Exhibit 10.3
EXECUTION COPY
PARTICIPATION RIGHTS AGREEMENT
PARTICIPATION RIGHTS AGREEMENT, dated as of October 19, 1999, by
and among MIDDLE BAY OIL COMPANY, INC., an Alabama corporation (the "COMPANY"),
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (the "PURCHASER") and 3TEC ENERGY
COMPANY, L.L.C. , a Delaware limited liability company (the "STOCKHOLDER"),
which as of the date hereof is the holder of approximately 35.5% of the issued
and outstanding shares of the Company's common stock, par value $0.02 per share
("COMMON STOCK"), Common Stock purchase warrants ("WARRANTS") entitling the
Stockholder to purchase 3,600,000 additional shares of Common Stock (subject to
adjustment as provided therein) and one or more Senior Subordinate Promissory
Notes ("NOTES") in the aggregate principal amount of $10,700,000 convertible at
the election of the Stockholder into 3,566,666 additional shares of Common Stock
(subject to adjustment as provided therein).
1. BACKGROUND. The Company and the Purchaser have entered into a
Securities Purchase Agreement (the "PURCHASE AGREEMENT"), dated as of the date
hereof, pursuant to which the Company has agreed, among other things, to issue
and sell (a) 1,055,042 shares of Common Stock, (b) Common Stock purchase
warrants ("PRUDENTIAL WARRANTS") entitling Purchaser to purchase 798,677
additional shares of Common Stock (subject to adjustment as provided therein),
and (c) $2,373,844 aggregate principal amount of Notes convertible at the
election of the Purchaser into 791,281 additional shares of Common Stock
(subject to adjustment as provided therein). This Agreement shall become
effective upon the issuance of the Securities.
2. TRANSFERS OF COMMON STOCK.
2.1 RIGHTS OF PARTICIPATION.
(a) TAGALONG OFFER. If the Stockholder or an Affiliate
thereof proposes to sell for value Notes or shares of the Common Stock or
Common Stock Equivalents (each of the Stockholder and any Affiliate
thereof being referred to herein as a "TRANSFEROR"), BUT EXCLUDING (i) a
sale which is pursuant to a public offering registered under the
Securities Act or is a transfer pursuant to Rule 144 of the Securities
Act, (ii) a sale to one or more of its Affiliates by a Transferor, or
(iii) a sale or sales which are effected by such Transferor in a single
transaction or a series of transactions and which do not involve more
than 5% of the Fully Diluted Common Stock, then such Transferor shall
offer (the "PARTICIPATION OFFER") to include in the proposed sale a
number of shares of Common Stock or Common Stock Equivalents, or an
aggregate principal amount of Notes, as the case may be, designated by
any
Tagalong Holder, not to exceed, in respect of any such Tagalong
Holder, the number of shares of Common Stock or Common Stock
Equivalents, or the aggregate principal amount of Notes, as the case
may be, equal to the product of (a) the aggregate principal amount of
Notes, or the aggregate number of shares of Common Stock or Common
Stock Equivalents, as the case may be, to be sold by the Transferor
to the proposed transferee and (b) a fraction, the numerator of which
shall be the number of shares of Fully Diluted Common Stock held by
such Tagalong Holder and the denominator of which shall be the number
of shares of Fully Diluted Common Stock held by the Transferor and
the Tagalong Holders. The Transferor shall give written notice to
each Tagalong Holder of the Participation Offer (the "PARTICIPATION
OFFER NOTICE") at least 30 days prior to the proposed sale. The
Participation Offer Notice shall specify the proposed transferee, the
aggregate principal amount of Notes, or the number of shares of
Common Stock or Common Stock Equivalents, as the case may be, to be
sold to such transferee, the amount and type of consideration to be
received therefor, and the place and date on which the sale is to be
consummated.
(b) EXERCISE. Each Tagalong Holder who wishes to
include Notes or shares of Common Stock or Common Stock Equivalents in
the proposed sale in accordance with this Section 2.1 shall so notify the
Transferor not more than 15 days after the date of receipt of the
Participation Offer Notice. The Participation Offer shall be conditioned
upon the Transferor's sale of Notes or shares of Common Stock or Common
Stock Equivalents pursuant to the transactions contemplated in the
Participation Offer Notice with the transferee named therein. If any
Tagalong Holders have accepted the Participation Offer, the Transferor
shall reduce to the extent necessary the aggregate principal amount of
Notes, or the number of shares of Common Stock or Common Stock
Equivalents, as the case may be, it otherwise would have sold in the
proposed sale so as to permit such Tagalong Holders to sell the aggregate
principal amount of Notes, or the number of shares of Common Stock or
Common Stock Equivalents, as the case may be, that they are entitled to
sell under this Section 2.1, and the Transferor and such Tagalong Holders
shall sell the aggregate principal amount of Notes, or the number of
shares of Common Stock or Common Stock Equivalents, as the case may be,
specified in the Participation Offer to the proposed transferee in
accordance with the terms of such sale set forth in the Participation
Offer Notice. If no Tagalong Holder accepts the Participation Offer in
accordance with this Section 2.1(b), the Transferor shall be free to
consummate the proposed sale that is the subject of such Participation
Offer with the proposed transferee. Any Notes or shares of the Common
Stock or Common Stock Equivalents sold or otherwise transferred in
compliance with the terms of this Agreement shall not thereafter be
subject to the terms of this Agreement.
2.2 RESTRICTIVE LEGEND. Contemporaneously with the execution
and delivery of this Agreement, (i) each certificate representing shares of
presently outstanding, or contemporaneously issued, Common Stock, (ii) each
certificate representing Warrants presently outstanding or contemporaneously
issued and (iii) each Note presently outstanding or contemporaneously issued,
held by the Stockholder shall be stamped or otherwise imprinted with a
conspicuous legend (or shall be exchanged for stock certificates, Warrant
certificates or Notes bearing a legend) in substantially the following
respective forms:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS SET FORTH IN A PARTICIPATION RIGHTS AGREEMENT DATED
AS OF OCTOBER 19, 1999 AMONG THE CORPORATION, THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA AND 3TEC ENERGY COMPANY, L.L.C., AND
SUCH SHARES MAY NOT BE TRANSFERRED EXCEPT IN COMPLIANCE WITH SUCH
RESTRICTIONS. SUCH PARTICIPATION RIGHTS AGREEMENT IS ON FILE AT
THE OFFICE OF THE CORPORATION AND A COPY THEREOF WILL BE FURNISHED
WITHOUT CHARGE TO THE HOLDER OF THE SHARES REPRESENTED BY THIS
CERTIFICATE UPON WRITTEN REQUEST." [FOR COMMON STOCK]
"THE COMMON STOCK PURCHASE WARRANTS REPRESENTED BY THIS
CERTIFICATE, AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF SUCH WARRANTS, ARE SUBJECT TO CERTAIN RESTRICTIONS SET
FORTH IN A PARTICIPATION RIGHTS AGREEMENT DATED AS OF OCTOBER 19,
1999 AMONG THE CORPORATION, THE PRUDENTIAL INSURANCE COMPANY OF
AMERICAN AND 3TEC ENERGY COMPANY, L.L.C., AND SUCH COMMON STOCK
PURCHASE WARRANTS AND SHARES OF COMMON STOCK MAY NOT BE
TRANSFERRED EXCEPT IN COMPLIANCE WITH SUCH RESTRICTIONS. SUCH
PARTICIPATION RIGHTS AGREEMENT IS ON FILE AT THE OFFICE OF THE
CORPORATION AND A COPY THEREOF WILL BE FURNISHED WITHOUT CHARGE TO
THE HOLDER OF THE COMMON STOCK PURCHASE WARRANTS REPRESENTED
HEREBY, OR TO THE HOLDER OF ANY SHARES OF COMMON STOCK ISSUABLE
UPON THE EXERCISE OF SUCH WARRANTS, UPON WRITTEN REQUEST." [FOR
WARRANTS]
"THIS NOTE, AND THE SHARES OF COMMON STOCK OF THE CORPORATION
ISSUABLE UPON THE CONVERSION HEREOF, ARE SUBJECT TO CERTAIN
RESTRICTIONS SET FORTH IN A PARTICIPATION RIGHTS AGREEMENT DATED
AS OF OCTOBER 19, 1999 AMONG THE CORPORATION, THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA AND 3TEC ENERGY COMPANY, L.L.C., AND
THIS NOTE AND SUCH SHARES OF COMMON STOCK MAY NOT BE TRANSFERRED
EXCEPT IN COMPLIANCE WITH SUCH RESTRICTIONS. SUCH PARTICIPATION
RIGHTS AGREEMENT IS ON FILE AT THE OFFICE OF THE CORPORATION AND A
COPY THEREOF WILL BE FURNISHED WITHOUT CHARGE
TO THE HOLDER THIS NOTE, OR TO THE HOLDER OF SUCH SHARES OF COMMON
STOCK, UPON WRITTEN REQUEST." [FOR NOTES]
Each certificate issued upon the direct or indirect transfer (other than
transfers made in compliance with the terms of this Agreement) of any such
outstanding Common Stock or Warrants, and each Note issued upon the direct or
indirect transfer (other than transfers made in compliance with the terms of
this Agreement) of any other Note, held by the Stockholder, and each certificate
representing shares of Common Stock issuable upon exercise of any such Warrant
or upon conversion of any such Note, as the case may be, (other than upon
exercise of any Warrant or conversion of any Note transferred in compliance
with the terms of this Agreement) shall also be stamped or otherwise imprinted
with the applicable, foregoing legend.
2.3 EFFECT OF VIOLATION. Any purported transfer of Notes,
Common Stock or Common Stock Equivalents which is not permitted by this
Agreement or which is in violation of this Agreement shall be void and of no
force and effect whatsoever.
3. DEFINITIONS. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings:
AFFILIATE: With respect to any Person, any other Person who,
directly or indirectly, is in control of, is controlled by, or is under
common control with, such Person. As used herein, the term "CONTROL"
means possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
AGREEMENT: This Participation Rights Agreement, as the same may
be amended from time to time.
COMMON STOCK: As defined in the introductory paragraph of this
Agreement.
COMMON STOCK EQUIVALENTS: All options, rights or warrants
(including, without limitation, the Warrants) to purchase shares of
Common Stock, all securities convertible into or exchangeable for shares
of Common Stock (including, without limitation, the Notes), all shares
of Common Stock into which shares of common stock of another class have
been converted, and all shares of stock or other securities of the
Company into which Common Stock (or Common Stock Equivalents) have been
converted.
COMPANY: As defined in the introductory paragraph of this
Agreement.
FULLY DILUTED COMMON STOCK: At any time, the then outstanding
Common Stock plus (without duplication) all shares of Common Stock
issuable, whether at such time or upon the passage of time or the
occurrence of future events, upon the exercise, conversion or exchange of
all then outstanding options, rights or warrants (including, without
limitation, the Warrants) or securities convertible into or exchangeable
for Common Stock (including, without limitation, the Notes).
PARTICIPATION OFFER: As defined in Section 2.1(a).
PARTICIPATION OFFER NOTICE: As defined in Section 2.1(a).
PERSON: A corporation, an association, a partnership, a limited
liability company, a business, an individual, a governmental or political
subdivision thereof or a governmental agency.
PURCHASE AGREEMENT: As defined in Section 1.
PURCHASER: As defined in the introductory paragraph of this
Agreement.
REQUIRED HOLDERS: At any time, any holder or holders of 662/3% of
the aggregate number of (i) shares of Common Stock held by all Tagalong
Holders, (ii) shares of Common Stock issuable upon the exercise of all
Warrants held by all Tagalong Holders and (iii) shares of Common Stock
issuable upon the conversion of all Notes held by all Tagalong Holders.
SECURITIES ACT: The Securities Act of 1933, as amended, or any
successor statute thereto.
STOCKHOLDER: As defined in the introductory paragraph of this
Agreement.
TAGALONG HOLDER. Any holder of (i) Common Stock, Warrants or
Notes issued pursuant to the Purchase Agreement, or (ii) Common Stock
issued upon the exercise of such Warrants or the conversion of such
Notes.
TRANSFEROR: As defined in Section 2.1(a).
WARRANTS: As defined in Section 1.
4. AGREEMENT. A copy of this Agreement shall be filed with the
permanent records of the Company and shall be kept at all times at the principal
place of business of the Company.
5. FURTHER ASSURANCES. Each party agrees to do, or cause to be
done, such further acts and to execute and deliver, or to cause to be executed
and delivered, such further agreements, instruments, certificates and other
documents as may be necessary or appropriate to effectuate and carry out the
purposes of this Agreement.
6. AMENDMENTS AND WAIVERS. This Agreement may be amended, modified
or supplemented only by an instrument approved in writing by the Company, the
Stockholders and the Required Holders. Any agreement of a party hereto to waive
compliance with the performance of any agreement or condition herein shall be
valid only if set forth in an instrument in writing signed by such party.
7. NOTICES. All communications provided for hereunder shall be sent
by first-class mail and (a) if addressed to a Tagalong Holder, addressed to such
Tagalong Holder in the manner set forth in the Purchase Agreement, or at such
other address as such Tagalong Holder shall have furnished to the other parties
hereto in writing, (b) if addressed to the Company, at 1221 Lamar Street, Suite
1020, Houston, Texas 77010, Attention: Floyd C. Wilson, or at such other
address, or to the attention of such other officer, as the Company shall have
furnished to the other parties hereto in writing; PROVIDED, HOWEVER, that any
such communication to the Company may also, at the option of any of the other
parties hereto, be either delivered to the Company at its address set forth
above or to any officer of the Company, or (c) if to the Stockholder or any
other Transferor, at 3TEC Energy Company, L.L.C., 5910 N. Central Expressway,
Suite 1150, Dallas, TX 75206, Attention: Floyd C. Wilson, or at such other
address as such party shall have furnished to the other parties hereto in
writing.
8. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns (including, in the case of the Stockholder, the other
Transferors) other than (a) the Persons to which a sale or other transfer is
made pursuant to clauses (i) and (iii) of Section 2.1(a) or their respective
successors and assigns (except the Stockholder) and (b) any transferee to which
a sale or other transfer is made by the Transferor in compliance with Section
2.1. In the event that the Stockholder transfers any Notes, Warrants, Common
Stock or Common Stock Equivalents to any of its Affiliates other than the
Company, it shall cause such Affiliates to comply with the provisions of this
Agreement. In addition, and whether or not any express assignment shall have
been made, the provisions of this Agreement which are for the benefit of the
Purchaser shall also be for the benefit of and enforceable by any subsequent
Tagalong Holder.
9. DESCRIPTIVE HEADINGS. The descriptive headings of the several
sections and paragraphs of this Agreement are inserted for reference only and
shall not limit or otherwise affect the meaning hereof.
10. SPECIFIC PERFORMANCE. The parties hereto recognize and agree that
money damages may be insufficient to compensate the Tagalong Holders for
breaches by the Company or the Stockholder of the terms hereof and,
consequently, that the equitable remedy of specific performance of the terms
hereof will be available in the event of any such breach.
11. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of Texas.
12. COUNTERPARTS. This Agreement may be executed simultaneously in
any number of counterparts, each of which shall be deemed an original, but all
such counterparts shall together constitute one and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES FOLLOW]
IN WITNESS WHEREOF, the parties have executed this Agreement, or
caused this Agreement to be executed and delivered by their respective officers
thereunto duly authorized, as of the date first above written.
MIDDLE BAY OIL COMPANY, INC.
By: /s/ Floyd C. Wilson
-------------------
Name: Floyd C. Wilson
Title: President and Chief Executive
Officer
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By: /s/ Ric E. Abel
Name: Ric E. Abel
Title: Vice President
3TEC ENERGY COMPANY, L.L.C.
By: /s/ Floyd C. Wilson
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Name: Floyd C. Wilson
Title: Managing Director