for the Assets (the "Purchase Price") shall be Ninety Million Dollars ($90,000,000), adjusted as provided in Section 2.2, payable to Sellers by wire transfer of immediately available funds at the Closing in the respective amounts $51,022,210 to Element and $38,977,790 to Crownrock.

Section 2.2

Adjustments to Purchase Price.

 

(a)    The Purchase Price for the Assets shall be adjusted as follows with all such amounts being determined in accordance with generally accepted accounting principles and Council of Petroleum Accountants Society (COPAS) standards:

 

(i)           Reduced by the aggregate amount of the following proceeds received by Sellers between the Effective Time and the Closing Date (with the period between the Effective Time and the Closing Date referred to as the "Adjustment Period"): (i) proceeds from the sale of Hydrocarbons (net of any royalties, overriding royalties or other burdens on or payable out of production, gathering, processing and transportation costs and any production, severance, sales or excise Taxes not reimbursed to Sellers by the purchaser of production) produced from or attributable to the Properties during the Adjustment Period, and (ii) other proceeds earned with respect to the Assets during the Adjustment Period;

 

(ii)           Reduced in accordance with Section 3.6, by an amount equal to the Allocated Value of those Properties (i) with respect to which preferential purchase rights have been exercised prior to Closing or (ii) that cannot be transferred at Closing due to unwaived requirements for consent to the assignments contemplated hereby;

(iii)           (A) Reduced as a result of Title Defects by the Title Defect Amount, (B) increased as a result of Title Benefits by the Title Benefit Amount, and (C) reduced as a result of Environmental Defects by the Environmental Defect Amount;

 

(iv)           Increased by the amount of all Property Costs and other costs attributable to the ownership and operation of the Assets which are paid by Sellers and incurred at or after the Effective Time, except any Property Costs and other such costs already deducted in the determination of proceeds in Section 2.2(a); and

 

(v)           Increased or reduced, as appropriate, pursuant to the provisions of Section 7.7;

 

(vi)           Reduced, if applicable, pursuant to the provisions of Section 7.8.

 

(b)    Each adjustment made pursuant to Section 2.2(a)(i) shall serve to satisfy, up to the amount of the adjustment, Purchaser's entitlement under Section 1.3 to Hydrocarbon production from or attributable to the Properties during the Adjustment Period, and to the value of other income, proceeds, receipts and credits earned with respect to the Assets during the Adjustment Period, and as such, Purchaser shall not have any separate rights to receive any production or income, proceeds, receipts and credits with respect to which an adjustment has been made.

 

(c)    Similarly, the adjustment described in Section 2.2(a)(v) shall serve to satisfy, up to the amount of the adjustment, Purchaser's obligation under Section 1.3 to pay Property Costs and other costs attributable to the ownership and operation of the Assets which are incurred during the Adjustment Period, and as such, Purchaser shall not be separately obligated to pay for any Property Costs or other such costs with respect to which an adjustment has been made.

 

Section 2.3

Allocation of Purchase Price.

 

Concurrent with the execution of this Agreement, Purchaser and Sellers will agree upon an allocation of the unadjusted Purchase Price among each of the Assets, consistent with the principles of Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury Regulations thereunder.  Such allocation of value shall be attached to this Agreement as Schedule 2.3. The "Allocated Value" for any Asset equals the portion of the unadjusted Purchase Price allocated to such Asset on Schedule 2.3, increased or reduced as described in this Article 2.  Any adjustments to the Purchase Price other than the adjustments provided for in Sections 2.2(a)(ii) and 2.2(a)(iii) shall be applied on a pro rata basis to the amounts set forth on Schedule 2.3 for all Assets.  After all such adjustments are made, any adjustments to the Purchase Price pursuant to Sections 2.2(a)(ii) and 2.2(a)(iii) shall be applied to the amounts set forth in Schedule 2.3 for the particular affected Assets. After Sellers and Purchaser have agreed on the Allocated Values for the Assets, Sellers and Purchaser will be deemed to have accepted such Allocated Values for purposes of this Agreement and the transactions contemplated hereby, but otherwise makes no representation or warranty as to the accuracy of such values. Sellers and Purchaser agree (i) that the Allocated Values shall be used by Sellers and Purchaser as the basis for reporting asset values and other items for purposes of all federal, state, and local Tax Returns, including without limitation Internal Revenue Service Form 8594, if required, or any similar statement of such allocation that may be required and (ii) that neither they nor their Affiliates will take positions inconsistent with the Allocated Values in notices to government authorities, in audit or other proce edings with respect to Taxes, in notices to preferential purchase right holders, or in other documents or notices relating to the transactions contemplated by this Agreement.  Purchaser and Sellers further agree that, on or before the Closing Date, they will mutually agree as to the further

allocation of the Allocated Values included in Schedule 2.3 as to the relative portion of those values attributable to leasehold costs and depreciable equipment.

Section 3.1

The Conveyance.

 

         The conveyances to be delivered by Sellers to Purchaser shall be substantially in the form of Annex I (a) and (b) hereto (the "Conveyances") and contain a special warranty of title by, through and under Sellers and their Affiliates to the Properties, but shall otherwise be without warranty of title, express, implied or statutory, except that such the Conveyances shall transfer to Purchaser all rights or actions on title warranties given or made by Sellers' predecessors (other than Affiliates of Sellers) with respect to the Properties, to the extent Sellers may legally transfer such rights.  The instrument attached as Annex I(a) shall be used to convey the Leases as to all Lands except the Lands that include the tracts that are subject to the right of reassignment discussed in Section 1.6.  The instrument attached as Annex I(b) shall be used to convey the Leases that are subject to the right of reassignment discussed in Section 1.6.

Section 3.2

Definition of Defensible Title.

 

         As used in this Agreement, the term "Defensible Title" means that record title of Sellers which, subject to Permitted Encumbrances:

(a)    Entitles Sellers to receive a share of the oil, gas and other associated minerals produced, saved and marketed from any Unit or Well throughout the duration of the productive life of such Unit or Well (after satisfaction of all royalties, overriding royalties, nonparticipating royalties, net profits interests or other similar burdens on or measured by production of oil and gas) (a "Net Revenue Interest"), of not less than the Net Revenue Interest share shown in Exhibit B for such Unit or Well, except, to the extent permitted by this Agreement, decreases in connection with those operations in which Sellers may after the Effective Time be non-consenting co-owners, decreases resulting from the establishment or amendment after the Effective Time of pools or units, and decreases required to allow other working in terest owners to make up past underproduction or pipelines to make up past under deliveries and except as stated in Exhibit B;

 

(b)    Obligates Sellers to bear a percentage of the costs and expenses for the maintenance and development of, and operations relating to, (i) any Unit or Well not greater than the "working interest" shown in Exhibit B without increase throughout the productive life of such Unit or Well except as stated in Exhibit B and except increases resulting from contribution requirements with respect to defaulting co-owners under applicable operating agreements from and after the Effective Time and increases that are accompanied by at least a proportionate increase in Sellers' Net Revenue Interest; and

 

(c)    Is free and clear of liens, encumbrances, obligations, security interests, irregularities, pledges, or other defects.

 

(i)           As used in this Agreement, the term "Title Defect" means, with respect to any applicable Asset, any lien, charge, encumbrance, obligation (including contract obligation), defect, or other matter (including without limitation a discrepancy in Net Revenue Interest or

working interest) that causes Sellers to fail to own Defensible Title to the Well(s) and Unit(s) or other location(s) identified on Schedule 2.3)  comprising such Asset, that has a Title Defect Amount attributable thereto in excess of $50,000, and that, in the aggregate with all other Title Defects results in a total Title Defect Amount in excess of $1,000,000.

 

(ii)           As used in this Agreement, the term "Title Benefit" means any right, circumstance or condition that operates to increase the Net Revenue Interest of Sellers in any Property above that shown on Exhibit B, without causing a greater than proportionate increase in Sellers' working interest above that shown in Exhibit B, that has a Title Benefit Amount attributable thereto in excess of $50,000, and that, in the aggregate with all other Title Benefits results in a total Title Benefit Amount in excess of $1,000,000

 

Section 3.3

Definition of Permitted Encumbrances.

 

         As used herein, the term "Permitted Encumbrances" means any or all of the following:

(a)    Royalties and any overriding royalties, reversionary interests and other burdens to the extent that they do not, reduce Sellers' Net Revenue Interest below that shown in Exhibit B or increase Sellers' working interest above that shown in Exhibit B without a corresponding increase in the Net Revenue Interest;

 

(b)    All leases, unit agreements, pooling agreements, operating agreements, production sales contracts, division orders and other contracts, agreements and instruments applicable to the Assets, to the extent that they do not, (i) individually, reduce Sellers' Net Revenue Interest below that shown in Exhibit B or increase Sellers' working interest above that shown in Exhibit B without a corresponding increase in the Net Revenue Interest or (ii) individually or in the aggregate, materially detract from the value of or materially interfere with the use or ownership of the Assets subject thereto or affected thereby (as currently used or owned);

 

(c)    Subject to compliance with Sections 3.6 and 7.8, preferential rights to purchase the Assets;

 

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

 

(e)    Liens for current Taxes or assessments not yet delinquent;

 

(f)     Materialman's, mechanic's, repairman's, employee's, contractor's, operator's, non-operator’s and other similar liens or charges arising in the ordinary course of business for amounts not yet delinquent (including any amounts being withheld as provided by law), or if delinquent, being contested in good faith by appropriate actions;

 

(g)    All rights to consent, by required notices to, filings with, or other actions by Governmental Bodies in connection with the sale or conveyance of oil and gas leases or interests therein if they are not required prior to the sale or conveyance;

(h)    Rights of reassignment arising upon final intention to abandon or release the Assets, or any of them;

 

(i)     Easements, rights-of-way, servitudes, permits, surface leases and other rights in respect of surface operations to the extent that they do not (i) individually reduce Sellers' Net Revenue Interest below that shown in Exhibit B or increase Sellers' working interest above that shown in Exhibit B without a corresponding increase in Net Revenue Interest, or (ii) individually or in the aggregate, materially detract from the value of or materially interfere with the use or ownership of the Assets subject thereto or affected thereby (as currently used or owned);

 

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

 

(k)    Any encumbrance on or affecting the Assets which is expressly assumed, bonded or paid by Purchaser at or prior to Closing or which is discharged by Sellers at or prior to Closing;

 

(l)     Any matters shown on Exhibit B;

 

(m)   Any other liens, charges, encumbrances, defects or irregularities which do not, individually or in the aggregate, materially detract from the value of or materially interfere with the use or ownership of the Assets 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, and which do not reduce Sellers' Net Revenue Interest below that shown in Exhibit B, or increase Sellers' working interest above that shown in Exhibit B without a corresponding increase in Net Revenue Interest; and

 

(n)    Imbalances associated with the Assets.

 

Section 3.4

Notice of Title Defects Defect Adjustments.

(a)    From the date of this Agreement until 5:00 p.m. (local time in Houston, Texas) ten (10) days prior to the Closing Date (the "Examination Period"), Sellers will provide to Purchaser and its authorized representatives reasonable access during normal business hours and in a manner so as to not unduly interfere with the normal business operations of Sellers to the office, personnel and books and records of Sellers in order for Purchaser to conduct such title examinations as it may in its sole discretion choose to conduct with respect to the Assets in order to determine whether Title Defects exist.  Such books and records shall include all title opinions, title files, ownership maps, lease files, assignments, division orders, operating records and agreements, well files, financial and accounting records , geological, geophysical and engineering records, in each case insofar as same may now be in existence and in the possession of Sellers, excluding, however, any information that Sellers are prohibited from disclosing by bona fide, third party confidentiality restrictions; provided, that if requested by Purchaser, Sellers shall use commercially reasonable efforts to obtain a waiver of any such restrictions in favor of Purchaser.

 

(b)    To assert a Title Defect, Purchaser must deliver claim notices to Sellers (each a "Title Defect Notice") on or before ten (10) days prior to the Closing Date (the "Title Claim Date"), except as

otherwise provided under Sections 3.5 or 3.6.  Each Title Defect Notice shall be in writing and shall include (i) a description of the alleged Title Defect(s), (ii) the Units or Wells affected by the Title Defect (each a "Title Defect Property"), (iii) the Allocated Value of each Title Defect Property, and (iv) the amount by which Purchaser reasonably believes the Allocated Value of each Title Defect Property is reduced by the alleged Title Defect(s) and the computations and information upon which Purchaser's belief is based. Notwithstanding any other provision of this Agreement to the contrary, Purchaser shall be deemed to have waived all Title Defects of which Sellers have not been notified under a Title Defect Notice on or before the Title Claim Date.

 

(c)    Sellers shall deliver to Purchaser on or before the Title Claim Date with respect to each Title Benefit a notice (a "Title Benefit Notice") including (i) a description of the Title Benefit, (ii) the Units or Wells affected, (iii) the Allocated Values of the Units or Wells subject to such Title Benefit and (iv) the amount by which the Sellers reasonably believe the Allocated Value of those Units or Wells is increased by the Title Benefit, and the computations and information upon which Sellers' belief is based.  In the event Purchaser discovers a Title Benefit during the Examination Period, it shall notify Sellers in writing of such Title Benefit before the Title Claim Date so that Sellers can include such Title Benefit in its Title Benefit Notice.

 

(d)           Sellers shall have the right, but no obligation, to attempt, at its sole cost, to cure or remove at any time prior to Closing (the "Cure Period"), unless the parties otherwise agree, any Title Defects of which it has been advised by Purchaser.

 

Section 3.5

Remedies for Title Defects.

(a)    In the event that any Title Defect is not waived by Purchaser or cured on or before Closing, and this Agreement is not terminated pursuant to Section 8.1(e) or 8.2(e), then, Sellers and Purchaser shall attempt to agree on one of the following options; provided that if Sellers and Purchaser cannot agree prior to the Closing Date then they will be deemed to have agreed to Section 3.5(a)(i),:

 

(i)           the Purchase Price will be reduced by an amount agreed upon ("Title Defect Amount") pursuant to Section 3.5(c) or 3.5(e) by Purchaser and Sellers as being the value of such Title Defect, taking into consideration the Allocated Value of the Property subject to such Title Defect, the portion of the Property subject to such Title Defect and the legal effect of such Title Defect on the Property affected thereby; provided, however, that if such Title Defect is the result of a discovery by Purchaser that Sellers owned, as of the Effective Time, a Net Revenue Interest in a Property that is less than the Net Revenue Interest set forth on Exhibit B, the n the proportion of reduction to the Purchase Price shall be determined in accordance with Section 3.5(c)(iii); or

 

(ii)           the Sellers will retain the Property that is subject to such Title Defect, and the Purchase Price will be reduced by an amount equal to the Allocated Value of such Property; or

 

(iii)           the Sellers will retain the Property that is subject to such Title Defect and replace such Property with a similar property not burdened by a Title Defect, if mutually agreed upon by Sellers and Purchaser.

 

(b)    With respect to each Unit or Well affected by Title Benefits reported under Section 3.4(c), the Purchase Price shall be increased by an amount (the "Title Benefit Amount") equal to the

increase in the Allocated Value for such Unit or Well caused by such Title Benefits, as determined pursuant to Section 3.5(d).

 

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

 

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

 

(ii)           if the Title Defect is a lien, encumbrance or other charge which is undisputed and liquidated in amount, then the Title Defect Amount shall be the amount necessary to be paid to remove the Title Defect from the Title Defect Property;

 

(iii)           if the Title Defect represents a discrepancy between (A) the Net Revenue Interest for any Title Defect Property and (B) the Net Revenue Interest or percentage stated on Exhibit B, then the Title Defect Amount shall be the product of the Allocated Value of such Title Defect Property multiplied by a fraction, the numerator of which is the Net Revenue Interest shortfall and the denominator of which is the Net Revenue Interest  stated on Exhibit B;

 

(iv)           if the Title Defect represents an obligation, encumbrance, burden or charge upon or other defect in title to the Title Defect Property of a type not described in subsections (i), (ii) or (iii) above, the Title Defect Amount shall be determined by taking into account the Allocated Value of the Title Defect Property, the portion of the Title Defect Property affected by the Title Defect, the legal effect of the Title Defect, the potential economic effect of the Title Defect over the life of the Title Defect Property, the values placed upon the Title Defect by Purchaser and Sellers and such other factors as are necessary to make a proper evaluation; and

 

(v)           notwithstanding anything to the contrary in this Article 3, the aggregate Title Defect Amounts attributable to the effects of all Title Defects upon any Title Defect Property shall not exceed the Allocated Value of the Title Defect Property.

 

(d)    The Title Benefit Amount for any Title Benefit shall be the product of the Allocated Value of the affected Unit or Well multiplied by a fraction, the numerator of which is the Net Revenue Interest  increase and the denominator of which is the Net Revenue Interest stated on Exhibit B.

 

(e)    Sellers and Purchaser shall attempt to agree on all Title Defect Amounts and Title Benefit Amounts prior to Closing.  If Sellers and Purchaser are unable to agree by Closing upon the Title Defect Amount(s) (if any) and the Title Benefit Amount(s) (if any), and, in the case of Title Defect Amounts, the Sellers and Purchaser have agreed (or have been deemed to have agreed) to proceed under Section 3.5(a)(i), the Title Defect Amounts and Title Benefit Amounts in dispute shall be exclusively and finally resolved by arbitration pursuant to this Section 3.5(e). There shall be a single arbitrator, who shall be a title attorney with at least ten (10) years experience in oil and gas titles involving Permian Basin properties, as selected by mutual agreement of Purchaser and Sellers within fifteen (15) days a fter the end of the Cure Period, and absent such agreement, by the Houston office of the American Arbitration Association (the "Title Arbitrator"). The arbitration proceeding shall be held in Austin, Texas and shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "Rules"), to the extent such rules do not conflict with the terms of this Section. The Title Arbitrator's determination shall be made within twenty (20) days after submission of the matters in dispute and shall be final and binding upon both parties, without right of appeal. In making his determination, the Title Arbitrator shall be bound by the rules set forth in Sections 3.5(c) and

3.5(d) and may consider such other matters as in the opinion of the Title Arbitrator are necessary or helpful to make a proper determination. Additionally, the Title Arbitrator may consult with and engage disinterested third parties to advise the arbitrator, including without limitation petroleum engineers. The Title Arbitrator shall act as an expert for the limited purpose of determining the specific disputed Title Defect Amounts and Title Benefit Amounts submitted by either party and may not award damages, interest or penalties to either party with respect to any matter. Sellers and Purchaser shall each bear its own legal fees and other costs of presenting its case. Each party shall bear one-half of the costs and expenses of the Title Arbitrator.

 

Section 3.6

Consents to Assignment and Preferential Rights to Purchase.

(a)    Following execution and delivery of this Agreement, Sellers shall promptly prepare and send (i) notices to the holders of any required consents to assignment of any Assets requesting such holder's consent to assign such Assets to Purchaser or Linn Operating, Inc. and (ii) notices to the holders of any applicable preferential rights to purchase any Asset requesting waivers of such preferential rights to purchase; provided, however, that Purchaser shall have the opportunity to review such notices before they are sent.   The consideration payable under this Agreement for any particular Assets for purposes of preferential purchase right notices shall be the Allocated Value for such Assets. Sellers shall use commercially reasonable efforts to cause such consents and waivers of preferential rights t o purchase (or the exercise thereof) to be obtained and delivered prior to Closing. Purchaser shall cooperate with Sellers in seeking to obtain such consents and waivers of preferential rights.

 

(b)    Sellers shall notify Purchaser at least five (5) Business Days prior to Closing of all required third-party consents to the assignment of the Assets to Purchaser which have not been obtained and the Assets to which they pertain. In no event shall there be included in the Conveyances at Closing any Asset subject to a consent requirement that provides that transfer of the Asset without consent will result in a termination or other material impairment of any rights in relation to such Asset. In cases where the Asset subject to such a requirement is a Contract and Purchaser is assigned the Properties to which the Contract relates, but the Contract is not transferred to Purchaser due to the unwaived consent requirement, Sellers shall continue after Closing to use commercially reasonable efforts to obtain such con sent so that such Contract can be transferred to Purchaser upon receipt of such consent. In cases where the Asset subject to such a requirement is a Property and the third-party consent to the sale and transfer of the Property is not obtained prior to the Closing Date, Purchaser may elect to treat the unsatisfied consent requirement as a Title Defect by giving Sellers notice thereof in accordance with Section 3.4(b), except that such notice must be given at least five (5) Business Days prior to the Closing Date. If an unsatisfied consent requirement with respect to which a Purchase Price adjustment is made under Section 3.5 is subsequently satisfied prior to the date of the final adjustment to the Purchase Price under Section 9.4(b), Sellers shall be paid the amount of the previous reduction in the Purchase Price and the provisions of this Section 3.6 shall no longer apply.

 

(c)    If any preferential rights to purchase any Properties are exercised prior to Closing, those Properties transferred to a third party as a result of the exercise of such preferential rights shall be treated as if subject to a Title Defect resulting in the complete loss of title and the Purchase Price shall be reduced under Section 2.2(b) by the Allocated Value for such Property. Sellers shall retain the consideration paid by the third party.

 

Section 3.7

Casualty or Condemnation Loss.

(a)    Purchaser shall assume all risk of loss with respect to, and any change in the condition of, the Assets from the Effective Time until Closing for production of Hydrocarbons through normal depletion (including watering out of any well, collapsed casing or sand infiltration of any well) and the depreciation of personal property due to ordinary wear and tear.

(b)    Subject to the provisions of Sections 8.1(f) and 8.2(f) hereof, if, after the date of this Agreement but prior to the Closing Date, any portion of the Assets is destroyed by fire or other casualty or is taken in condemnation or under right of eminent domain, and the loss as a result of such individual casualty or taking exceeds twenty percent (20%) of the Purchase Price, Purchaser shall not be required to close.  Should Purchaser elect to close, Sellers, at their option, may elect  (i) to cause the Assets affected by any casualty or taking to be repaired or restored to at least their condition prior to such casualty, at Sellers' sole cost, as promptly as reasonably practicable (which work may extend after the Closing Date); (ii) to remove the Assets affected by any casualty or taking and reduce the Purchase Price by the Allocated Value of such Assets; or (iii) to treat such casualty or taking as a Title Defect with respect to the affected Property or Properties under Section 3.4. In each case, Sellers shall retain all rights to insurance and other claims against third parties with respect to the casualty or taking except to the extent the parties otherwise agree in writing.

(c)    If, after the date of this Agreement but prior to the Closing Date, any portion of the Assets is destroyed by fire or other casualty or is taken in condemnation or under right of eminent domain, and the loss as a result of such individual casualty or taking is ten percent (10%) or less of the Purchase Price, Purchaser shall nevertheless be required to close and Sellers shall, at Closing, reduce the Purchase Price in an amount equal to the amount required to repair or restore the affected Assets to their condition prior to such casualty (or in the case of a taking, by the Allocated Value of such taken Property).  If Purchaser agrees, Sellers shall in lieu of a Purchase Price reduction contemplated above, pay to Purchaser and shall assign, transfer and set over to Purchaser or subrogate Purchaser to all of Sellers' right, title and interest (if any) in insurance claims, unpaid awards, and other rights against third parties (other than Affiliates of Sellers and its and their directors, officers, employees and agents) arising out of the casualty or taking.

Section 4.1

Assessment.

(a)    During the Examination Period, Purchaser shall have the right, or the right to cause an environmental consultant reasonably acceptable to Sellers ("Purchaser's Environmental Consultant"), to conduct a Phase I environmental assessment of the Properties and to conduct any further Phase I or other non-invasive environmental assessment of the Properties it deems appropriate, to the extent Sellers have the authority to grant such right to Purchaser ("Purchaser's Environmental Review").  Purchaser agrees to conduct Purchaser's Environmental Review during normal business hours in a manner so as not to unduly interfere with the business operations of Sellers and in compliance with all Applicable Laws, and Purchaser shall exercise due care with respect to Sellers' properties and their condition.

 

(b)    Prior to the Closing, unless otherwise required by Applicable Law, Purchaser shall (and shall cause Purchaser's Environmental Consultant, if applicable, to) treat confidentially any matters

revealed by Purchaser's Environmental Review and any reports or data generated from such review (the "Environmental Information"), and Purchaser shall not (and shall cause Purchaser's Environmental Consultant, if applicable, to not) disclose any Environmental Information to any Governmental Entity or other third party without the prior written consent of Sellers (unless so required under Applicable Law).  Prior to the Closing, unless otherwise required by Applicable Law, Purchaser may use the Environmental Information only in connection with the transactions contemplated by this Agreement.  If Purchaser, Purchaser's Environmental Consultant, if applicable, or any third party to whom Purchaser has provided any Environmental Information become legally compelled to disclose any of the Environmental Information, Purchaser shall provide Sellers with prompt notice and Sellers, at Sellers' expense, may file any pro tective order, or seek any other remedy, as it deems appropriate under the circumstances.  If this Agreement is terminated prior to the Closing, Purchaser shall deliver the Environmental Information to Sellers, which Environmental Information shall become the sole property of Sellers.

 

Section 4.2

Environmental Defects.

(a)    If Purchaser or Purchaser's Environmental Consultant, if applicable, discovers any Environmental Defect (as herein defined), Purchaser shall notify Sellers on or before ten  (10) days  before Closing.  To be effective, such notice (an "Environmental Defect Notice") must (i) be in writing; (ii) be received by Sellers prior to the expiration of the Examination Period; (iii) describe the Environmental Defect in reasonable detail, including (A) the specific Properties affected by or associated with such Environmental Defect, (B) if applicable, a site plan showing the location of all field notes and the field conditions observed, (C) the written conclusion of Purchaser's Environmental Consultant, if applicable, that an Environmental Defect is believed to exist, wh ich conclusion shall be reasonably substantiated by the factual data gathered in Purchaser's Environmental Review, and (D) if feasible and applicable, a separate, reasonably specific citation of the provisions of the Environmental Laws alleged to be violated and the related facts that substantiate such violation; (iv) describe the procedures recommended to correct, eliminate or pay the Environmental Defect, together with any related recommendations from Purchaser's Environmental Consultant, if applicable; and (v) set forth Purchaser's good faith estimate of the Environmental Defect Amount, including the basis for such estimate.   Upon the receipt of such effective notice from Purchaser, Sellers shall have the option, in addition to the remedy set forth in Section 4.3, but not the obligation, to attempt to cure such Environmental Defect at any time prior to the Closing, at the sole cost and expense of Sellers.   If Sellers and Purchaser are unable to reach an agreement as to whether an Environmental Defect exists or, if it does exist, the amount of the Environmental Defect Amount attributable thereto, the provisions of Section 4.4 shall be applicable.  Notwithstanding any other provision of this Agreement to the contrary, Purchaser shall be deemed to have waived all Environmental Defects of which Sellers have not been given notice pursuant to an Environmental Defect Notice in accordance with this Section 4.2(a).

 

(b)    If any Environmental Defect described in a notice delivered in accordance with Section 4.2(a) is not cured on or before the Closing, then the Purchase Price shall be reduced, subject to Section 4.3, by the Environmental Defect Amount of such Environmental Defect.

 

(c)    As used in this Agreement:

 

(i)           "Environmental Defect" shall mean, with respect to any given Asset, a violation of Environmental Laws in effect as of the Effective Time in the jurisdiction in which such Property is located, an obligation under Environmental Laws to complete immediately or promptly after the Closing any corrective action at the Asset, or any Environmental Liability

arising from or attributable to any condition, event, circumstance, activity, practice, incident, action, or omission existing or occurring prior to the Closing Date, or the use, release, storage, treatment, transportation, or disposal of Hazardous Materials subsequent to the Effective Time and prior to the Closing Date, (A) regarding which an Environmental Defect Notice has been timely and otherwise validly delivered, (B) that has an Environmental Defect Amount attributable thereto in excess of $50,000, (C) that, in the aggregate with all other Environmental Defects results in a total Environmental Defect Amount in excess of $1,000,000, and (D) is not otherwise disclosed in Schedule 4.2.

 

(ii)           "Environmental Defect Amount" shall mean the amount (A) the reasonably estimated costs and expenses to correct such Environmental Defect in the most cost effective manner reasonably available, consistent with Environmental Laws, or (B) the amount of Environmental Liabilities reasonably believed will be incurred or required to be paid by Sellers with respect thereto. The parties recognize that the calculation of an Environmental Defect Amount may require the use of assumptions and extrapolations; however, it is acknowledged and agreed that any such assumptions and extrapolations will be consistent with the known factual information and reasonable in nature.

 

Section 4.3

Remedies for Environmental Defects.

 

In the event that any Environmental Defect is not waived by Purchaser or cured on or before Closing, and this Agreement is not terminated pursuant to Section 8.1(e) or 8.2(e), then, Sellers and Purchaser will attempt to agree on one of the following; provided that if they cannot agree prior to the Closing Date, they will be deemed to have agreed to Section 4.3(i):

 

(i)           the Purchase Price will be reduced by the Environmental Defect Amount in accordance with Section 2.2(a)(iii) agreed upon by Sellers and Purchaser (or failing such agreement in accordance with Section 4.4); or

 

(ii)           the Sellers will retain the Property that is subject to such Environmental Defect, and the Purchase Price will be reduced by an amount equal to the Allocated Value of such Property.

 

 

Section 4.4

Disputes Regarding Environmental Defects.

 

Sellers and Purchaser shall attempt to agree on all Environmental Defect Amounts prior to Closing.  If Sellers and Purchaser are unable to agree by Closing upon the Environmental Defect Amount and Sellers will not retain the Property pursuant to Section 4.3(ii), the Environmental Defect Amounts in dispute shall be exclusively and finally resolved by arbitration pursuant to this Section 4.4. There shall be a single arbitrator, who shall be an environmental attorney with at least ten (10) years experience in environmental law, as selected by mutual agreement of Purchaser and Sellers within fifteen (15) days after the end of the Cure Period, and failing such agreement, such arbitrator (the "Environmental Arbitrator") shall be selected in accordance with the Rules.  The arbitration proceeding shall be held in Austin, T exas and shall be conducted in accordance with the Rules, to the extent such rules do not conflict with the terms of this Section. The Environmental Arbitrator's determination shall be made

within twenty (20) days after submission of the matters in dispute and shall be final and binding upon both parties, without right of appeal. In making his determination, the Environmental Arbitrator shall be bound by the rules set forth in Sections 4.2 and 4.3  and may consider such other matters as in the opinion of the Environmental Arbitrator are necessary or helpful to make a proper determination. Additionally, the Environmental Arbitrator may consult with and engage disinterested third parties to advise the Environmental Arbitrator. The Environmental Arbitrator shall act as an expert for the limited purpose of determining the specific disputed Environmental Defect Amounts submitted by either party and may not award damages, interest or penalties to either party with respect to any matter. Sellers and Purchaser shall each bear its own legal fees and other costs of presenting its case. Each party shall bear one-ha lf of the costs and expenses of the Environmental Arbitrator.

 

Section 4.5

NORM, Wastes and Other Substances.

Purchaser acknowledges that the Assets have been used for exploration, development, and production of oil and gas and that there may be petroleum, produced water, wastes, or other 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, hazardous substances, or NORM.  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 without limitation, water, soils or s ediment.  Special procedures may be required for the assessment, remediation, removal, transportation, or disposal of environmental media, wastes, asbestos, hazardous substances, and NORM from the Assets.  Notwithstanding this acknowledgment, nothing in this Section limits Purchaser’s ability to claim an Environmental Defect with respect to NORM on equipment included in the Assets that is not in service.

Section 5.1

Generally.

 
 

(a)    Any representation "to the knowledge of such Seller" or "to such Seller’s knowledge" is limited to matters within the actual knowledge of the individuals listed on Schedule 5.1(a) ("Sellers’ Knowledge Individuals") of Sellers.  "Actual knowledge" for purposes of this Agreement means information actually personally known by Sellers’ Knowledge Individuals.

 

(b)    Inclusion of a matter on a Schedule to a representation or warranty which addresses matters having a Material Adverse Effect shall not be deemed an indication that such matter does, or may, have a Material Adverse Effect. Matters may be disclosed on a Schedule to this Agreement for purposes of information only.

 

(c)    Subject to the foregoing provisions of this Section 5.1, the disclaimers and waivers contained in Sections 11.8 and 11.9 and the other terms and conditions of this Agreement, each of Sellers severally represents and warrants to Purchaser the matters set out in Sections 5.2 through 5.22.

Section 5.2

Existence and Qualification.

Such Seller is an organization existing and in good standing under the laws of the state of its formation and is duly qualified to do business as a foreign corporation where the Assets are located, except where the failure to so qualify would not have a Material Adverse Effect.

Section 5.3

Power.

Such Seller has the power to enter into and perform this Agreement and consummate the transactions contemplated by this Agreement.

Section 5.4

Authorization and Enforceability.

The execution, delivery and performance of this Agreement, and the performance of the transactions contemplated hereby, have been duly and validly authorized by all necessary action on the part of such Seller. This Agreement has been duly executed and delivered by such Seller (and all documents required hereunder to be executed and delivered by such Seller at Closing will be duly executed and delivered by such Seller) and this Agreement constitutes, and at the Closing such documents will constitute, the valid and binding obligations of such Seller, enforceable in accordance with their terms except as such enforceability may be limited by applicable bankruptcy or other similar laws affecting the rights and remedies of creditors generally as well as to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

Section 5.5

No Conflicts.

The execution, delivery and performance of this Agreement by such Seller, and the transactions contemplated by this Agreement will not (i) violate any provision of the governing documents of such Seller, (ii) result in default (with due notice or lapse of time or both) or the creation of any lien or encumbrance or give rise to any right of termination, cancellation or acceleration under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license or agreement to which such Seller is a party or which affect the Assets, (iii) violate any judgment, order, ruling, or decree applicable to such Seller as a party in interest, (iv) to the knowledge of such Seller, violate any Laws applicable to such Seller or any of the Assets, or (v) require any filing with, notification of or consent, approval or authorization of any Governmental Body, except for (a) rights to consent by, required notices to, and filings with or other actions by Governmental Bodies where the same are not required prior to the assignment of oil and gas interests and (b) any matters described in clauses (ii), (iii) or (iv) above which would not have a Material Adverse Effect.

Section 5.6

Liability for Brokers' Fees.

Purchaser shall not directly or indirectly have any responsibility, liability or expense, as a result of undertakings or agreements of such Seller, 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 5.7

Litigation.

Except as set forth in: (a) Schedule 5.7(a) no investigation, proceeding, action, suit, or other legal proceeding of any kind or nature before any Governmental Body or arbitrator (including any take-or-pay claims) is pending or, to the knowledge of such Seller, threatened with respect to the Assets, or such Seller (with respect to any of the Assets), or either of them, or with respect to the ownership, operation, development, maintenance, or use of any thereof; and (b) Schedule 5.7(b), no notice in writing from any Governmental Body or any other Person has been received by such Seller claiming any violation of or noncompliance with any Law with respect to the Assets (including any such Law concerning the conservation of natural resources).

Section 5.8

Taxes and Assessments.

 

(a)    With respect to Applicable Taxes, all Tax Returns of such Seller have been filed in a timely manner (within any applicable extension periods), all such Tax Returns are true, correct and complete in all material respects, and all Applicable Taxes (other than Taxes that Purchaser and such Seller have taken into account in the determination of the Purchase Price under Section 2.2(a) or Taxes attributable to Purchaser pursuant to Section 7.13) have been paid in full or will be timely paid in full by the due date thereof.  All Applicable Tax withholding and deposit requirements imposed on or with respect to such Seller have been satisfied in full in all respects.  There are no liens on any of the Assets that arose in connection with any failure (or alleged failure) to pay any Applicable Tax.

 

(b)    There is no claim against such Seller for any Applicable Taxes, and no assessment, deficiency, or adjustment has been asserted, proposed, or threatened against such Seller with respect to any Applicable Taxes or Tax Returns with respect to Applicable Taxes.  No claim has ever been made by an authority in a jurisdiction where such Seller does not file Tax Returns that it is or may be subject to taxation in that jurisdiction, and the Assets are not subject to Taxes in any jurisdiction in which such Seller has not filed Tax Returns.

 

(c)    With respect to Applicable Taxes, there is not in force any extension of time with respect to the due date for the filing of any Tax Return of or with respect to such Seller or any waiver or agreement for any extension of time for the assessment or payment of any Applicable Tax of or with respect to such Seller.  No request for any such waiver is pending.

 

(d)    Such Seller is not a party to or bound by any Applicable Tax allocation, sharing or indemnity agreements or arrangements.

 

(e)    None of the Assets is "tax exempt use property" within the meaning of Section 168(h) of the Code or "tax exempt bond financed property" within the meaning of Section 168(g)(5) of the Code.

 

(f)     None of the Assets is held in an arrangement (other than as may arise by virtue of such Seller’s organizational or governing documents) that is treated as a partnership for Income Tax purposes.

 

(g)    None of the Assets being sold by such Seller hereunder is (nor will be as of the Closing Date) an interest in any entity (including any entity disregarded as separate from its owner) for Income Tax purposes.

(h)    Such Seller is not a party to any agreement with any Taxing Authority with respect to Applicable Taxes that would be terminated or adversely affected as a result of the transactions contemplated by this Agreement.

 

(i)     Such Seller is not a "foreign person" within the meaning of Section 1445(f)(3) of the Code.

 

(j)     All of such Seller's property that is subject to property tax has been properly listed and described on the property tax rolls of the appropriate taxing jurisdiction for all periods prior to the Effective Time and no portion of such Seller's property constitutes omitted property for property tax purposes.

 

Section 5.9

Outstanding Capital Commitments.

As of the Effective Time, and the date hereof, there were no outstanding AFEs or other commitments to make capital expenditures which are binding on the Assets owned by such Seller and which such Seller reasonably anticipates will individually require expenditures by the owner of those Assets after the Effective Time in excess of $50,000 per Asset other than those shown on Schedule 5.9 hereto.

 

Section 5.10

Compliance with Laws.

Except as disclosed on Schedule 5.10, to the knowledge of such Seller, the Sellers’ Operated Assets operated by such Seller are, and Sellers' operation of those Sellers’ Operated Assets has been and currently is, and the other Assets are and the operation of the other Assets has been and currently is, in substantial compliance with the provisions and requirements of all Laws (other than Environmental Laws, as to which Sellers make no representations or warranties hereunder) of all Governmental Bodies having jurisdiction with respect to the Assets, or the ownership, operation, development, maintenance, or use of any thereof.

Section 5.11

Contracts.

(a)    Except as disclosed on Schedule 5.11(a), to the knowledge of such Seller, such Seller has paid its share of all costs (including without limitation Property Costs) payable by it under the Leases and Contracts, and all Leases and Contracts are in full force and effect and constitute valid and binding obligations of the parties thereto.  Except as disclosed on Schedule 5.11(a), to the knowledge of such Seller, such Seller is not in breach or default (and no situation exists that, which the passing of time or giving of notice would create a breach or default) under any of the Leases or Contracts, and no breach or default by any third party (or situation that, with the passing of time or giving of notice would create a breach or default) exists, expect such defaults as would not, individually or in the aggregate have a Material Adverse Effect.

 

(b)    To such Seller’s knowledge, Schedule 5.11(b) sets forth all of the following contracts, agreements, and commitments (excluding Leases and Surface Contracts) to which any of the Assets owned by such Seller will be bound as of the Closing: (i) any agreement with any Affiliate of such Seller; (ii) any agreement or contract for the sale, exchange, or other disposition of Hydrocarbons produced from or attributable to such Seller’s interest in the Assets that is not cancelable without penalty or other

material payment on not more than 30 days prior written notice; (iii) any agreement of or binding upon such Seller to sell, lease, farmout, or otherwise dispose of any interest in any of the Assets after the date hereof, other than conventional rights of reassignment arising in connection with such Seller’s surrender or release of any of the Assets; and (iv) any tax partnership agreement of or binding upon such Seller affecting any of the Assets.

 

Section 5.12

Payments for Production.

To the knowledge of such Seller, except as set forth on Schedule 5.12, (a) all rentals, royalties, excess royalty, overriding royalty interests, production payments, and other payments due and/or payable by such Seller to mineral and royalty holders and other interest owners during the period of such Seller’s ownership up to the Effective Time under or with respect to the Assets and the Hydrocarbons produced therefrom or attributable thereto, have been paid, and (b) such Seller is not obligated under any contract or agreement for the sale of gas from the Assets containing a take-or-pay, advance payment, prepayment, or similar provision, or under any gathering, transmission, or any other contract or agreement with respect to any of the Assets to gather, deliver, process, or transport any gas  without then or thereafter receiving full payment therefor.

Section 5.13

Imbalances.

To the knowledge of such Seller, Schedule 5.13 accurately sets forth all of such Seller’s Imbalances and penalties as of the Effective Time arising with respect to the Assets and except as disclosed in Schedule 5.13 as of the Effective Time (i) no Person is entitled to receive any portion of such Seller’s Hydrocarbons produced from the Assets or to receive cash or other payments to "balance" any disproportionate allocation of Hydrocarbons produced from the Assets under any operating agreement, gas balancing or storage agreement, gas processing or dehydration agreement, gas transportation agreement, gas purchase agreement, or other agreements, whether similar or dissimilar, (ii) such Seller is not obligated to deliver any quantities of gas or to pay any penalties or other amounts, in connection with the violation of any of the terms of any gas  contract or other agreement with shippers with respect to the Assets, and (iii) such Seller is not obligated to pay any penalties or other payments under any gas transportation or other agreement as a result of the delivery of quantities of gas from the Wells in excess of the contract requirements.

Section 5.14

Governmental Authorizations.

To the knowledge of such Seller, except as disclosed on Schedule 5.14, such Seller has obtained and is maintaining all federal, state and local governmental licenses, permits, franchises, orders, exemptions, variances, waivers, authorizations, certificates, consents, rights, privileges and applications therefor (the "Governmental Authorizations") that are presently necessary or required for the ownership and operation of the Sellers’ Operated Assets that are currently owned and operated by such Seller (including, but not limited to, those required under Environmental Laws). Except as disclosed in Schedule 5.7(a), Schedule 5.7(b) or Schedule 5.14 (i) to the knowledge of such Seller, such Seller has operated such Sellers’ Operated Assets in accordance with the conditions and provisions of such Governmental Authorizations, an d (ii) no notices of violation have been received by such Seller, and no proceedings are pending or, to such Seller’s knowledge, threatened in writing that might result in any modification, revocation, termination or suspension of any such Governmental Authorizations or which would require any corrective or remediation action by such Seller.