EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
among
CANAAN ENERGY CORPORATION,
CHK ACQUISITION, INC.
and
CHESAPEAKE ENERGY CORPORATION
COMMERCIAL LAW GROUP, P.C.
ATTORNEYS & COUNSELORS
2725 Oklahoma Tower . 210 Park Avenue . Oklahoma City, Oklahoma 73102-5604
Telephone (405) 232-3001 . Telecopier (405) 232-5553
TABLE OF CONTENTS
-----------------
1. Definitions .................................................. 1
1.1 Affiliate(s) .......................................... 1
1.2 Agreement ............................................. 2
1.3 Alternative Proposal .................................. 2
1.4 Bank Credit Agreement ................................. 2
1.5 Canaan ................................................ 2
1.6 Canaan Area ........................................... 2
1.7 Canaan Certificate .................................... 2
1.8 Canaan Common Stock ................................... 2
1.9 Canaan Disclosure Schedule ............................ 2
1.10 Canaan Employee(s) .................................... 2
1.11 Canaan Employee Benefit Plans ......................... 2
1.12 Canaan Financial Statements ........................... 2
1.13 Canaan Material Agreements ............................ 2
1.14 Canaan Permits ........................................ 2
1.15 Canaan Plans .......................................... 2
1.16 Canaan Predecessor .................................... 2
1.17 Canaan Representative ................................. 3
1.18 Canaan Rights ......................................... 3
1.19 Canaan Rights Agreement ............................... 3
1.20 Canaan SEC Documents .................................. 3
1.21 Canaan Severance Policy ............................... 3
1.22 Canaan Specified Stockholders ......................... 3
1.23 Canaan Stock Option(s) ................................ 3
1.24 Canaan Stockholder Meeting ............................ 3
1.25 Canaan Termination Fee ................................ 3
1.26 CERCLA ................................................ 3
1.27 Certificate of Merger ................................. 3
1.28 Closing ............................................... 3
1.29 Closing Date .......................................... 3
1.30 COBRA ................................................. 3
1.31 Code .................................................. 4
1.32 Confidentiality Agreement ............................. 4
1.33 Contract Employee ..................................... 4
1.34 Defensible Title ...................................... 4
1.35 Dissenting Stockholders ............................... 4
1.36 Effective Time ........................................ 4
1.37 Environmental Law ..................................... 4
1.38 ERISA ................................................. 4
1.39 Exchange Act .......................................... 4
1.40 Exchange Agent ........................................ 4
1.41 Exchange Fund ......................................... 4
1.42 GAAP .................................................. 4
1.43 Goodwill Protection Agreement ......................... 5
-i-
1.44 Governmental Authority ...................................................... 5
1.45 Hazardous Material .......................................................... 5
1.46 HSR Act ..................................................................... 5
1.47 Hydrocarbons ................................................................ 5
1.48 Indemnified Parties ......................................................... 5
1.49 Irrevocable Proxy ........................................................... 5
1.50 Lien(s) ..................................................................... 5
1.51 Material Adverse Effect ..................................................... 5
1.52 Merger ...................................................................... 6
1.53 Merger Consideration ........................................................ 6
1.54 Net Revenue Interests ....................................................... 6
1.55 Office Space Agreement ...................................................... 6
1.56 OGCA ........................................................................ 6
1.57 Oil and Gas Interests ....................................................... 6
1.58 Ownership Interests ......................................................... 7
1.59 Parent ...................................................................... 7
1.60 Parent Companies ............................................................ 7
1.61 Parent Representative ....................................................... 7
1.62 Parent Subsidiaries ......................................................... 7
1.63 Parties ..................................................................... 7
1.64 Payout Balance .............................................................. 7
1.65 Permitted Encumbrances ...................................................... 7
1.66 Per Share Merger Consideration .............................................. 8
1.67 Person(s) ................................................................... 8
1.68 Proxy Statement ............................................................. 8
1.69 Returns ..................................................................... 8
1.70 SEC ......................................................................... 8
1.71 Securities Act .............................................................. 8
1.72 Sub ......................................................................... 8
1.73 Sub Common Stock ............................................................ 8
1.74 Superior Proposal ........................................................... 8
1.75 Surviving Corporation ....................................................... 8
1.76 Tax(es) ..................................................................... 9
1.77 Third-Party Consent ......................................................... 9
1.78 Transaction Documents ....................................................... 9
1.79 Working Interest ............................................................ 9
2. Consummation of the Merger ........................................................ 9
2.1 The Merger .................................................................. 9
2.2 Effect of the Merger ........................................................ 9
2.3 Governing Instruments, Directors and Officers of the Surviving Corporation .. 9
2.3.1 Certificate of Incorporation ......................................... 9
2.3.2 Bylaws ............................................................... 9
2.3.3 Name ................................................................. 10
2.3.4 Directors and Officers ............................................... 10
2.4 Effect on Securities ........................................................ 10
-ii-
2.4.1 Sub Common Stock ....................................... 10
2.4.2 Canaan Common Stock .................................... 10
2.4.3 Canaan Stock Options ................................... 10
2.4.4 Treasury Stock and Parent Owned Stock .................. 11
2.4.5 Dissenting Stockholder Shares .......................... 11
2.5 Exchange of Certificates ........................................ 12
2.5.1 Exchange Fund .......................................... 12
2.5.2 Notice and Surrender ................................... 12
2.5.3 Full Satisfaction ...................................... 13
2.5.4 Unclaimed Exchange Fund ................................ 13
2.5.5 No Liability ........................................... 13
2.5.6 Lost, Stolen or Destroyed Certificates ................. 14
2.5.7 Investment of Exchange Fund ............................ 14
2.6 Closing ......................................................... 14
2.7 Effective Time of the Merger .................................... 14
2.8 Taking of Necessary or Further Action ........................... 14
3. Canaan Representations and Warranties ................................. 15
3.1 Corporate Organization .......................................... 15
3.2 Authority and Enforceability .................................... 15
3.3 No Violations ................................................... 16
3.4 Consents and Approvals .......................................... 16
3.5 Canaan SEC Documents ............................................ 16
3.6 Financial Statements ............................................ 17
3.7 Capital Structure ............................................... 17
3.8 Governmental Regulation ......................................... 18
3.9 Litigation ...................................................... 18
3.10 Brokers ......................................................... 18
3.11 Absence of Certain Changes or Events ............................ 18
3.12 Compliance with Laws, Material Agreements and Permits ........... 18
3.13 No Restrictions ................................................. 19
3.14 Taxes ........................................................... 19
3.15 Employee Benefit Plans .......................................... 21
3.16 Environmental Matters ........................................... 23
3.17 Vote Required ................................................... 24
3.18 Canaan Board of Directors Actions ............................... 24
3.19 Employment Contracts and Benefits ............................... 24
3.20 Labor Matters ................................................... 24
3.21 Insurance ....................................................... 25
3.22 Intangible Property ............................................. 25
3.23 Title to Assets ................................................. 25
3.24 Opinion of Financial Advisor .................................... 25
3.25 Oil and Gas Operations .......................................... 26
3.26 Financial and Commodity Hedging ................................. 26
3.27 Books and Records ............................................... 26
3.28 Other Entities .................................................. 26
-iii-
3.29 Account Information.............................................. 26
3.30 Powers of Attorney............................................... 26
3.31 Plugging Status.................................................. 26
3.32 No Knowledge of Breach of Representations........................ 27
3.33 Proxy Statement.................................................. 27
3.34 Equipment........................................................ 27
3.35 Current Commitments.............................................. 27
3.36 Payout Balances, Gas Imbalances and Take or Pay.................. 27
3.37 Full Disclosure.................................................. 28
3.38 Certain Agreements............................................... 28
3.39 Affiliate Transactions........................................... 28
4. Parent and Sub Representations and Warranties.......................... 28
4.1 Organization and Standing........................................ 28
4.2 Authority and Enforceability..................................... 28
4.3 No Restriction................................................... 29
4.4 Consents and Approvals........................................... 29
4.5 Authorization.................................................... 29
4.6 Litigation....................................................... 29
4.7 Broker's or Finder's Fees........................................ 29
4.8 Funding.......................................................... 29
4.9 Interim Operations of Sub........................................ 30
4.10 Proxy Statement.................................................. 30
4.11 No Knowledge of Breach of Representations........................ 30
4.12 Prior Purchases.................................................. 30
5. Covenants.............................................................. 30
5.1 Conduct of Canaan Business Pending Closing....................... 30
5.2 Access to Information............................................ 33
5.3 No Solicitation.................................................. 33
5.4 Canaan Stockholder Meeting....................................... 35
5.5 Proxy Statement.................................................. 35
5.6 Public Announcements............................................. 36
5.7 Notification of Certain Matters.................................. 36
5.8 Indemnification.................................................. 37
5.9 Employee and Severance Matters................................... 38
5.10 Reasonable Best Efforts.......................................... 40
5.11 Stock Options.................................................... 41
5.12 Stockholder Litigation........................................... 42
5.13 Further Assurances............................................... 42
5.14 Rights Agreement; Consequences if Rights Triggered............... 42
5.15 Payment of Expenses.............................................. 42
5.16 Canaan Termination Fee........................................... 43
5.17 Dissenting Stockholder Payments.................................. 43
5.18 Name............................................................. 43
5.19 Related Agreements............................................... 43
-iv-
6. Conditions Precedent....................................................... 43
6.1 Conditions to Each Party's Obligation to Effect the Merger........... 43
6.1.1 Stockholder Approval......................................... 44
6.1.2 Other Approvals.............................................. 44
6.1.3 No Injunctions or Restraints................................. 44
6.2 Conditions to Obligations of Parent and Sub.......................... 44
6.2.1 Representations and Warranties............................... 44
6.2.2 Performance of Covenants and Agreements by Canaan............ 45
6.2.3 No Adverse Change............................................ 45
6.2.4 Dissenting Stockholders...................................... 45
6.2.5 Releases..................................................... 45
6.2.6 Opinion of Counsel........................................... 45
6.3 Conditions to Obligation of Canaan................................... 45
6.3.1 Representations and Warranties............................... 45
6.3.2 Performance of Covenants and Agreements by Parent and Sub.... 45
7. Termination................................................................ 46
7.1 Termination Rights................................................... 46
7.1.1 Mutual Consent............................................... 46
7.1.2 Date Certain................................................. 46
7.1.3 By Parent.................................................... 46
7.1.4 By Canaan.................................................... 46
7.1.5 Superior Proposal............................................ 47
7.2 Effect of Termination................................................ 47
8. Miscellaneous.............................................................. 47
8.1 Nonsurvival of Representations and Warranties........................ 47
8.2 Amendment............................................................ 47
8.3 Notices.............................................................. 48
8.4 Counterparts......................................................... 48
8.5 Severability......................................................... 48
8.6 Entire Agreement; No Third Party Beneficiaries....................... 49
8.7 Applicable Law....................................................... 49
8.8 No Remedy in Certain Circumstances................................... 49
8.9 Enforcement of Agreement............................................. 49
8.10 Assignment........................................................... 49
8.11 Waivers.............................................................. 50
8.12 References and Titles................................................ 50
8.13 Incorporation........................................................ 50
Exhibit "A" - Irrevocable Proxy
Exhibit "B" - Goodwill Protection Agreement
Exhibit "C" - Office Space Agreement
Exhibit "D" - Release
Exhibit "E" - Opinion
-v-
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER is entered into effective the 19th
day of April, 2002, by and among CANAAN ENERGY CORPORATION, an Oklahoma
corporation ("Canaan"), CHK ACQUISITION, INC., an Oklahoma corporation ("Sub"),
and CHESAPEAKE ENERGY CORPORATION, an Oklahoma corporation ("Parent").
B A C K G R O U N D:
A. The board of directors of each of Parent, Sub and Canaan has determined
that it is in the best interests of its respective stockholders to approve the
acquisition by Parent of Canaan by means of the merger of Sub with and into
Canaan, upon the terms and subject to the conditions set forth in this Agreement
and the applicable provisions of the OGCA;
B. The board of directors of each of Parent, Sub and Canaan has unanimously
adopted resolutions approving the Merger, this Agreement and the transactions
contemplated hereby, and the board of directors of Canaan has unanimously agreed
to recommend that the stockholders of Canaan approve this Agreement, the Merger
and the transactions contemplated hereby;
C. Parent, Sub and Canaan desire to make certain representations, warranties,
covenants and agreements in connection with the Merger and also to prescribe
various conditions to the Merger;
D. Parent has advised Canaan and the Canaan Specified Stockholders that it
will not enter into this Agreement unless the Canaan Specified Stockholders
execute and deliver to Parent an Irrevocable Proxy in the form set forth in
Exhibit "A" attached hereto and made a part hereof;
E. Parent has advised Canaan that Parent will not consummate this Agreement
unless Leo E. Woodard, John K. Penton and Michael S. Mewbourn execute and
deliver to Parent a Goodwill Protection Agreement in the form set forth in
Exhibit "B" attached hereto and made a part hereof; and
F. Upon consummation of the Merger pursuant to this Agreement, all of the
issued and outstanding Canaan Common Stock and Canaan Stock Options will be
converted into the right to receive the Merger Consideration as determined in
accordance with the terms of this Agreement.
NOW, THEREFORE, for and in consideration of the recitals and the
mutual covenants and agreements set forth in this Agreement, the Parties hereby
agree as follows:
1. Definitions. As used in this Agreement, each of the following terms has
-----------
the meaning given in this paragraph or in the paragraphs referred to below:
1.1 Affiliate(s). With respect to any Person, each other Person that
-----------
directly or indirectly (through one or more intermediaries or
otherwise) controls, is controlled by, or is under common control with
such Person.
1.2 Agreement. This Agreement and Plan of Merger, as amended,
---------
supplemented or modified from time to time.
1.3 Alternative Proposal. As defined in paragraph 5.3.2 of this
--------------------
Agreement.
1.4 Bank Credit Agreement. The Restated and Consolidated Agreement dated
---------------------
October 23, 2000, by and among Canaan and a lending group led by Bank
One, Oklahoma, N.A. as amended October 9, 2001 and November 21, 2001.
1.5 Canaan. Canaan Energy Corporation, an Oklahoma corporation.
------
1.6 Canaan Area. As defined in paragraph 5.1.10 of this Agreement.
-----------
1.7 Canaan Certificate. A certificate representing shares of Canaan
------------------
Common Stock.
1.8 Canaan Common Stock. Canaan's common stock, $0.01 par value per
-------------------
share.
1.9 Canaan Disclosure Schedule. The disclosure schedule attached hereto
--------------------------
entitled the Canaan Disclosure Schedule and any documents listed on
such disclosure schedule or expressly incorporated therein by
reference.
1.10 Canaan Employee(s). As defined in paragraph 5.9 of this Agreement.
-----------------
1.11 Canaan Employee Benefit Plans. As defined in paragraph 3.15 of this
-----------------------------
Agreement.
1.12 Canaan Financial Statements. The audited and unaudited consolidated
---------------------------
financial statements of Canaan (including the related notes) included
(or incorporated by reference) in Canaan's Annual Report on Form 10-K
for the year ended December 31, 2001, as filed with the SEC.
1.13 Canaan Material Agreements. The: (1) Bank Credit Agreement; (2) the
--------------------------
Cedar Brush Prospect Agreement dated November 5, 2001, between Canaan
and Union Gas Corporation, a Texas corporation; (3) all agreements or
instruments filed with or listed in the Canaan SEC Documents as
material contracts; and (4) any other written or oral agreements,
contracts, commitments or understandings to which Canaan is a party,
by which any of Canaan is directly or indirectly bound, or to which
any asset of any of Canaan may be subject, involving total value,
consideration or obligations in excess of One Million Dollars
($1,000,000.00).
1.14 Canaan Permits. As defined in paragraph 3.12 of this Agreement.
--------------
1.15 Canaan Plans. The stock option plans and related agreements listed in
------------
section 2.4.3 of the Canaan Disclosure Schedule.
1.16 Canaan Predecessor. As defined in paragraph 3.14.1 of this Agreement.
------------------
-2-
1.17 Canaan Representative. Any director, officer, employee, agent,
---------------------
advisor (including legal, accounting and financial advisors),
Affiliate or other representative of Canaan.
1.18 Canaan Rights. The preferred share purchase rights issued pursuant to
-------------
the Canaan Rights Agreement for each share of Canaan Common Stock
outstanding on March 25, 2002.
1.19 Canaan Rights Agreement. The Rights Agreement dated as of March 13,
-----------------------
2002 between Canaan and UMB Bank, N.A., as rights agent setting forth
the terms and conditions of the Canaan Rights.
1.20 Canaan SEC Documents. As defined in paragraph 3.5 of this Agreement.
--------------------
1.21 Canaan Severance Policy. As defined in paragraph 5.9.1(b) of this
-----------------------
Agreement.
1.22 Canaan Specified Stockholders. The stockholders of Canaan who are:
-----------------------------
(a) on Canaan's board of directors; or (b) executive officers of
Canaan.
1.23 Canaan Stock Option(s). Any unexpired option or other right to
---------------------
purchase Canaan Common Stock issued under the Canaan Plans and
outstanding as of the Effective Time (regardless of whether vested,
unvested or currently exercisable).
1.24 Canaan Stockholder Meeting. The meeting of the stockholders of Canaan
--------------------------
for the purpose of voting on this Agreement and the Merger.
1.25 Canaan Termination Fee. As defined in paragraph 5.16 of this
----------------------
Agreement.
1.26 CERCLA. The Comprehensive Environmental Response, Compensation and
------
Liability Act of 1980, as amended.
1.27 Certificate of Merger. The Certificate of Merger to be prepared and
---------------------
executed in accordance with the applicable provisions of the OGCA and
filed with the Secretary of State of Oklahoma to reflect the
consummation of the Merger.
1.28 Closing. The closing of the Merger and the consummation of the other
-------
transactions contemplated by this Agreement.
1.29 Closing Date. Unless otherwise agreed to by Parent and Canaan in
------------
writing, the Closing will take place on the second business day
following the day after which both of the following have occurred:
(a) the Canaan Stockholder Meeting; and (b) the satisfaction of the
conditions to the Merger as set forth in this Agreement (other than
conditions that by their nature are to be satisfied at Closing).
1.30 COBRA. The Consolidated Omnibus Reconciliation Act of 1985, as
-----
amended, as contained in section 4980B of the Code.
-3-
1.31 Code. The Internal Revenue Code of 1986, as amended.
----
1.32 Confidentiality Agreement. The letter agreement dated March 28,
-------------------------
2002 between Canaan and Parent relating to Canaan's furnishing
of information to Parent in connection with Parent's evaluation
of a possible transaction between Parent and Canaan.
1.33 Contract Employee. As defined in paragraph 5.9.1(d) of this
-----------------
Agreement.
1.34 Defensible Title. Such right, title and interest to an asset
----------------
that is: (a) evidenced by an instrument or instruments filed of
record in accordance with the conveyance and recording laws of
the applicable jurisdiction to the extent necessary to prevail
against competing claims of bona fide purchasers for value
without notice; (b) subject to Permitted Encumbrances; and (c)
free and clear of all other Liens, claims, infringements,
burdens or other defects.
1.35 Dissenting Stockholders. Any holder or holders of Canaan
-----------------------
Common Stock who validly perfect appraisal rights under Section
1091 of the OGCA.
1.36 Effective Time. As defined in paragraph 2.7 of this Agreement.
--------------
1.37 Environmental Law. Any federal, state, local or foreign statute,
-----------------
code, ordinance, rule, regulation, policy, guideline, permit,
consent, approval, license, judgment, order, writ, decree,
injunction or other authorization relating to: (a) emissions,
discharges, releases or threatened releases of Hazardous
Materials into the natural environment (including, without
limitation, ambient air, soil, sediments, land surface or
subsurface, buildings or facilities, surface water, groundwater,
publicly-owned treatment works, septic systems or land); (b) the
generation, treatment, storage, disposal, use, handling,
manufacture, transportation or shipment of Hazardous Materials;
or (c) the pollution of the environment, solid waste or
operation or reclamation of mines.
1.38 ERISA. The Employee Retirement Income Security Act of 1974, as
-----
amended from time to time.
1.39 Exchange Act. The Securities Exchange Act of 1934, as amended
------------
from time to time.
1.40 Exchange Agent. UMB Bank, N.A., the paying agent for shares of
--------------
Canaan Common Stock.
1.41 Exchange Fund. As defined in paragraph 2.5.1 of this Agreement.
-------------
1.42 GAAP. Generally accepted accounting principles, as recognized
----
by the U.S. Financial Accounting Standards Board (or any
enerally recognized successor).
-4-
1.43 Goodwill Protection Agreement. The agreement to be executed and
-----------------------------
delivered at the Closing by Leo E. Woodard, John K. Penton and
Michael S. Mewbourn in favor of Canaan and Parent substantially
in the form attached hereto as Exhibit "B."
1.44 Governmental Authority. Any national, state, county or municipal
----------------------
government, (whether domestic or foreign), agency, board,
bureau, commission, court, department or other instrumentality
of any such government, or any arbitrator in any case that has
jurisdiction over Canaan, Parent or Sub or any of their
respective properties or assets.
1.45 Hazardous Material. Any: (a) "hazardous substance" as defined by
------------------
CERCLA; (b) "hazardous waste" as defined by the Resource
Conservation and Recovery Act, as amended; (c) hazardous,
dangerous or toxic chemical, material, waste or substance,
within the meaning of and regulated by any Environmental Law;
(d) radioactive material, including any naturally occurring
radioactive material, and any source, special or by product
material as defined in 42 U.S.C. 2011 et seq. and any amendments
or authorizations thereof; (e) asbestos-containing materials in
any form or condition; or (f) polychlorinated biphenyls in any
form or condition.
1.46 HSR Act. The Hart-Scott-Rodino Antitrust Improvements Act of
-------
1976, as amended from time to time.
1.47 Hydrocarbons. Oil, condensate, gas, casinghead gas and other
------------
liquid or gaseous hydrocarbons.
1.48 Indemnified Parties. As defined in paragraph 5.8.1 of this
-------------------
Agreement.
1.49 Irrevocable Proxy. The irrevocable proxy in the form attached
-----------------
hereto as Exhibit "A" to be executed by the Canaan Specified
Stockholders granting to Parent the right to vote such holders'
Canaan Common Stock in connection with the stockholders' vote
concerning the Merger and any and all related matters.
1.50 Lien(s). Any lien, mortgage, security interest, pledge, deposit,
-------
production payment, restriction, burden, encumbrance, rights of
a vendor under any title retention or conditional sale
agreement, or lease or other arrangement substantially
equivalent thereto.
1.51 Material Adverse Effect. An event or condition or a series of
-----------------------
related events or conditions that: (1) has an adverse financial
impact of more than Five Million Dollars ($5,000,000) on Canaan;
(2) materially and adversely affects the business, assets,
liabilities or financial condition of Canaan; or (3) with
respect to either Party, materially and adversely affects the
ability of the party to consummate the transactions contemplated
by this Agreement in accordance herewith or fulfill the
conditions to Closing. Notwithstanding the foregoing the
following will not be taken into account in determining whether
there has been a Material Adverse Effect: (x) any adverse affect
or change that is caused by or results from conditions affecting
the United States economy generally or the economy of any nation
or region in which Canaan or Parent
-5-
(as the case may be) conducts business on a consolidated basis;
(y) any adverse affect or change that is caused by or results
from conditions generally affecting the natural gas industry
including, without limitation, the prices of natural gas and
oil; and (z) any adverse affect or change that is caused by or
results from the announcement or pendency of this Agreement, the
Merger or the transactions contemplated hereby.
1.52 Merger. As defined in paragraph 2.1 of this Agreement.
------
1.53 Merger Consideration. The aggregate amount equal to the sum of:
--------------------
(1) the total number of shares of Canaan Common Stock that are
issued and outstanding as of the Effective Time other than those
held by Parent or Sub multiplied by the Per Share Merger
Consideration; plus (2) the aggregate amount by which the Per
Share Merger Consideration exceeds the exercise price of each of
the Canaan Stock Options identified in Section 2.4.3 of the
Canaan Disclosure Schedule which are in the money (based on the
Per Share Merger Consideration) and which are outstanding at the
Effective Time.
1.54 Net Revenue Interests. Canaan's interest in Hydrocarbons
---------------------
produced from or attributable to Canaan's Oil and Gas Interests,
after deducting all lessor's royalties, overriding royalties,
production payments, and other interests or burdens on
Hydrocarbons produced from Canaan's oil and gas properties or
any well thereon.
1.55 Office Space Agreement. The agreement to be executed between
----------------------
Canaan and LJ Natural Gas Company, in substantially the form
attached hereto as Exhibit "C."
1.56 OGCA. The Oklahoma General Corporation Act, as amended.
----
1.57 Oil and Gas Interests. Any and all: (a) direct and indirect
---------------------
interests in and rights with respect to oil, gas, mineral and
related properties and assets of any kind and nature, direct or
indirect, including working, royalty and overriding royalty
interests, production payments, operating rights, net profits
interests, other non-working interests and non-operating
interests; (b) interests in and rights with respect to
Hydrocarbons and other minerals or revenues therefrom and
contracts in connection therewith and claims and rights thereto
(including oil and gas leases, operating agreements, unitization
and pooling agreements and orders, division orders, transfer
orders, mineral deeds, royalty deeds, oil and gas sales,
exchange and processing contracts and agreements and interests
related to any of the foregoing), surface interests, fee
interests, reversionary interests, reservations and concessions;
(c) easements, rights of way, licenses, permits, leases, and
other interests associated with, appurtenant to, or necessary
for the operation of any of the foregoing; and (d) interests in
fixtures, equipment and machinery (including well equipment and
machinery), oil and gas production, gathering, transmission,
compression, treating, processing and storage facilities
(including tanks, tank batteries, pipelines and gathering
systems), pumps, water plants, electric plants, gasoline and gas
processing plants, refineries and other tangible personal
property and fixtures associated with, appurtenant to, or
necessary for the operation of any of the foregoing.
-6-
1.58 Ownership Interests. The Net Revenue Interests, Working
-------------------
Interests and other ownership interests, if any, of Canaan in
Canaan's Oil and Gas Interests which were classified as having
proved reserves as of December 31, 2001 as reported in the
Canaan SEC Reports and listed in Section 1.58 of the Canaan
Disclosure Schedule.
1.59 Parent. Chesapeake Energy Corporation, an Oklahoma corporation.
------
1.60 Parent Companies. Parent and the Parent Subsidiaries.
----------------
1.61 Parent Representative. Any director, officer, employee, agent,
---------------------
advisor (including legal, accounting and financial advisors),
Affiliate or other representative of Parent or Parent
Subsidiaries.
1.62 Parent Subsidiaries. Sub and all other direct or indirect
-------------------
wholly owned subsidiaries of Parent.
1.63 Parties. The collective reference to Parent, Sub and Canaan.
-------
1.64 Payout Balance. As defined in paragraph 3.36 of this Agreement.
--------------
1.65 Permitted Encumbrances. Any: (a) Liens for Taxes, assessments or
----------------------
other governmental charges or levies that are not at the
particular time in question due and delinquent, foreclosure,
distraint, sale or other similar proceedings have not been
commenced or if commenced, have been stayed or are being
contested in good faith by appropriate proceedings and if Canaan
will have set aside on its books such reserves (segregated to
the extent required by sound accounting practices) as may be
required by GAAP or otherwise determined by its board of
directors to be adequate with respect thereto; (b) Liens of
carriers, warehousemen, mechanics, laborers, materialmen,
landlords, vendors, workmen and operators arising by operation
of law in the ordinary course of business or by a written
agreement existing as of the date hereof and necessary or
incident to the exploration, development, operation and
maintenance of Hydrocarbon properties and related facilities and
assets for sums not yet due or being contested in good faith by
appropriate proceedings, if Canaan will have set aside on its
books such reserves (segregated to the extent required by sound
accounting practices) as may be required by GAAP or otherwise
determined by its board of directors to be adequate with respect
thereto; (c) Liens incurred in the ordinary course of business
in connection with worker's compensation, unemployment insurance
and other social security legislation (other than ERISA); (d)
Liens incurred in the ordinary course of business to secure the
performance of bids, tenders, trade contracts, leases, statutory
obligations, surety and appeal bonds, performance and repayment
bonds and other obligations of a like nature; (e) Liens,
easements, rights-of-way, restrictions, servitudes, permits,
conditions, covenants, exceptions, reservations and other
similar encumbrances incurred in the ordinary course of business
or existing on property and not (i) reducing the Canaan Net
Revenue Interest set forth in Section 1.58 of the Canaan
Disclosure Schedule, (ii) increasing the Canaan Working
Interests in any Oil and Gas Interest set forth in Section 1.58
of the Canaan Disclosure Schedule or (iii) impairing the value
of the assets of
-7-
Canaan or interfering with the ordinary conduct of the business
of Canaan or rights to any of their assets; (f) Liens created or
arising by operation of law to secure a party's obligations as a
purchaser of oil and gas; (g) all rights to consent by, required
notices to, filings with, or other actions by any Governmental
Authority to the extent customarily obtained subsequent to
Closing; (h) farmout, carried working interest, joint operating,
unitization, royalty, overriding royalty, sales and similar
agreements relating to the exploration or development of, or
production from, Hydrocarbon properties entered into in the
ordinary course of business that do not (x) reduce the Canaan
Net Revenue Interests set forth in Section 1.58 of the Canaan
Disclosure Schedule, (y) increase the Canaan Working Interests
in any Oil and Gas Interest set forth in Section 1.58 of the
Canaan Disclosure Schedule or (z) adversely affect the value of
any asset of Canaan; (i) any defects, irregularities or
deficiencies in title to easements, rights-of-way or other
surface use agreements that do not (x) reduce the Canaan Net
Revenue Interests set forth in Section 1.58 of the Canaan
Disclosure Schedule, (y) increase the Canaan Working Interests
in any Oil and Gas Interest set forth in Section 1.58 of the
Canaan Disclosure Schedule or (z) adversely affect the value of
any asset of Canaan; (j) preferential rights to purchase and
Third-Party Consents disclosed in Section 1.65 of the Canaan
Disclosure Schedule; (k) Liens arising under or created pursuant
to the Bank Credit Agreement; and (l) Liens specifically
described in Section 1.65 of the Canaan Disclosure Schedule.
1.66 Per Share Merger Consideration. Eighteen Dollars ($18.00) per
------------------------------
share of Canaan Common Stock including the associated Canaan
Rights.
1.67 Person(s). Any natural person, corporation, company, limited or
---------
general partnership, joint stock company, joint venture,
association, limited liability company, limited liability
partnership, trust, bank, trust company, land trust, business
trust or other entity or organization, whether or not a
Governmental Authority.
1.68 Proxy Statement. A proxy statement in a definitive form
---------------
relating to the Canaan Stockholder Meeting.
1.69 Returns. As defined in paragraph 3.14.1 of this Agreement.
-------
1.70 SEC. The Securities and Exchange Commission.
---
1.71 Securities Act. The Securities Act of 1933, as amended from time
--------------
to time.
1.72 Sub. CHK Acquisition, Inc., an Oklahoma corporation and wholly-
---
owned subsidiary of Parent.
1.73 Sub Common Stock. Sub's common stock, par value $1.00 per share.
----------------
1.74 Superior Proposal. As defined in paragraph 5.3.2 of this
-----------------
Agreement.
1.75 Surviving Corporation. As defined in paragraph 2.2 of this
---------------------
Agreement.
-8-
1.76 Tax(es). Any and all taxes, fees, levies, duties, tariffs,
-------
imposts, and other charges of any kind (together with any and
all interest, penalties, additions to tax and additional
amountsimposed with respect thereto) imposed by any Governmental
Authority or taxing authority including, without limitation,
taxes or other charges on or with respect to income, franchises,
windfall or other profits, gross receipts, property, sales, use,
capital stock, payroll, employment, social security, workers'
compensation, unemployment compensation, or net worth, taxes or
other charges in the nature of excise, withholding, ad valorem,
stamp, transfer, value added, or gains taxes, license,
registration and documentation fees, and custom duties, tariffs,
and similar charges.
1.77 Third-Party Consent. The consent or approval of any Person other
-------------------
than Canaan, Parent, Sub or any Governmental Authority.
1.78 Transaction Documents. This Agreement, the Irrevocable Proxy,
---------------------
the Goodwill Protection Agreement, the Office Space Agreement
and the other documents and instruments executed and delivered
in connection with any of the foregoing.
1.79 Working Interest. Canaan's share of all of the costs,
----------------
expenses, burdens, and obligations of any type or nature
attributable to Canaan's interests in its oil and gas properties
or any well thereon.
2 Consummation of the Merger. The Merger will be consummated as follows:
--------------------------
2.1 The Merger. Subject to the terms and conditions set forth in
----------
this Agreement, at the Effective Time, Sub will be merged with
and into Canaan in accordance with the provisions of this
Agreement and the OGCA. Such merger is referred to in this
Agreement as the "Merger."
2.2 Effect of the Merger. Upon the effectiveness of the Merger, the
--------------------
separate existence of Sub will cease and Canaan, as the
surviving corporation in the Merger (the "Surviving
Corporation"), will continue its corporate existence under the
laws of the State of Oklahoma. The Merger will have the effects
specified in this Agreement and the OGCA.
2.3 Governing Instruments, Directors and Officers of the Surviving
--------------------------------------------------------------
Corporation.
-----------
2.3.1 Certificate of Incorporation. The certificate of
----------------------------
incorporation of Canaan, as in effect immediately prior to
the Effective Time amended to reflect the change in the
name of the Surviving Corporation as provided herein, will
be the certificate of incorporation of the Surviving
Corporation until duly amended in accordance with its
terms and applicable law.
2.3.2 Bylaws. The bylaws of Canaan, as in effect immediately
------
prior to the Effective Time, will be the bylaws of the
Surviving Corporation until duly amended in accordance
with their terms and applicable law.
-9-
2.3.3 Name. The name of the Surviving Corporation will be CHK
----
Acquisition, Inc., however, at the option of Parent,
the name of the Surviving Corporation may be changed.
2.3.4 Directors and Officers. The directors and officers of
----------------------
Sub at the Effective Time will be the directors and
officers, respectively, of the Surviving Corporation
from the Effective Time until their respective
successors have been duly elected or appointed in
accordance with the certificate of incorporation and
bylaws of the Surviving Corporation and applicable law.
2.4 Effect on Securities. As of the Effective Time, by virtue of the
--------------------
Merger and without any action on the part of any holder thereof,
the Sub Common Stock, the Canaan Common Stock and other Canaan
securities will be treated as follows subject to the terms and
conditions of this Agreement:
2.4.1 Sub Common Stock. Each share of Sub Common Stock
----------------
outstanding immediately prior to the Effective Time
will be automatically converted into and become one (1)
share of common stock of the Surviving Corporation on a
one for one basis. As a result of the Merger the
foregoing stock will represent one hundred percent
(100%) of the issued and outstanding capital stock of
the Surviving Corporation immediately after the
Effective Time.
2.4.2 Canaan Common Stock. At the Effective Time, by virtue
-------------------
of the Merger and without any action on the part of any
holder thereof, each share of Canaan Common Stock that
is issued and outstanding immediately prior to the
Effective Time will be converted into the right to
receive the Per Share Merger Consideration.
Notwithstanding the foregoing, the shares of Canaan
Common Stock covered by paragraph 2.4.4 of this
Agreement will be controlled by such paragraph and will
not receive the Per Share Merger Consideration. Each
share of Canaan Common Stock, when so converted, will
automatically be canceled and retired, will cease to
exist and will no longer be outstanding, and the holder
of any Canaan Certificate representing any such shares
will cease to have any rights with respect thereto,
except the right to receive the Per Share Merger
Consideration upon the surrender of such Canaan
Certificate in accordance with paragraph 2.5.
2.4.3 Canaan Stock Options. Section 2.4.3 of the Canaan
--------------------
Disclosure Schedule lists: (a) each of the Canaan
Plans; and (b) each Canaan Stock Option outstanding as
of the date hereof specifying the Canaan Plan under
which such Canaan Stock Option was issued, the number
of shares of Canaan Common Stock covered by such Canaan
Stock Option, the term of such Canaan Stock Option, the
vesting schedule for such Canaan Stock Option and the
exercise price for such Canaan Stock Option. Each
Canaan Stock Option remaining outstanding at the
Effective Time will be or become fully vested at the
Effective Time. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder
thereof, each Canaan Stock Option will
-10-
be canceled and each Canaan Stock Option will be
converted into the right to receive, for each share of
Canaan Common Stock with respect to which such Canaan
Stock Option is exercisable, cash in an amount equal to
the Per Share Merger Consideration, less the per share
exercise price of such Canaan Stock Option. On
presentation to Parent of the Canaan Stock Option or
compliance with the provisions of paragraph 2.5.6 with
respect thereto, the Parent will pay or cause to be
paid to each holder of a Canaan Stock Option, for each
share of Canaan Common Stock with respect to which such
Canaan Stock Option is exercisable, cash in an amount
equal to (i) the amount by which (A) the Per Share
Merger Consideration, exceeds (B) the per share
exercise price of such Canaan Stock Option, less (ii)
amounts required to be withheld by Parent or Canaan, if
any, in respect of federal taxes and other payroll
withholding as a consequence of the cancellation and
conversion of such Canaan Stock Option in accordance
herewith. Without limiting the foregoing, except as
expressly disclosed in Section 2.4.3 of the Canaan
Disclosure Schedule, Canaan further hereby represents
and warrants to Parent that: (i) all adjustments
required to be made to the number of shares issuable or
the exercise price for exercise under each of the
Canaan Stock Options has been accurately made as
disclosed in Section 2.4.3 of the Canaan Disclosure
Schedule; and (ii) all required notices have been given
to the holders of the Canaan Stock Options including,
without limitation, adjustment notices. As of the
Effective Time, as a result of the Merger, the
provisions in any of the Canaan Plans or any other
program, arrangement, option, warrant or other
agreement providing for the issuance or grant of any
interest in respect of the capital stock of Canaan will
be canceled, cease to exist and no longer be
outstanding as of the Effective Time and Canaan will
take all action necessary to ensure that following the
Effective Time no Person will have any right thereunder
to acquire equity securities of Canaan, the Surviving
Corporation or any subsidiary thereof.
2.4.4 Treasury Stock and Parent Owned Stock. At the Effective
-------------------------------------
Time, by virtue of the Merger, all shares of Canaan
Common Stock that are issued and held as treasury
stock, if any, and all shares of Canaan Common Stock
held by Parent will be canceled and retired and will
cease to exist, and no Merger Consideration or other
consideration will be paid or payable in exchange
therefor.
2.4.5 Dissenting Stockholder Shares. Except as provided
-----------------------------
herein, any issued and outstanding shares of Canaan
Common Stock held by a Dissenting Stockholder will be
converted into the right to receive such consideration
as may be determined to be due to such Dissenting
Stockholder pursuant to the OGCA. If a Dissenting
Stockholder effectively withdraws the demand for
appraisal or loses the right of appraisal as provided
under the OGCA, the shares of Canaan Common Stock held
by such Dissenting Stockholder will be deemed to be
converted under paragraph 2.4.2 of this Agreement
(without interest). Canaan will provide prompt notice
to Parent of any written
-11-
demands for appraisal, withdrawals of demands for appraisal and
any other instruments served pursuant to the OGCA and will
provide to Parent the opportunity to direct all negotiations
and proceedings with respect to demands for appraisal under the
OGCA. Absent the prior written consent of Parent and Sub,
Canaan will not negotiate, settle or offer to settle any demand
for appraisal, provided, however that any and all payments made
to settle such appraisal rights or made pursuant to the OGCA
will be made solely out of Canaan assets and neither Parent nor
Sub will have any liability therefor. Notwithstanding anything
contained in this paragraph 2.4.5, if the Merger is rescinded
or abandoned or if the stockholders of Canaan revoke the
authority to effect the Merger, then the right of any
Dissenting Stockholder to receive such consideration as may be
determined to be due in respect of such Dissenting
Stockholder's Canaan Common Stock pursuant to the OGCA will
cease.
2.5 Exchange of Certificates. The exchange of Canaan Common Stock for the
------------------------
Per Share Merger Consideration will be consummated as follows:
2.5.1 Exchange Fund. At the Effective Time, Parent will deposit with
-------------
the Exchange Agent, for the benefit of the holders of shares of
Canaan Common Stock and for exchange in accordance with this
Agreement, funds representing the Merger Consideration to be
paid in exchange for shares of Canaan Common Stock pursuant to
paragraph 2.5.2, less the amount of the Merger Consideration
which: (i) would have been payable to Dissenting Stockholders;
and (ii) will be payable with respect to the Canaan Stock
Options. The funds delivered to the Exchange Agent pursuant
hereto are referred to herein as the "Exchange Fund." The
Exchange Agent, pursuant to irrevocable instructions consistent
with the terms of this Agreement, will deliver the Per Share
Merger Consideration to be paid pursuant to paragraph 2.5.2 out
of the Exchange Fund, and the Exchange Fund will not be used
for any other purpose whatsoever.
2.5.2 Notice and Surrender. As soon as reasonably practicable after
--------------------
the Effective Time, Parent will cause the Exchange Agent to
mail to each holder of record of Canaan Common Stock that,
immediately prior to the Effective Time, were converted into
the right to receive the Per Share Merger Consideration
pursuant to paragraph 2.4.2, a letter of transmittal to be used
to effect the exchange of such Canaan Common Stock for the Per
Share Merger Consideration, along with instructions for using
such letter of transmittal to effect such exchange. The letter
of transmittal (or the instructions thereto) will specify that
delivery of any Canaan Certificate will be effected, and the
risk of loss and title thereto will pass, only upon delivery of
such Canaan Certificate to the Exchange Agent and will be in
such form and have such other provisions as Parent may
reasonably specify. On surrender to the Exchange Agent of a
Canaan Certificate for cancellation, together with a duly
completed and executed letter of transmittal and any other
required
-12-
documents: (a) the holder of such Canaan Certificate will be
entitled to receive in exchange therefor the Per Share Merger
Consideration for each share of Canaan Common Stock represented
by such Canaan Certificate (after giving effect to any required
withholding of Taxes); and (b) the Canaan Certificate so
surrendered will forthwith be canceled. No interest will be
paid or accrued on the Per Share Merger Consideration. In the
event of a transfer of ownership of Canaan Common Stock that is
not registered in the transfer records of Canaan, the Per Share
Merger Consideration may be paid to a transferee if the Canaan
Certificate representing such shares of Canaan Common Stock is
presented to the Exchange Agent accompanied by all documents
required to evidence and effect such transfer and to evidence
that any applicable stock transfer Taxes have been paid. Until
surrendered as contemplated by this paragraph 2.5.2, each
Canaan Certificate will be deemed at any time after the
Effective Time to represent only the right to receive on such
surrender the Per Share Merger Consideration for the number of
shares of Canaan Common Stock represented by such Canaan
Certificate as provided in paragraph 2.4.2.
2.5.3 Full Satisfaction. Payment of the Per Share Merger
-----------------
Consideration upon the surrender for exchange of shares of
Canaan Common Stock in accordance with the terms hereof will be
deemed to have been paid in full satisfaction of all rights
pertaining to such shares of Canaan Common Stock. After the
Effective Time, there will be no further registration of
transfers on the Surviving Corporation's stock transfer books
of the shares of Canaan Common Stock that were outstanding
immediately prior to the Effective Time. If, after the
Effective Time, a Canaan Certificate is presented to the
Surviving Corporation or Parent for any reason, it will be
canceled and exchanged as provided in this paragraph 2.5.
2.5.4 Unclaimed Exchange Fund. Any portion of the Exchange Fund held
-----------------------
by the Exchange Agent in accordance with the terms of this
paragraph 2.5 that remains unclaimed by the former stockholders
of Canaan for a period of one (1) year following the Effective
Time will be delivered to Parent, on demand. Thereafter, any
former stockholders of Canaan who have not theretofore complied
with the provisions of this paragraph 2.5 will look only to
Parent for payment of their claim for the Per Share Merger
Consideration for the number of shares of Canaan Common Stock
owned. No interest will be paid or payable on any Per Share
Merger Consideration regardless of the date actually paid.
2.5.5 No Liability. Neither Parent, Sub, Canaan, the Surviving
------------
Corporation, the Exchange Agent nor any other Person will be
liable to any former holder of shares of Canaan Common Stock
for any amount properly delivered to any public official
pursuant to any applicable abandoned property, escheat or
similar law. Any amounts remaining unclaimed by former holders
of Canaan Common Stock for a period of three (3) years
following the Effective Time
-13-
(or such earlier date immediately prior to the time at which
such amounts would otherwise escheat to or become property of
any Governmental Authority) will, to the extent permitted by
applicable law, become the property of Parent, free and clear
of any claims or interest of any such holders or their
successors, assigns or personal representatives previously
entitled thereto.
2.5.6 Lost, Stolen or Destroyed Certificates. If any Canaan
--------------------------------------
Certificate is lost, stolen or destroyed, upon the making of an
affidavit of that fact by the Person claiming such Canaan
Certificate to be lost, stolen or destroyed and, if required by
Parent, the posting by such Person of a bond, in such
reasonable amount as Parent may direct, as indemnity against
any claim that may be made against Parent with respect to such
Canaan Certificate, the Exchange Agent will pay in exchange for
such lost, stolen or destroyed Canaan Certificate the Per Share
Merger Consideration deliverable with respect thereto pursuant
to this Agreement.
2.5.7 Investment of Exchange Fund. The Exchange Agent will invest any
---------------------------
cash included in the Exchange Fund from time to time, as
directed by Parent, in short term money market assets or
similar securities. Any interest and other income resulting
from such investments will be payable to Parent on demand and
will be the sole property of Parent.
2.6 Closing. The Closing will take place on the Closing Date at such
-------
time and place as is agreed upon by Parent and Canaan.
2.7 Effective Time of the Merger. The Merger will become effective
----------------------------
immediately when the Certificate of Merger is accepted for filing by
the Secretary of State of Oklahoma or at such time thereafter as is
provided in the Certificate of Merger (the "Effective Time"). The
Certificate of Merger will be filed on the Closing Date as soon as
practicable after the Closing; provided, however, that the Certificate
of Merger may be filed prior to the Closing Date or prior to the
Closing so long as it provides for an Effective Time that occurs after
the Closing.
2.8 Taking of Necessary or Further Action. Each of Parent, Sub and Canaan
-------------------------------------
will use all reasonable efforts to take all such actions as may be
necessary or appropriate in order to effectuate the Merger under the
OGCA as promptly as commercially practicable. If, at any time after
the Effective Time, any further action is necessary or desirable to
carry out the purposes of this Agreement and to vest the Surviving
Corporation with full right, title and possession to all assets,
property, rights, privileges, powers and franchises of either Sub or
Canaan, the officers and directors of the Surviving Corporation are
fully authorized, in the name of the Surviving Corporation or
otherwise to take, and will take all such lawful and necessary action.
-14-
3. Canaan Representations and Warranties. Except as set forth in the Canaan
-------------------------------------
Disclosure Schedule with a reference to each paragraph of this Agreement
modified by such item of disclosure, Canaan hereby represents and warrants to
Parent and Sub that:
3.1 Corporate Organization. Canaan: (a) is a corporation duly organized,
----------------------
validly existing and in good standing under the laws of the state of
Oklahoma; (b) has all requisite corporate power and authority to own,
lease and operate its properties and assets and to carry on its
business as it is presently being conducted; and (c) is duly
qualified to do business as a foreign corporation, and is in good
standing, in each jurisdiction where the character of the properties
owned or leased by it or the nature of its activities makes such
qualification necessary (except where any failure to be so qualified
as a foreign corporation or to be in good standing would not,
individually or in the aggregate, have a Material Adverse Effect on
Canaan). Copies of the certificate or articles of incorporation and
bylaws of Canaan have heretofore been delivered to Parent and such
copies are accurate and complete as of the date hereof.
3.2 Authority and Enforceability. The board of directors of Canaan (at a
----------------------------
meeting duly called and held) has: (a) determined that the Merger is
advisable; and (b) resolved to approve the Merger and recommend the
approval and adoption of this Agreement by Canaan's stockholders. In
addition, the board of directors of Canaan has taken all action
necessary to render the Control Share Acquisition Act, Sections 1145
through 1155 of Title 18 of the Oklahoma Statutes and Section 1090.3
of the OGCA inapplicable to the Merger and the other transactions
contemplated by this Agreement. No other state takeover statute or
similar statute or regulation applies or purports to apply to Canaan
with respect to this Agreement, the Merger or any other transaction
contemplated by this Agreement. Canaan has the requisite corporate
power and authority to execute and deliver this Agreement and (with
respect to consummation of this Agreement and the Merger, subject to
the approval of the stockholders of Canaan) to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and (with the approval by the stockholders of Canaan) the
consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary corporate action on the part
of Canaan, including approval by the board of directors of Canaan,
and no other corporate proceedings on the part of Canaan are
necessary to authorize the execution or delivery of this Agreement or
(with approval by the stockholders of Canaan) to consummate the
transactions contemplated hereby. The board of directors of Canaan
has taken all action necessary to render the Canaan Rights
inapplicable to this Agreement, the other Transaction Documents and
the Merger and ensure that neither Parent nor Sub nor any of their
Affiliates or associates is or will become an "Acquiring Person" (as
defined in the Canaan Rights Agreement) by reason of any of the
Transaction Documents or the Merger. In addition, a "Distribution
Date" (as defined in the Canaan Rights Agreement) will not occur by
reason of the execution of this Agreement, the execution of any of
the Transaction Documents or the consummation of the Merger. This
Agreement has been duly and validly executed and delivered by Canaan
and constitutes a valid and binding obligation of Canaan, enforceable
against Canaan in accordance with its terms.
-15-
3.3 No Violations. The execution and delivery of this Agreement does not,
-------------
and the consummation of the transactions contemplated hereby and
compliance by Canaan with the provisions hereof will not, conflict
with, result in any violation of or default (with or without notice
or lapse of time or both) under, give rise to a right of termination,
cancellation or acceleration of any obligation (excluding any change
of control put or acceleration) or to the loss of a material benefit
under, or result in the creation of any Lien on any of the properties
or assets of Canaan under, any provision of: (a) the certificate of
incorporation or bylaws of Canaan; (b) any loan or credit agreement,
note, bond, mortgage, indenture, lease, permit, concession,
franchise, license or other agreement or instrument applicable to
Canaan; or (c) assuming the consents, approvals, authorizations or
permits and filings or notifications referred to in paragraph 3.4 are
duly and timely obtained or made, any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Canaan or
any of Canaan's properties or assets, other than, in the case of
clause (b) or (c) above, any such conflict, violation, default,
right, loss or Lien that, individually or in the aggregate, would not
have a Material Adverse Effect on Canaan.
3.4 Consents and Approvals. No consent, approval, order or authorization
----------------------
of, registration, declaration, or filing with, or permit from, any
Governmental Authority is required by or with respect to Canaan in
connection with the execution and delivery of this Agreement by
Canaan or the consummation by Canaan of the transactions contemplated
hereby except for the following: (1) any such consent, approval,
order, authorization, registration, declaration, filing or permit
which the failure to obtain or make would not, individually or in the
aggregate, have a Material Adverse Effect on Canaan; (2) the filing
of the Certificate of Merger with the Secretary of State of Oklahoma
pursuant to the provisions of the OGCA; (3) the filing, if necessary,
of a pre-merger notification report under the HSR Act and the
expiration or termination of the applicable waiting period; (40 the
filing with the SEC of the Proxy Statement and such other reports
under Section 13(a) of the Exchange Act and such other compliance
with the Exchange Act and the Securities Act and the rules and
regulations of the SEC thereunder as may be required in connection
with this Agreement and the transactions contemplated hereby and the
obtaining from the SEC of such orders as may be so required; and (5)
such filings and approvals as may be required by any applicable state
securities, "blue sky" or takeover laws or Environmental Laws. No
Third-Party Consent is required by or with respect to Canaan in
connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby, except for: (x)
any such Third-Party Consent which the failure to obtain would not,
individually or in the aggregate, have a Material Adverse Effect on
Canaan; (y) the valid approval of this Agreement and the Merger by
the stockholders of Canaan; and (z) any consent, approval or waiver
required by the terms of the Bank Credit Agreement, which consent,
approval or waiver Canaan agrees to use reasonable efforts to obtain
if requested by Parent or Sub.
3.5 Canaan SEC Documents. Parent has had available to it a true, correct
--------------------
and complete copy of each report, schedule, registration statement
and definitive proxy statement filed by Canaan with the SEC since
December 31, 2000, and prior to the Effective Time (the "Canaan SEC
Documents"), which are all the documents that Canaan was or will be
-16-
required to file with the SEC since such date. As of their respective
dates, the Canaan SEC Documents complied or will comply in all
material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of
the SEC thereunder applicable to such Canaan SEC Documents, and none
of the Canaan SEC Documents contained or will contain any untrue
statement of a material fact or omitted or will omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading.
3.6 Financial Statements. The Canaan Financial Statements were prepared
--------------------
in accordance with the applicable published rules and regulations of
the SEC with respect thereto and in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly present in all material
respects, in accordance with applicable requirements of GAAP, the
financial position of Canaan as of their respective dates and the
results of operations and the cash flows of Canaan for the periods
presented therein.
3.7 Capital Structure. The authorized capital stock of Canaan consists of
-----------------
50,000,000 shares of Canaan Common Stock and 1,000,000 shares of
preferred stock, 25,000 of which have been designated as Series A
Junior Participating Preferred Stock , par value $.01. As of April
17, 2002: (a) 4,353,646 shares of Canaan Common Stock were validly
issued and outstanding; (b) 500,000 shares of Canaan Common Stock
were reserved for issuance pursuant to the Canaan Plans, of which
Canaan Stock Options to purchase a total of 470,450 shares of Canaan
Common Stock were issued and outstanding; (c) there are no shares of
capital stock of Canaan of any class authorized, issued or
outstanding other than the Canaan Common Stock ; and (d) 578,169
shares of Canaan Common Stock were held by Canaan as treasury stock.
Except for changes resulting from the exercise of Canaan Stock
Options listed in section 2.4.3 of the Canaan Disclosure Schedule
Canaan will notify Parent in writing simultaneously with any change
after April 17, 2002, in any of the numbers of securities set forth
in the immediately preceding sentence together with a detailed
explanation of the event giving rise to such change. Except as
described in subpart (a) above, as described in Section 2.4.3 of the
Canaan Disclosure Schedule and the Canaan Rights under the Canaan
Rights Plan, there are: (i) no outstanding shares of capital stock or
other voting securities of Canaan; (ii) no outstanding securities of
Canaan or any other Person convertible into or exchangeable or
exercisable for shares of capital stock or other voting securities of
Canaan; and (iii) no outstanding subscriptions, options, warrants,
calls, rights (including preemptive rights, stock appreciation
rights, phantom stock rights, conversion rights, commitments,
understandings or agreements to which Canaan is a party or by which
it is bound) obligating Canaan to issue, deliver, sell, purchase,
redeem or acquire shares of capital stock or other securities of
Canaan or obligating Canaan to grant, extend or enter into any such
subscription, option, warrant, call, right, commitment, understanding
or agreement. All outstanding shares of capital stock of Canaan are
validly issued, fully paid and nonassessable and not subject to any
preemptive right. As of the date hereof there is no, and at the
Effective Time there will not be any, stockholder agreement, voting
trust or other agreement or understanding
-17-
to which Canaan is a party or by which it is bound relating to the
voting of any shares of the capital stock of Canaan.
3.8 Governmental Regulation. Canaan is not subject to regulation under
-----------------------
the Public Utility Holding Company Act of 1935, the Federal Power
Act, the Investment Company Act of 1940 or any state public utilities
laws.
3.9 Litigation. There is no litigation, arbitration, investigation or
----------
other proceeding of any Governmental Authority or other Person
pending or, to the knowledge of Canaan, threatened against Canaan or
Canaan's assets which, if adversely determined, could reasonably be
expected to have a Material Adverse Effect on Canaan. Canaan has no
knowledge of any facts that are likely to give rise to any
litigation, arbitration, investigation or other proceeding of any
Governmental Authority or other Person which, individually or in the
aggregate, could reasonably be expected to have a Material Adverse
Effect on Canaan. Canaan is not subject to any outstanding
injunction, judgment, order, decree or ruling (other than routine oil
and gas field regulatory orders and any injunction, judgment, order,
decree or ruling that, either individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect on
Canaan). There is no litigation, investigation or other proceeding of
any Governmental Authority or other Person pending or, to the
knowledge of Canaan, threatened against or affecting Canaan that
questions the validity or enforceability of this Agreement or any
other document, instrument or agreement to be executed and delivered
by Canaan in connection with the transactions contemplated hereby.
3.10 Brokers. No broker, finder, investment banker or other Person is or
-------
will be, in connection with the transactions contemplated by this
Agreement, entitled to any brokerage, finder's or other fee or
compensation based on any arrangement or agreement made by or on
behalf of Canaan for which Canaan or Parent or Sub will have any
obligation or liability.
3.11 Absence of Certain Changes or Events. Since December 31, 2001, Canaan
------------------------------------
has conducted its business only in the ordinary course of business
consistent with past practices and, since such date, there has not
been any event (financial or otherwise, whether or not in the
ordinary course of business), circumstance or condition that: (a)
would be reasonably likely to have a Material Adverse Effect on
Canaan; or (b) would have required the consent of Parent pursuant to
paragraph 5.1 had such event occurred after the date of this
Agreement.
3.12 Compliance with Laws, Material Agreements and Permits. Canaan is not
-----------------------------------------------------
in violation of, or in default under, and no event has occurred that
(with notice or the lapse of time or both) would constitute a
violation of or default under: (a) its certificate or articles of
incorporation or bylaws or other governing document; (b) any
applicable law, rule, regulation, order, writ, decree or judgment of
any Governmental Authority; or (c) any Canaan Material Agreement,
except (in the case of clause (b) or (c) above) for any violation or
default that would not, individually or in the aggregate, have a
Material Adverse Effect on Canaan. Canaan has obtained and holds all
permits, licenses,
-18-
variances, exemptions, orders, franchises, approvals and
authorizations of all Governmental Authorities necessary for the
lawful conduct of its business or the lawful ownership, use and
operation of its assets ("Canaan Permits"), except for Canaan Permits
which the failure to obtain or hold would not, individually or in the
aggregate, have a Material Adverse Effect on Canaan. Canaan is in
compliance with the terms of each of the Canaan Permits, except where
the failure to comply would not, individually or in the aggregate,
have a Material Adverse Effect on Canaan. No investigation or review
by any Governmental Authority with respect to Canaan is pending or,
to the knowledge of Canaan, threatened, other than those, the outcome
of which would not, individually or in the aggregate, have a Material
Adverse Effect on Canaan. To the knowledge of Canaan, no party to any
Canaan Material Agreement is in material breach of the terms,
provisions and conditions of such Canaan Material Agreement.
3.13 No Restrictions. Canaan is not a party to: (a) any agreement,
---------------
indenture or other instrument that contains restrictions with respect
to the payment of dividends or other distributions with respect to
its capital stock; (b) any financial arrangement with respect to or
creating any indebtedness to any Person (other than indebtedness
reflected in the Canaan Financial Statements or indebtedness incurred
in the ordinary course of business); (c) any agreement, contract or
commitment relating to the making of any advance to, or investment
in, any Person; (d) any guaranty or other contingent liability with
respect to any indebtedness or obligation of any Person (other than
the endorsement of negotiable instruments for collection in the
ordinary course of business); or (e) any agreement, contract or
commitment limiting in any respect its ability to compete with any
Person or otherwise conduct business of any line or nature.
3.14 Taxes. During the period beginning on January 1, 1998, and ending on
-----
the date hereof, except as expressly provided below:
3.14.1 Canaan and any affiliated, combined or unitary group of which
Canaan or any subsidiary is or was a member and any Person
that has been acquired by Canaan (a "Canaan Predecessor") has
properly completed and timely (taking into account any
extensions) filed all federal, state, local and foreign
returns, declarations, reports, estimates, information
returns and statements ("Returns") required to be filed in
respect of any Tax and has timely paid all Taxes that are
shown by such Returns to be due and payable and the Returns
correctly and accurately (except for one or more matters the
aggregate effect of which would not reasonably be expected to
have a Material Adverse Effect) reflect the facts regarding
the income, business and assets, operations, activities,
status or other matters of Canaan required to be shown
thereon or any other information required to be shown thereon
and are not subject to penalties under Section 6662 of the
Code, relating to accuracy-related penalties, or any
corresponding provision of applicable state, local or foreign
tax law or any predecessor provision. Canaan has established
reserves that are adequate in the aggregate for the payment
of all material Taxes not yet due and payable with respect to
the results of operations of Canaan through the date hereof,
and has complied with all applicable laws, rules and
-19-
regulations relating to the payment and withholding of Taxes
and the filing of material federal, state or local Returns
except where the failure to comply would not reasonably be
expected to have a Material Adverse Effect.
3.14.2 Section 3.14.2 of the Canaan Disclosure Schedule sets forth
the last taxable period through which the federal income Tax
Returns of Canaan and any Canaan Predecessor have been
examined by the IRS. Except to the extent being contested in
good faith, all material deficiencies asserted as a result of
such examinations and any examination by any applicable state
or local taxing authority have been paid, fully settled or
adequately provided for in Canaan's most recent audited
financial statements. No Tax audits or other administrative
proceedings or court proceedings are presently pending with
regard to any Taxes for which Canaan would be liable, and no
deficiency which has not yet been paid for any such Taxes has
been proposed, asserted or assessed against Canaan with
respect to any period which would reasonably be expected to
have a Material Adverse Effect. No claim has been asserted by
an authority in any jurisdiction where Canaan do not file
Returns that any Canaan Company is subject to Tax in that
jurisdiction.
3.14.3 Canaan and the Canaan Predecessors have not executed or
entered into (or prior to the close of business on the
Closing Date will execute or enter into) with the IRS or any
taxing authority: (a) any agreement extending the period for
assessment or collection of any Tax for which Canaan is
liable for any period that is open under the applicable
statute of limitations; or (b) a closing agreement pursuant
to Section 7121 of the Code or any similar provision of state
or local income tax law that relates to Canaan for the
current or any future taxable period. Canaan and the Canaan
Predecessors have not made an election under Section 341(f)
of the Code or agreed to have Section 341(f)(2) of the Code
apply to any disposition of a subsection (f) asset (as such
term is defined in Section 341(f)(4) of the Code) owned by
Canaan. Canaan is not a party to, is not bound by and has no
obligation under any tax sharing agreement or similar
agreement or arrangement. Canaan is not a party to any
agreement or other arrangement that would result separately
or in the aggregate in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code.
3.14.4 There are no Liens for Taxes (other than for current Taxes
not yet due and payable) on the assets of Canaan.
3.14.5 Canaan has never been a member of an "affiliated group of
corporations" within the meaning of Section 1504 of the Code,
other than as a common parent corporation.
3.14.6 After the date hereof, no election which is inconsistent with
past practices with respect to Taxes will be made by Canaan
without the written consent of Parent.
-20-
3.14.7 None of the assets of Canaan are property that is required to
be treated as being owned by any other Person pursuant to the
"safe harbor lease" provisions of former Section 168(f)(8) of
the Code.
3.14.8 None of the assets of Canaan directly or indirectly secures
any debt the interest on which is tax-exempt under Section
103(a) of the Code. None of the assets of Canaan is
"tax-exempt use property" within the meaning of Section
168(h) of the Code.
3.14.9 Canaan has not agreed to make nor is it required to make any
adjustment under Section 481(a) of the Code by reason of a
change in accounting method or otherwise which will have any
adverse effect on any Tax for a period which ends after
December 31, 2000.
3.14.10 Canaan and the Canaan Predecessors have not participated in
an international boycott within the meaning of Section 999 of
the Code.
3.14.11 Canaan and the Canaan Predecessors have not had a permanent
establishment in any foreign country, as defined in any
applicable tax treaty or convention between the United States
and such foreign country.
3.14.12 Section 3.14.12 of the Canaan Disclosure Schedule identifies
each arrangement to which Canaan is currently a party and
which is a partnership for federal income tax purposes and
which was required to file an income tax return for a taxable
year of such partnership which ended in 2001 (taking into
account any election which permitted such arrangement not to
file a return).
3.14.13 Canaan did not have an excess loss account in any subsidiary
which had on December 31, 2001, assets with a fair market
value in excess of $500,000.
3.14.14 Canaan is in compliance with all applicable laws, rules,
regulations and orders applicable to the Oil and Gas
Interests to the extent pertaining to escheatment or similar
laws affecting the payment of revenues except where the
failure to comply would not reasonably be expected to have a
Material Adverse Effect on Canaan.
3.15 Employee Benefit Plans.
----------------------
3.15.1 Section 3.15.1 of the Canaan Disclosure Schedule lists: (i)
the "employee benefit plans" (within the meaning of Section
3(3) of ERISA), which Canaan maintains or sponsors or with
respect to which Canaan has any material liability (actual or
contingent, primary or secondary); and (ii) all other (A)
director or employee compensation or benefit plans, programs
or arrangements, (B) stock purchase, stock option, severance,
bonus, incentive and deferred compensation plans, (C) written
employment or consulting contracts, and (D) change-in-control
agreements which Canaan maintains,
-21-
sponsors or is a party to or with respect to which Canaan has
or could have any material liability (such plans, programs,
arrangements, contracts and agreements are collectively
referred to herein as the "Canaan Employee Benefit Plans").
3.15.2 (i) The reserves reflected in the balance sheet contained in
the Canaan Financial Statements for the period ending
December 31, 2001 (together with all footnotes attached
thereto, the "Balance Sheet") relating to any unfunded
benefits under the Canaan Employee Benefit Plans were
adequate in the aggregate under GAAP as of December 31, 2001;
and (ii) Canaan has not incurred any material unfunded
liability in respect of any such Canaan Employee Benefit
Plans since that date.
3.15.3 There are no suits, investigations or claims (other than
undisputed claims for benefits) pending or, to the knowledge
of Canaan threatened (or any basis therefor) relating to or
for benefits under the Canaan Employee Benefit Plans.
3.15.4 Each Canaan Employee Benefit Plan has been established and
administered in all material respects in accordance with its
terms, and in all material respects in compliance with the
applicable provisions of ERISA, the Code and other applicable
laws, rules and regulations and each Canaan Employee Benefit
Plan which is intended to be qualified within the meaning of
Code Section 401(a) is so qualified.
3.15.5 (i) No Canaan Employee Benefit Plan currently has any
"accumulated funding deficiency" as such term is defined in
ERISA Section 302 and Code Section 412 (whether or not
waived); (ii) no event or condition exists or is expected to
occur which is a reportable event within the meaning of ERISA
Section 4043 with respect to any Canaan Employee Benefit Plan
that is subject to Title IV of ERISA and with respect to
which the 30-day notice requirement has not been waived;
(iii) each member of Canaan's Controlled Group (as defined
below) has made all required premium payments when due to the
Pension Benefit Guaranty Corporation ("PBGC"); (iv) neither
Canaan nor any member of its Controlled Group is subject to
any liability to the PBGC for any Canaan Employee Benefit
Plan termination; (v) no amendment has occurred which
requires Canaan or any member of its Controlled Group to
provide security pursuant to Code Section 401(a)(29); and
(vi) neither Canaan nor any member of its Controlled Group
has engaged in a transaction which is reasonably likely to
subject it to liability under ERISA Section 4069. For the
purposes of this paragraph 3.15, the term "Controlled Group"
means all corporations, trades or businesses which, together
with Canaan, are treated as a single employer under Section
414 of the Code.
3.15.6 No Canaan Employee Benefit Plan is a multiemployer plan
(within the meaning of Section 3(37) of ERISA) and neither
Canaan nor any member of its Controlled Group has incurred or
is reasonably likely to incur any liability
-22-
to any multiemployer plan nor has or is engaged in a
transaction which is reasonably expected to subject Canaan
or any member of its Controlled Group to any liability under
ERISA Section 4212(c).
3.15.7 Each Canaan Employee Benefit Plan described in subpart
3.15.1(i) above can be unilaterally terminated at any time by
Canaan without material liability to Canaan.
3.16 Environmental Matters.
---------------------
3.16.1 (i) The reserves reflected in the Canaan Financial Statements
relating to environmental matters were adequate under GAAP as
of December 31, 2001, and Canaan has not incurred any
liability in respect of any environmental matter since that
date which would reasonably be expected to have a Material
Adverse Effect; and (ii) the Canaan SEC Documents include all
information relating to environmental matters required to be
included therein under the rules and regulations of the SEC
applicable thereto.
3.16.2 To the knowledge of Canaan, except for any matters which
would not reasonably be expected to have a Material Adverse
Effect: (i) each of Canaan and Canaan Predecessors has
conducted its business and operated its assets, and is
conducting its business and operating its assets, in
compliance with all Environmental Laws; (ii) Canaan has not
been notified by any Governmental Authority that any of the
operations or assets of Canaan is the subject of any
investigation or inquiry by any Governmental Authority
evaluating whether any material remedial action is needed to
respond to a release of any Hazardous Material or to the
improper storage or disposal (including storage or disposal
at offsite locations) of any Hazardous Material; (iii)
neither Canaan nor any other Person has filed any notice
under any federal, state or local law indicating that (A)
Canaan or any Canaan Predecessor is responsible for the
improper release into the environment, or the improper
storage or disposal of any Hazardous Material, or (B) any
Hazardous Material is improperly stored or disposed of upon
any property of Canaan or any Canaan Predecessor; (iv) Canaan
does not have any contingent liability in connection with a
release into the environment at or on the property now or
previously owned or leased by Canaan or any Canaan
Predecessor, or the storage or disposal of any Hazardous
Material; (v) neither Canaan or any of the Canaan Predecessor
has received any claim, complaint, notice, inquiry or request
for information which remains unresolved as of the date
hereof with respect to any alleged violation of any
Environmental Law or regarding potential liability under any
Environmental Law relating to operations or conditions of any
facilities or property owned, leased or operated by Canaan or
any Canaan Predecessor; (vi) there are no sites, locations or
operations at which Canaan is currently undertaking, or has
completed, any remedial or response action relating to any
such disposal or release, as required by Environmental Laws;
and (vii) all underground storage tanks and solid waste
disposal facilities owned or
-23-
operated by Canaan are used and operated in material
compliance with Environmental Laws.
3.17 Vote Required. The affirmative vote of the holders of a majority of
-------------
the outstanding shares of Canaan Common Stock voting as one class is
the only vote of the holders of any class or series of Canaan capital
stock or other voting securities necessary to approve this Agreement
and the Merger. The affirmative vote of the holders of Canaan capital
stock, or any of them, is not necessary to approve any of the
Transaction Documents other than this Agreement or to consummate any
transaction other than the Merger.
3.18 Canaan Board of Directors Actions. The board of directors of Canaan
---------------------------------
has by requisite vote of all directors present: (a) determined that
the Merger is advisable; (b) approved the Merger in accordance with
the provisions of Section 1081 of the OGCA and the transactions
contemplated by this Agreement; and (c) recommended the approval of
this Agreement and the Merger by the holders of Canaan Common Stock
and directed that the Merger be submitted for consideration by the
holders of Canaan Common Stock at a meeting of such stockholders
contemplated by paragraph 5.4 hereof.
3.19 Employment Contracts and Benefits. Except as otherwise provided for
---------------------------------
in any Canaan Employee Benefit Plan: (a) Canaan is not subject to or
obligated under any consulting, employment, severance, termination or
similar arrangement, any employee benefit, incentive or deferred
compensation plan with respect to any Person, or any bonus, profit
sharing, pension, stock option, stock purchase or similar plan or
other arrangement or other fringe benefit plan entered into or
maintained for the benefit of employees or any other Person; and (b)
no employee of Canaan, the Canaan Predecessor or any other Person
owns, or has any rights granted by Canaan to acquire, any interest in
any of the assets or business of Canaan. Section 3.19 of the Canaan
Disclosure Schedule sets forth all indebtedness, promissory notes and
other obligations owing by any employee, officer or non-employee
director of Canaan including, without limitation, by any employee,
officer or non-employee director, the principal amount thereof, the
interest rate applicable thereto, any collateral securing payment
thereof, the payment terms and the maturity date thereof.
3.20 Labor Matters. No employees of Canaan are represented by any labor
-------------
organization. No labor organization or group of employees of Canaan
has made a demand for recognition or certification as a union or
other labor organization, and there are no representation or
certification proceedings or petitions seeking a representation
proceeding presently pending or threatened in writing to be brought
or filed with the National Labor Relations Board or any other labor
relations tribunal or authority. There are no organizing activities
involving Canaan pending with any labor organization or group of
employees of Canaan. Canaan is in material compliance with all laws,
rules, regulations and orders relating to the employment of labor,
including all such laws, rules, regulations and orders relating to
wages, hours, collective bargaining, discrimination, civil rights,
safety and health, workers' compensation and the collection and
payment of withholding or social security Taxes and similar Taxes,
except where
-24-
the failure to comply would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse
Effect on Canaan.
3.21 Insurance. Each of the insurance policies currently maintained
---------
by Canaan is described in Section 3.21 of the Canaan Disclosure
Schedule. Canaan maintains, and through the Closing Date will
maintain, such insurance in full force and effect. Canaan may
terminate each of its insurance policies or binders at or after
the Closing and will incur no penalties or other material costs
in doing so other than any short rate premium adjustments. None
of such policies or binders was obtained through the use of
false or misleading information or the failure to provide the
insurer with all information requested in order to evaluate the
liabilities and risks insured. There is no material default with
respect to any provision contained in any such policy or binder,
nor has Canaan failed to give any notice or present any claim
under any such policy or binder in due and timely fashion. There
are no billed but unpaid premiums past due under any such policy
or binder. There (a) are no outstanding claims under any such
policies or binders and, to the knowledge of Canaan, there has
not occurred any event that might reasonably form the basis of
any claim against or relating to Canaan that is not covered by
any of such policies or binders; (b)is no notice of cancellation
or non-renewal of any such policies or binders which has been
received; and (c) no performance bonds outstanding with respect
to Canaan.
3.22 Intangible Property. There are no material trademarks, trade
-------------------
names, patents, service marks, brand names, computer programs,
databases, industrial designs, copyrights or other intangible
property that are necessary for the operation, or continued
operation, of the business of Canaan or for the ownership and
operation, or continued ownership or operation, of any of
Canaan's assets, for which Canaan does not hold valid and
continuing authority in connection with the use thereof. Section
3.22 of the Canaan Disclosure Schedule lists each seismic
agreement to which Canaan is a party.
3.23 Title to Assets. Canaan has Defensible Title subject only to
---------------
Permitted Encumbrances to: (1) all Oil and Gas Interests of
Canaan included or reflected in the Ownership Interests and
included in section 1.58 of the Canaan Disclosure Schedule as
having proved reserves; (2) all other Oil and Gas Interests of
Canaan as listed in section 3.23 of the Canaan Disclosure
Schedule detailing the type of interest and general location;
(30 all other assets owned by Canaan. Each Oil and Gas Interest
included or reflected in the Ownership Interests entitles Canaan
to receive not less than the undivided Net Revenue Interest set
forth in (or derived from) the Ownership Interests of all
Hydrocarbons produced, saved and sold from or attributable to
such Oil and Gas Interest, and the portion of such costs and
expenses of operation and development of such Oil and Gas
Interest that is borne or to be borne by Canaan is not greater
than the undivided Working Interest set forth in (or derived
from) the Ownership Interests.
3.24 Opinion of Financial Advisor. The board of directors of Canaan
----------------------------
has received the opinion of CIBC World Markets, Inc., that, as
of such date, the Per Share Merger Consideration to be received
by the holders of Canaan Common Stock is fair to such holders
from a financial point of view.
-25-
3.25 Oil and Gas Operations. (a) All wells included in the Oil and
----------------------
Gas Interests of Canaan have been drilled and (if completed)
completed, operated and produced in accordance with generally
accepted oil and gas field practices and in compliance with
applicable oil and gas leases and applicable laws, rules,
regulations, except where the failure or violation would not
reasonably be expected to have a Material Adverse Effect on
Canaan; and (b) proceeds from the sale of Hydrocarbons produced
from Canaan's Oil and Gas Interests are being received by Canaan
in a timely manner and are not being held in suspense for any
reason (except for amounts, individually or in the aggregate,
not in excess of $250,000 held in suspense in the ordinary
course of business).
3.26 Financial and Commodity Hedging. Section 3.26 of the Canaan
-------------------------------
Disclosure Schedule accurately summarizes the outstanding
Hydrocarbon and financial hedging positions of Canaan (including
fixed price controls, collars, swaps, caps, hedges and puts) as
of the date reflected on the Canaan Disclosure Schedule. After
the date hereof, Canaan has not and will not enter into,
terminate or modify any hedging positions without Parent's prior
written consent, which will not be unreasonably withheld.
3.27 Books and Records. All books, records and files of Canaan
-----------------
(including those pertaining to Canaan's Oil and Gas Interests,
wells and other assets, the production, gathering,
transportation and sale of Hydrocarbons, and corporate,
accounting, financial and employee records): (a) have been
prepared, assembled and maintained in accordance with usual and
customary policies and procedures; and (b) fairly and accurately
reflect the ownership, use, enjoyment and operation by Canaan of
their respective assets.
3.28 Other Entities. Canaan has no direct or indirect equity interest
--------------
in any corporation, partnership, limited liability company,
joint venture, business association or other entity (other than
joint venture, joint operating or ownership arrangements related
to oil and gas activities entered into in the ordinary course of
business or other partnerships that, individually or in the
aggregate, are not material to the operations or businesses of
Canaan).
3.29 Account Information. Section 3.29 of the Canaan Disclosure
-------------------
Schedule contains an accurate list of the names and addresses of
every bank and other financial institution in which Canaan
maintains an account (whether checking, savings or otherwise),
lock box or safe deposit box, and the account numbers and
Persons having signature authority or legal access thereto.
3.30 Powers of Attorney. There are no outstanding powers of attorney
------------------
relating to or affecting Canaan.
3.31 Plugging Status. All wells operated by Canaan or any Canaan
---------------
Predecessor that have been permanently plugged and abandoned
have been so plugged and abandoned in accordance in with all
applicable requirements of each Governmental Authority having
jurisdiction over Canaan and the Oil and Gas Interests except
where failure to comply would not reasonably be expected to have
a Material Adverse Effect.
-26-
3.32 No Knowledge of Breach of Representations. Canaan has no actual
-----------------------------------------
knowledge that any of the representations of Parent or Sub
contained in this Agreement are untrue as of the date of this
Agreement. If and to the extent that Canaan has any such
knowledge as of the date of this Agreement, Canaan will not
assert any remedy under this Agreement for breach of such
representation (including, but not limited to, any right to not
close the Merger due to a failure to satisfy the condition to
Closing set forth in paragraph 6.3.1 arising solely as a result
of any such breach).
3.33 Proxy Statement. None of the information supplied or to be
---------------
supplied by Canaan for inclusion or incorporation by reference
in the Proxy Statement and any amendments or supplements thereto
will, at the time the Proxy Statement or any amendment or
supplement thereto is first mailed to stockholders of Canaan, at
the time such stockholders vote on approval and adoption of this
Agreement and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under
which they were made, not misleading. If at any time prior to
Effective Time any event with respect to Canaan or Canaan's
officers and directors occurs which is required to be described
in an amendment of, or a supplement to, the Proxy Statement,
such event will be so described, and such amendment or
supplement will be promptly filed with the SEC and, as required
by law, disseminated to the stockholders of Canaan. The Proxy
Statement will comply as to form in all material respects with
the provisions of the Exchange Act.
3.34 Equipment. All equipment constituting part of the Oil and Gas
---------
Interests operated by Canaan has been installed, maintained, and
operated by Canaan as a prudent operator in accordance with oil
and gas industry standards, and is currently in a state of
repair so as to be adequate for normal operations by Canaan,
except where the failure to do so would not, individually or in
the aggregate, have a Material Adverse Effect on Canaan.
3.35 Current Commitments. Section 3.35 of the Canaan Disclosure
-------------------
Schedule contains a true and reasonably complete list as of
April 17, 2002, of all oral or written commitments for Canaan's
portion of capital expenditures of more than $50,000 with
respect to any of the Oil and Gas Interests for which all of the
activities anticipated in such commitments are not reasonably
expected to have been completed by the Effective Time. Except
for those set forth in Section 3.35 of the Canaan Disclosure
Schedule or as otherwise permitted by paragraph 5.1.10 of this
Agreement, as of Closing there will be no oral or written
commitments for capital expenditures with respect to the Oil and
Gas Interests.
3.36 Payout Balances, Gas Imbalances and Take or Pay. To the
-----------------------------------------------
knowledge of Canaan the Payout Balance for each well owned and
operated by Canaan is properly reflected in Section 3.36 of the
Canaan Disclosure Schedule as of the respective date(s) shown
thereon. To the knowledge of Canaan, the Payout Balance for any
such third-party operated well in which Canaan owns an interest
is properly reflected in Section 3.36 of the Canaan Disclosure
Schedule as of the respective date(s) shown thereon. "Payout
-27-
Balance(s)" means the status, as of the dates of the Canaan's
calculations, of the recovery by Canaan or a third party of a cost
amount specified in the contract relating to a well out of the
revenue from such well where the Net Revenue Interest of Canaan
therein will be reduced or the Working Interest therein will be
increased when such amount has been recovered. With respect to the
Oil and Gas Interests (a) there are no production, transportation or
processing imbalances existing with respect to Canaan or the Oil and
Gas Interests, and (b) Canaan have received no deficiency payments
under gas contracts for which any party has a right to take
deficiency gas from Canaan, nor has Canaan received any payments for
production which are subject to refund or recoupment out of future
production.
3.37 Full Disclosure. The representations, warranties or other statements
---------------
by Canaan in this Agreement or in the Canaan Disclosure Schedule or
Exhibits hereto or any documents distributed generally to Canaan's
stockholders, taken as a whole, do not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements contained therein not misleading.
3.38 Certain Agreements. There are no contracts, agreements, arrangements
------------------
or understandings to which Canaan is a party which create, govern or
purport to govern the right of another party (other than Parent or
Sub) to acquire Canaan.
3.39 Affiliate Transactions. There are no transactions between Canaan and
----------------------
any of Canaan's Affiliates, which are required to be disclosed in the
Canaan SEC Documents which are not disclosed.
4. Parent and Sub Representations and Warranties. Parent and Sub hereby
---------------------------------------------
jointly and severally represent and warrant to Canaan that:
4.1 Organization and Standing. Each of Parent and Sub is a corporation
-------------------------
duly formed, validly existing and in good standing under the laws of
the State of Oklahoma and has the corporate power and authority to
own its property and to carry on its business as such business is now
being conducted.
4.2 Authority and Enforceability. Each of Parent and Sub has the
----------------------------
requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of Parent
and Sub, including approval by the respective boards of directors of
Parent and Sub and by Parent as the sole stockholder of Sub, and no
other corporate proceedings on the part of Parent or Sub are
necessary to authorize the execution or delivery of this Agreement or
to consummate the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by each of Parent
and Sub and (with respect to consummation of this Agreement and the
Merger, assuming that this Agreement constitutes a valid and binding
obligation of Canaan) constitutes a valid and binding
-28-
obligation of each of Parent and Sub, enforceable against Parent and
Sub in accordance with its terms.
4.3 No Restriction. Neither Parent nor Sub is subject to any order,
--------------
judgment or decree, or the subject of any litigation, claim or
proceeding, pending or threatened, or any other restriction of any
kind or character known to either Parent or Sub, which would affect
its ability to carry out the transactions contemplated by this
Agreement.
4.4 Consents and Approvals. No consent, approval, order or authorization
----------------------
of, registration, declaration, or filing with, or permit from, any
Governmental Authority is required by or with respect to Parent or
Sub in connection with the execution and delivery of this Agreement
by Parent or Sub or the consummation by Parent and Sub of the
transactions contemplated hereby except for the following: (a) any
such consent, approval, order, authorization, registration,
declaration, filing or permit which the failure to obtain or make
would not, individually or in the aggregate, have a Material Adverse
Effect; (b) the filing of the Certificate of Merger with the
Secretary of State of Oklahoma pursuant to the provisions of the
OGCA; (c) the filing, if necessary, of a pre-merger notification
report by Parent under the HSR Act and the expiration or termination
of the applicable waiting period; (d) the filing with the SEC of the
Proxy Statement and such reports under Section 13(a) of the Exchange
Act and such other compliance with the Exchange Act and the
Securities Act and the rules and regulations of the SEC thereunder as
may be required in connection with this Agreement and the
transactions contemplated hereby and the obtaining from the SEC of
such orders as may be so required; (e) such filings and approvals as
may be required by any applicable state securities, "blue sky" or
takeover laws or Environmental Laws; and (f) the valid approval of
this Agreement and the Merger by the board of directors of Parent and
Sub.
4.5 Authorization. All corporate action on the part of each of Parent and
-------------
Sub, their directors and stockholders necessary for the transaction
contemplated by this Agreement has been taken. This Agreement is
legal, valid and binding with respect to each of Parent and Sub and
is enforceable in accordance with its terms except as the
enforceability thereof may be limited by bankruptcy, insolvency or
similar laws affecting creditors' rights generally.
4.6 Litigation. There are no actions, proceedings, or investigations
----------
pending, or to the knowledge of Parent or Sub, any basis or threat
thereof, which question the validity of this Agreement or any other
action taken or to be taken in connection herewith or which would
have a material adverse effect on the ability of either Parent or Sub
to consummate the transactions contemplated hereby.
4.7 Broker's or Finder's Fees. Neither Parent nor Sub has incurred any
-------------------------
liability, contingent or otherwise, for brokers' or finders' fees in
respect of this Agreement for which either Canaan or any of its
stockholders will have any responsibility whatsoever.
4.8 Funding. Parent has available adequate funds or the means to obtain
-------
adequate funds in an aggregate amount sufficient to pay (a) all
amounts required to be paid by Parent and
-29-
Sub under this Agreement including payment in full of all amounts
under the Bank Credit Agreement; and (b) all expenses which have been
or will be incurred by Parent or Sub in connection with this
Agreement and the transactions contemplated hereby.
4.9 Interim Operations of Sub. Sub was formed solely for the purpose of
-------------------------
engaging in the transactions contemplated by this Agreement and has
not engaged in any business or activity (or conducted any operations)
of any kind, entered into any agreement or arrangement with any
Person, or incurred, directly or indirectly, any material liabilities
or obligations, except in connection with its incorporation, the
negotiation of this Agreement, the Merger and transactions
contemplated hereby.
4.10 Proxy Statement. None of the information supplied or to be supplied
---------------
by Parent for inclusion or incorporation by reference in the Proxy
Statement, and any amendments or supplements thereto will, at the
time the Proxy Statement or any amendment or supplement thereto is
first mailed to stockholders of Canaan, at the time such stockholders
vote on approval and adoption of this Agreement and at the Effective
Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in
order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. If at any
time prior to Effective Time any event with respect to any of the
Parent Companies or their officers and directors will occur which is
required to be described in an amendment of, or a supplement to, the
Proxy Statement, such event will be so described, and such amendment
or supplement will be promptly filed with the SEC and, as required by
law, disseminated to the stockholders of Canaan.
4.11 No Knowledge of Breach of Representations. Parent has no actual
-----------------------------------------
knowledge that any of Canaan's representations contained in this
Agreement are untrue as of the date of this Agreement. If and to the
extent that Parent has any such knowledge as of the date of this
Agreement, Parent will not assert any remedy under this Agreement for
breach of such representation (including, but not limited to, any
right to not close the Merger due to a failure to satisfy the
condition to Closing set forth in paragraph 6.2.1 arising solely as a
result of any such breach).
4.12 Prior Purchases. The Schedule 13D, as amended, filed by Parent
---------------
pursuant to the Exchange Act with respect to prior purchases of
Canaan Common Stock complies with the Exchange Act and all rules and
regulations promulgated thereunder. Except as disclosed in the
Schedule 13D as previously filed there are no other agreements or
arrangements pursuant to which the sellers of the shares to the
Parent are entitled to receive any additional consideration from any
Parent Company or any Affiliate of the Parent.
5. Covenants. From the date hereof until the Effective Time, Parent, Sub and
---------
Canaan hereby covenant and agree as follows:
5.1 Conduct of Canaan Business Pending Closing. From the date hereof
------------------------------------------
until the Effective Time, Canaan covenants and agrees that, unless
Parent otherwise agrees in writing, the
-30-
businesses of Canaan will be conducted only in, and Canaan will
not take any action except in, the ordinary course of business
and in a manner consistent with past practice, and Canaan will
use its reasonable best efforts to preserve substantially intact
the business organization of Canaan, to keep available the
services of the current officers, employees and consultants of
Canaan and to preserve the goodwill of those current
relationships of Canaan with customers, suppliers and other
Persons with which Canaan have significant business relations. By
way of amplification and not limitation, except as contemplated
by this Agreement, Canaan will not, between the date of this
Agreement and the Effective Time, directly or indirectly do, or
propose to do, any of the following without the prior written
consent of Parent:
5.1.1 Amend or otherwise change the certificate of
incorporation or bylaws or equivalent organizational
documents of Canaan;
5.1.2 Issue, sell, pledge, dispose of, grant, encumber, or
authorize the issuance, sale, pledge, disposition, grant
or encumbrance of: (a) any shares of any class of capital
stock of Canaan, or any options, warrants, convertible
securities or other rights of any kind to acquire any
shares of such capital stock, or any other ownership
interest (including, without limitation, any phantom
interest), of Canaan (except for the issuance of shares
of Canaan Common Stock issuable pursuant to Canaan Stock
Options outstanding on the date hereof and disclosed in
the Canaan Disclosure Schedule); or (b) any assets of
Canaan, except for sales of oil and gas production in the
ordinary course of business;
5.1.3 Declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or
otherwise, with respect to any of its capital stock;
5.1.4 Reclassify, combine, split, subdivide or redeem, purchase
or otherwise acquire, directly or indirectly, any capital
stock or amend or modify any warrant or other right to
acquire any capital stock;
5.1.5 (a) Acquire (including, without limitation, by formation,
merger, consolidation, or acquisition of stock or assets)
any interest in any corporation, partnership, other
business organization or any division thereof or any
material amount of assets other than in the ordinary
course of business; (b) incur any indebtedness for
borrowed money in excess of the existing borrowing base
under the current Bank Credit Agreement or issue any debt
securities or assume, guarantee or endorse, or otherwise
as an accommodation become responsible for, the
obligations of any Person, or make any loans, advances or
capital contribution to, or investments in, any other
Person, except in the ordinary course of business and
consistent with past practice, but in no event in excess
of $100,000; or (c) enter into or amend any contract,
agreement, commitment or arrangement with respect to any
matter set forth in this paragraph 5.1.5;
31
5.1.6 Increase the compensation payable or to become payable to
any officers or employees, except for increases in
accordance with past practices in salaries or wages of
employees of Canaan who are not officers of Canaan, or
grant any severance or termination pay to, or enter into
any employment or severance agreement with, any director,
officer or other employee of Canaan (except as permitted
by this Agreement), or establish, adopt, enter into,
modify or amend any collective bargaining, bonus, profit
sharing, thrift, compensation, stock option, restricted
stock, pension, retirement, deferred compensation,
employment, termination, severance phantom stock plan or
other plan, agreement, trust, fund, policy or arrangement
for the benefit of any director, officer or employee;
5.1.7 Make any material Tax election or settle or compromise
any material federal, state, local or foreign Tax
liability;
5.1.8 Pay, discharge or satisfy any claim, liability or
obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment,
discharge or satisfaction, in the ordinary course of
business and consistent with past practice, of
liabilities reflected or reserved against in the Canaan
Financial Statements or subsequently incurred in the
ordinary course of business and consistent with past
practices;
5.1.9 Settle or compromise any pending or threatened suit,
action or claim which is material or which relates to any
of the transactions contemplated hereby, except if such
settlement or compromise would not have a Material
Adverse Effect;
5.1.10 Undertake or agree to: (a) any capital commitment outside
Arkansas, Oklahoma and Texas (the "Canaan Area"); (b) any
new land or lease initiatives or acquisitions; (c) any
capital expenditures in the Canaan Area in an individual
amount greater than $10,000 net to Canaan's interest or,
when aggregated with all other capital commitments, in an
aggregate amount greater than $200,000 net to Canaan's
interest unless such capital expenditure is in an oil and
gas well proposed by a Parent Company, proposed by a
third party and participated in by a Parent Company or
approved by the Parent; or (d) any new well proposals or
regulatory or governmental action with respect to any
well activities, provided however, Canaan agrees to
provide notice to the Parent of any new well proposal
within three (3) days after receipt and the Parent will
have fifteen (15) days thereafter to consent to the
proposal, in which case Canaan will participate in such
well proposal (to the extent Canaan is required to act in
a shorter time period the notice and response periods
will be shortened so that Parent will be provided a
minimum of 24 hours to consent);
32
5.1.11 Make any change in accounting methods, principles or
practices materially affecting the reported consolidated
assets, liabilities or results of operations of Canaan,
except insofar as may have been required by a change in
GAAP;
5.1.12 Make, enter into or renew, extend, amend, modify, or
waive any provisions of any Canaan Material Agreement or
any other material commitment or relinquish or waive any
Canaan Material Agreement rights or agree to the
termination of any material Canaan Material Agreement,
except in the ordinary course of business consistent with
prior practice;
5.1.13 Agree to any covenant of Canaan not to compete (other
than pursuant to any radius restriction contained in any
lease, reciprocal easement or development, construction,
operating or similar agreement) or any other covenant
restricting the development, manufacture, marketing or
distribution of the products and services of Canaan or
otherwise limiting the freedom of Canaan to compete in
any line of business or with any Person or in any area or
to own, operate, sell, transfer, pledge or otherwise
dispose of or encumber any material assets or which would
so limit the freedom of Parent or any of its Affiliates
after the consummation of the Merger;
5.1.14 Amend, modify, terminate, waive or permit to lapse any
material right of first refusal, preferential right,
right of first offer or any other material right of
Canaan; or
5.1.15 Take or offer or propose to take, or agree to take in
writing, or otherwise, any of the actions described in
paragraphs 5.1.1 through 5.1.14 of this paragraph 5.1 or
any action which would result in any of the conditions to
the Merger not being satisfied.
5.2 Access to Information. Canaan will afford to Parent and Parent
---------------------
Representatives (including, without limitation, directors,
officers and employees of Parent and its Affiliates, and counsel,
accountants and other professionals retained by Parent) such
access, during normal business hours throughout the period prior
to the Effective Time, to Canaan's books, records (including,
without limitation, Tax returns and work papers of Canaan's
independent auditors), properties, personnel and to such other
information as Parent reasonably requests and will permit Parent
to make such inspections as Parent may reasonably request and
will cause the officers of all of Canaan to furnish Parent with
such financial and operating data and other information with
respect to the business, properties and personnel of Canaan as
Parent may from time to time reasonably request, provided,
however, that no investigation pursuant to this paragraph 5.2
will affect or be deemed to modify any of the representations or
warranties made by Canaan in this Agreement. All information
exchanged pursuant to this paragraph 5.2 will be subject to the
Confidentiality Agreement.
5.3 No Solicitation. Immediately following the execution of this
---------------
Agreement, Canaan:
33
5.3.1 Will (and will cause each of the Canaan Representatives
to) terminate any and all existing activities,
discussions and negotiations with third parties (other
than Parent) with respect to any possible transaction
involving any proposal to acquire all or any part of the
Canaan Common Stock or all or a material portion of the
assets, business or equity interests of Canaan (other
than the transactions contemplated by this Agreement),
whether by merger, purchase of assets, tender offer,
exchange offer or otherwise.
5.3.2 Will not (and will cause the Canaan Representatives not
to): (a) solicit, initiate or encourage the submission
of, any offer or proposal to acquire any of the Canaan
Common Stock (other than the exercise of Canaan Stock
Options) or all or any material portion of the assets,
business or equity interests of Canaan or any other
transaction the consummation of which would or could
reasonably be expected to impede, interfere with, prevent
or materially delay the consummation of the Merger (other
than the transactions contemplated by this Agreement),
whether by merger, purchase of assets, tender offer,
exchange offer or otherwise (an "Alternative Proposal");
(b) engage in negotiations or discussions concerning or
provide any non-public information to any Person relating
to an Alternative Proposal; or (c) agree to, approve or
recommend, or otherwise facilitate any effort or attempt
to make or implement, any Alternative Proposal, or
withdraw its recommendation of the Merger, provided,
however, that: (i) Canaan's board of directors may take
and disclose to the stockholders of Canaan a position
contemplated by Rules 14d-9 or 14e-2(a) promulgated under
the Exchange Act with regard to an Alternative Proposal;
and (ii) following receipt from a third party (without
any solicitation, initiation or encouragement by Canaan
or any Canaan Representatives) of a bona fide written
Alternative Proposal, (x) Canaan may, upon written notice
to Parent, engage in discussions or negotiations with
such third party and may furnish such third party
non-public information concerning Canaan, and Canaan's
business, properties and assets if, prior to furnishing
such information to such third party, such third party
executes a confidentiality agreement not materially less
favorable to Canaan than the Confidentiality Agreement
(but containing provisions permitting Canaan to comply
with paragraphs 5.3.2 and 5.3.3 hereof) and (y) the board
of directors of Canaan may recommend such Alternative
Proposal or withdraw, modify or not make its
recommendation referred to in paragraph 3.18, if and only
to the extent that Canaan's board of directors determines
in good faith that: (1) based on the advice of Canaan's
counsel, the failure to recommend such Alternative
Proposal would constitute a breach of the board's
fiduciary duties; and (2) based on the advice of Canaan's
financial advisor, such Alternative Proposal, if
consummated, would result in a transaction more favorable
to Canaan's stockholders from a financial point of view
than the transaction contemplated by this Agreement (a
"Superior Proposal") and the Person making such Superior
Proposal has the financial means, or the ability to
obtain the necessary financing, to conclude such
transaction.
34
5.3.3 Will promptly notify Parent after receipt by Canaan or any of
the Canaan Representatives of any Alternative Proposal, any
inquiries indicating that any Person is considering making or
wishes to make an Alternative Proposal or any requests for
nonpublic information and the terms and conditions of any
proposals or offers and the status of any actions, including
any discussions, taken pursuant to such Alternative Proposal.
Canaan agrees that it will keep Parent informed, on a current
basis, of the status and terms of any such Alternative Proposal
and of any discussions or negotiations regarding same.
5.3.4 Will use Canaan's best efforts to cause each of the Irrevocable
Proxies to be executed and delivered to Parent simultaneously
with the execution of this Agreement, all in form and substance
satisfactory to Parent and its legal counsel.
Nothing in this paragraph 5.3 will permit Canaan to terminate this
Agreement or to change or withdraw its recommendation except as
specifically provided in paragraph 7.1.
5.4 Canaan Stockholder Meeting. As promptly as practicable after the date
--------------------------
hereof, Canaan will: (a) take all action necessary in accordance with
applicable law and its certificate of incorporation and bylaws to
convene a meeting of its stockholders for the purpose of voting on
this Agreement and the Merger; (b) distribute to its stockholders the
Proxy Statement in accordance with applicable federal and state law
and with its certificate of incorporation and bylaws, which Proxy
Statement will contain the recommendation of the board of directors of
Canaan that its stockholders approve the merger; (c) use all
reasonable efforts to solicit from its stockholders proxies in favor
of the approval and adoption of the Merger, this Agreement and the
transactions contemplated hereby and to secure the Canaan stockholders
approval; and (d) cooperate and consult with Parent with respect to
each of the foregoing matters; provided, that nothing in this
paragraph will prohibit the board of directors of Canaan from failing
to make or from withdrawing or modifying its recommendation to
Canaan's stockholders hereunder to the extent permitted by paragraph
5.3.2 of this Agreement.
5.5 Proxy Statement. With respect to the Proxy Statement, the Parties
---------------
agree that:
5.5.1 Parent and Canaan will cooperate and promptly prepare a
preliminary Proxy Statement and Canaan will file the
preliminary Proxy Statement with the SEC as soon as practicable
after the date hereof.
5.5.2 Parent and Canaan will cause the Proxy Statement, at the time
it is delivered to the Canaan stockholders, to comply as to
form in all material respects with the applicable provisions of
the Securities Act, the Exchange Act and the rules and
regulations of the SEC thereunder.
5.5.3 Canaan hereby covenants and agrees with Parent that the Proxy
Statement (at the time it is first mailed to stockholders of
Canaan, at the time of the Canaan
-35-
Stockholder Meeting, and at the Effective Time) will not
contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If, at
any time prior to the Effective Time, any event with respect to
Canaan, or with respect to other information included in the
Proxy Statement, occurs and such event is required to be
described in a supplement to the Proxy Statement, such event
will be so described and such supplement will be promptly
prepared, filed and disseminated.
5.5.4 Parent hereby covenants and agrees with Canaan that the Proxy
Statement (at the time it is first mailed to stockholders of
Canaan, at the time of the Canaan Stockholder Meeting, and at
the Effective Time) will not contain an untrue statement of a
material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are
made, not misleading (provided, however, that this provision
will only apply to any information contained in the Proxy
Statement that was supplied by Parent specifically for
inclusion therein). If, at any time prior to the Effective
Time, any event with respect to Parent, or with respect to any
information concerning Parent included in the Proxy Statement,
occurs and such event is required to be described in a
supplement to the Proxy Statement, such event will be disclosed
to Canaan to be so described and such supplement will be
promptly prepared, filed and disseminated.
5.5.5 Neither the Proxy Statement nor any amendment or supplement
thereto will be filed or disseminated to the stockholders of
Canaan without the approval of both Parent and Canaan which
approval will not be unreasonably withheld.
5.6 Public Announcements. Prior to Closing, Canaan will consult with
--------------------
Parent before issuing any press release or otherwise making any public
statements with respect to the transactions contemplated by this
Agreement and will not issue any press release or make any such public
statement prior to obtaining the approval of Parent; provided,
however, that such approval will not be required where such release or
announcement is required by applicable law; and provided further, that
Canaan may respond to inquiries by the press or others regarding the
transactions contemplated by this Agreement, so long as such responses
are consistent with previously issued press releases.
5.7 Notification of Certain Matters. Canaan will give prompt notice to
-------------------------------
Parent of: (a) any representation or warranty of Canaan contained in
this Agreement being untrue or inaccurate when made; (b) the
occurrence of any event or development that would cause (or could
reasonably be expected to cause) any representation or warranty of
Canaan contained in this Agreement to be untrue or inaccurate on the
Closing Date; or (c) any failure of Canaan to comply with or satisfy
any covenant, condition, or agreement to be complied with or satisfied
by it hereunder. Parent will give prompt
-36-
notice to Canaan of: (i) any representation or warranty of Parent
contained in this Agreement being untrue or inaccurate when made; (ii)
the occurrence of any event or development that would cause (or could
reasonably be expected to cause) any representation or warranty of
Parent contained in this Agreement to be untrue or inaccurate on the
Closing Date; or (iii) any failure of Parent to comply with or satisfy
any covenant, condition, or agreement to be complied with or satisfied
by it hereunder.
5.8 Indemnification. From and after the Effective Time, Parent agrees
---------------
that:
5.8.1 Parent will indemnify and hold harmless each present and former
director and/or officer of Canaan, determined as of the
Effective Time (the "Indemnified Parties"), that is made a
party or threatened to be made a party to any threatened,
pending or completed, action, suit, proceeding or claim,
whether civil, criminal, administrative or investigative, by
reason of the fact that he or she was a director or officer of
Canaan prior to the Effective Time and arising out of actions
or omissions of the Indemnified Party in any such capacity
occurring at or prior to such Effective Time (a "Claim")
against any costs or expenses (including reasonable attorneys'
fees), judgments, fines, losses, claims, damages or liabilities
reasonably incurred in connection with any Claim, whether
asserted or claimed prior to, at or after the Effective Time,
to the fullest extent that Canaan would have been permitted
under Oklahoma law, the certificate of incorporation or bylaws
of Canaan or written indemnification agreements in effect at
the date hereof, including provisions therein relating to the
advancement of expenses incurred in the defense of any action
or suit.
5.8.2 Any Indemnified Party wishing to claim indemnification under
paragraph 5.8.1, upon learning of any such Claim, will promptly
notify Parent thereof, but the failure to so notify Parent will
not relieve Parent of any liability it may have to such
Indemnified Party if such failure does not materially prejudice
Parent. In the event of any such Claim (whether arising before
or after the Effective Time): (a) Parent will have the right to
assume the defense thereof and Parent will not be liable to
such Indemnified Party for any legal expenses of other counsel
or any other expenses subsequently incurred by such Indemnified
Party in connection with the defense thereof, except that if
Parent elects not to assume such defense, the Indemnified Party
may retain counsel reasonably satisfactory to Parent, and
Parent will pay reasonable fees and expenses of such counsel
for the Indemnified Party; provided, however, that Parent will
be obligated pursuant to this paragraph 5.8.2 to pay for only
one firm or counsel for all Indemnified Parties unless the use
of one counsel for such Indemnified Parties would present such
counsel with a conflict of interest; (b) such Indemnified
Parties will cooperate in the defense of any such matter; and
(c) Parent will not be liable for any settlement effected
without its prior written consent, which consent will not be
unreasonably withheld; and provided, further, however, that
Parent will not have any obligation hereunder to any
Indemnified Party when and if a court of competent jurisdiction
will
-37-
ultimately determine, and such determination will have become
final and non-appealable, that the indemnification of such
Indemnified Party in the manner contemplated hereby is
prohibited by applicable law. If such indemnity is not
available with respect to any Indemnified Party, then Parent
and the Indemnified Party will contribute to the amount
payable in such proportion as is appropriate to reflect
relative faults and benefits, with any allocation of
respective "fault" otherwise allocable to Canaan being
allocated to Parent.
5.8.3 The rights of each Indemnified Party shall be in addition to
any other rights such Indemnified Party may have under the
certificate of incorporation or bylaws of Canaan, under the
OGCA, under existing indemnification agreements, or otherwise,
all of which will be assumed by the Surviving Corporation.
5.8.4 In the event Parent or any of its successors or assigns (i)
consolidates with or merges into any other Person and shall
not be the continuing or surviving corporation or entity in
such consolidations or merger or (ii) transfers all or
substantially all of its properties and assets to any Person,
then and in either case, proper provisions shall be made so
that the successors and assigns of Parent, as case may be,
shall assume the obligations as set forth in this paragraph.
5.8.5 The provisions of this paragraph 5.8 shall survive
consummation of the Merger and expressly are intended to
benefit each of the Indemnified Parties.
5.9 Employee and Severance Matters.
------------------------------
5.9.1 Attached as Section 5.9 of the Canaan Disclosure Schedule is:
(1) a current list of each of Canaan's employees (the "Canaan
Employees"); (2) a copy of Canaan's severance policy (the
"Canaan Severance Policy"); (3) a severance package table
which lists the cost of all severance pay to be paid to each
of the Canaan Employees; (4) a list of Canaan Employees with
written employment agreements (the "Contract Employees"); (5)
a list of all contract pumpers and other independent
contractors (the "Independent Contractors") and a summary of
the terms of such arrangements including, without limitation,
any severance package; and (6) a list of each of the Canaan
Employees with change in control agreements ("CIC Employees")
together with the amounts and terms of such change in control
agreements.
5.9.2 On or immediately prior to the Closing Date, Canaan will pay
the amounts payable to the CIC Employees under the applicable
change in control agreements in an amount not to exceed the
amounts disclosed in the Canaan Disclosure Schedule, provided
the CIC Employee has tendered the CIC Employee's resignation
and executed all other documents and taken all actions
required under this Agreement, the change of control agreement
or the CIC Employee's employment agreement. Canaan will also
pay the severance pay
-38-
as indicated on the severance package table to the Canaan
Employees. Notwithstanding the immediately preceding sentence,
Canaan will not pay such severance pay to: (1) any Canaan
Employee who is not a Contract Employee and to whom Parent or
Sub offers a substantially comparable job (as determined by
Parent in its reasonable discretion) with equal or better base
salary at such employee's current location; (2) any Contract
Employee who chooses not to terminate his employment agreement
with Canaan on the Closing Date; (3) any Independent
Contractor who is covered by the Canaan Severance Policy and
chooses not to terminate his contract with Canaan on the
Closing Date; or (4) any Canaan Employee who does not execute
a severance agreement in substantially the form required by
the Canaan Severance Policy. With respect to any Canaan
Employee who is not paid severance pay on or immediately prior
to the Effective Date, all the terms and provisions of the
Canaan Severance Policy and the Contract Employees' employment
agreements will continue in full force and effect. Parent
shall provide funding to Canaan at the Closing sufficient in
amount for Canaan to make all payments required or permitted
by this paragraph 5.9.2.
5.9.3 Neither Canaan nor Parent is under any obligation to retain or
hire any Canaan Employee after the Effective Time. At least
five (5) days before the Closing Date, Parent will provide to
Canaan a list of those Canaan Employees to whom an offer of
employment has been or will be made to be effective on the day
after the Closing Date. On reasonable prior notice during
normal business hours, Parent and the Parent Representatives
will be given reasonable access to the facilities and to
personnel, safety and other relevant records of Canaan (to the
extent access to such records does not violate any law or the
legitimate privacy rights of the Canaan Employee concerned)
for the purpose of preparing for and conducting employment
interviews with any Canaan Employees. Canaan will be
responsible for and pay, on or before the Closing Date, any
and all severance or other payments due to the Canaan
Employees.
5.9.4 To the extent legally required by COBRA, for a period of 18
months following the Effective Time, Parent will, or will
cause the Surviving Corporation to: (a) maintain Canaan's
health benefit plans for the benefit of the continuing and
terminated Canaan Employees; or (b) provide such continuing
and terminated Canaan Employees with the rights and benefits
of Parent's employee health benefit plans; provided, that
--------
Parent will not be required to pay, or cause the Surviving
Corporation to pay, the premiums for coverage under such plans
for any terminated Canaan Employee. Parent will, or will cause
the Surviving Corporation to, fulfill all coverage
continuation obligations imposed by Section 4980B of the Code
and Section 601 of ERISA for those Canaan Employees who are
not retained by Parent or the Surviving Corporation. The
provisions of this Section 5.9.4 are intended to be for the
benefit of, and will be enforceable by, the Parties and the
Canaan Employees covered by the Employee Plans at the
Effective Time and their respective heirs and representatives.
-39-
5.9.5 The Parent shall give to all Canaan employees who continue
their employment with a Parent Company or the Surviving
Corporation after the Effective Time ("Affected Employees")
the opportunity to participate in all employee benefit plans
maintained by Parent for its employees generally and shall
give full credit for their continuous service with Canaan
(including deemed service credited by Canaan) for purposes of
eligibility to participate in vesting (but not benefit
accruals under any defined benefit pension plan) under all
employee benefit plans, programs, policies or arrangements
which are maintained by Parent or any Parent Company for such
Affected Employees to the same extent recognized by Canaan
immediately prior to the Effective Time under any similar
Canaan Employee Benefit Plans. Parent and the Surviving
Corporation shall (i) waive all limitations as to pre-existing
conditions, exclusions and waiting periods with respect to
participation and coverage requirements applicable to the
Affected Employees under any welfare benefit plan, that such
employees may be eligible to participate in after the
Effective Time (other than limitations or waiting periods that
are already in effect with respect to any such employees under
the Canaan plans and that have not been satisfied as of the
Effective Time) and (ii) provide each Affected Employee with
credit for any co-payments and deductibles paid prior to the
Effective Time (in the calendar year of the Effective Time)
and satisfying any applicable deductible or out-of-pocket
requirements for the year in which the Effective Time occurred
under any welfare plans that such employees are eligible to
participate in after the Effective Time. For any Affected
Employee who is terminated without cause within six months
following the Effective Time, such Affected Employee shall
receive a severance payment equal to the greater of the amount
payable under the Canaan Severance Policy or any Parent
severance plan or policy applicable to employees generally.
5.9.6 Canaan will use its best efforts to cause Canaan's Profit
Sharing Plan and Indian Oil's 401(k) to be terminated
immediately prior to the Closing with the result that all
participants therein shall be 100% vested. The Parent shall
cause the Surviving Corporation to take all of such action as
is necessary as promptly as reasonably possible to receive IRS
approval for the termination of such plans and promptly
thereafter to distribute to the participants in the plans all
amounts that they are entitled to receive under the plans.
Parent will permit Affected Employees receiving distributions
from the Canaan Profit Sharing Plan to be eligible for
rollover contributions to any similar plans maintained by the
Parent and will permit any outstanding plan loans that are in
compliance with the applicable plan and the applicable law to
be continued.
5.10 Reasonable Best Efforts. Upon the terms and subject to the conditions
-----------------------
set forth in this Agreement, each of the Parties will use all
reasonable best efforts to take, or cause to be taken, all actions,
and to do, or cause to be done, and to assist and cooperate with the
other Parties in doing, all things necessary, proper or advisable to
consummate and make effective, in the most expeditious manner
practicable, the Merger and the other transactions contemplated
hereby, including: (a) the obtaining of all necessary actions
-40-
or non-actions, waivers, consents and approvals from Governmental
Authorities and the making of all necessary registrations and filings
(including filings with Governmental Authorities, if any) and the
taking of all reasonable steps as may be necessary to obtain an
approval or waiver from, or to avoid an action or proceeding by, any
Governmental Entity; (b) the obtaining of all necessary consents,
approvals or waivers from third parties; (c) the defending of any
lawsuits or other legal proceedings, whether judicial or
administrative, challenging the Transaction Documents or the
consummation of the transactions contemplated hereby, including
seeking to have any stay or temporary restraining order entered by any
court or other Governmental Entity vacated or reversed; and (d) the
execution and delivery of any additional instruments necessary to
consummate the Merger and to fully carry out the purposes of the
Transaction Documents. In connection with and without limiting the
foregoing, the Canaan and Canaan's board of directors will: (i) take
all action necessary to ensure that no state takeover statute or
similar statute or regulation is or becomes applicable to the Merger
or the Transaction Documents; and (ii) if any state takeover statute
or similar statute or regulation becomes applicable to the Merger or
the Transaction Documents, take all action necessary to ensure that
the Merger and the other transactions contemplated hereby may be
consummated as promptly as practicable on the terms contemplated by
the Transaction Documents and otherwise to minimize the effect of such
statute or regulation on the Merger.
5.11 Stock Options.
-------------
5.11.1 As soon as practicable following the date of this Agreement,
Canaan's board of directors (or, if appropriate, any committee
administering the Canaan Plans) will adopt such resolutions or
take such other actions as are required to adjust the terms of
all outstanding Canaan Stock Options granted under any Canaan
Plan to confirm that each of the Canaan Stock Options
outstanding immediately prior to the acceptance for payment of
shares of Canaan Common Stock pursuant to the terms of this
Agreement will be canceled, with the holder thereof becoming
entitled to receive an amount of cash equal to the product of
(a) the excess, if any, of (i) the Per Share Merger
Consideration over (ii) the exercise price per share of Canaan
Common Stock subject to such Canaan Stock Option, multiplied
by (b) the number of shares of Canaan Common Stock issuable
pursuant to the unexercised portion of such Canaan Stock
Option. Subject to the Closing of the Merger, Parent agrees to
provide any funding out of the Merger Consideration necessary
to make the foregoing payments.
5.11.2 All amounts payable pursuant to paragraph 5.11.1 will be
subject to any required withholding of Taxes and will be paid
at or as soon as practicable at or following the Effective
Time, but in any event within seven days following the
Effective Time, without interest. The cancellation of a Canaan
Stock Option in exchange for the cash payment described in
paragraph 5.11.1 will be deemed a release of any and all
rights the holder of such Canaan Stock Option had or may have
had in respect thereof.
-41-
5.11.3 As soon as practicable following the date of this Agreement,
Canaan's board of directors (or, if appropriate, any committee
administering the Canaan Plans) will take or cause to be taken
such actions as are required to cause (i) the Canaan Plans to
terminate as of the Effective Time and (ii) the provisions in
any other plan, program or agreement providing for the
issuance, transfer or grant of any capital stock of Canaan or
any interest in respect of any capital stock of Canaan to be
terminated as of the Effective Time. Canaan will ensure that
following the Effective Time no holder of a Canaan Stock
Option or any participant in any Canaan Plan or other benefit
plan, program or agreement will have any right thereunder to
acquire any capital stock of Canaan or the Surviving
Corporation.
5.12 Stockholder Litigation. Canaan will give Parent the opportunity to
----------------------
participate in the defense or settlement of any stockholder litigation
against Canaan and its directors relating to the Merger and Canaan
will not agree to any settlement of such litigation without Parent's
consent.
5.13 Further Assurances. At and after the Effective Time, the officers and
------------------
directors of the Surviving Corporation will be authorized to execute
and deliver, in the name and on behalf of Canaan or Sub, any deeds,
bills of sale, assignments or assurances and to take and do, in the
name and on behalf of Canaan or Sub, any other actions and things to
vest, perfect or confirm of record or otherwise in the Surviving
Corporation any and all right, title and interest in, to and under any
of the rights, properties or assets of Canaan acquired or to be
acquired by the Surviving Corporation as a result of, or in connection
with, the Merger.
5.14 Rights Agreement; Consequences if Rights Triggered. Canaan's board of
--------------------------------------------------
directors will take all action requested in writing by Parent in order
to render the Canaan Rights inapplicable to the Merger and the
transactions contemplated by this Agreement. Except as approved in
writing by Parent, Canaan's board of directors will not (i) amend the
Canaan Rights Agreement, (ii) redeem the Canaan Rights or (iii) take
any action with respect to, or make any determination under, the
Canaan Rights Agreement, in each case in a manner adverse to Parent or
Sub. If any triggering event occurs under the Canaan Rights Agreement
at any time during the period from the date of this Agreement to the
Effective Time, Canaan and Parent will make such adjustment to the Per
Share Merger Consideration as Canaan and Parent will mutually agree so
as to preserve the economic benefits that Canaan and Parent each
reasonably expected on the date of this Agreement to receive as a
result of the consummation of the Merger and the other transactions.
5.15 Payment of Expenses. Except as set forth in this paragraph 5.15, all
-------------------
expenses incurred in connection with this Agreement will be paid by
the party incurring such expenses, whether or not the Merger is
consummated. "Expenses" as used in this Agreement will include all
reasonable out-of-pocket expenses (including, without limitation, all
fees and expenses of counsel, accountants, experts and consultants to
a party hereto and its affiliates) incurred by a party or on its
behalf in connection with or related to the
-42-
authorization, preparation, negotiation, execution and performance of
this Agreement, the preparation, printing, filing and mailing of the
Proxy Statement, the solicitation of stockholder approvals and all
other matters related to the closing of the Merger.
5.16 Canaan Termination Fee. Parent and Canaan agree that: (a) if Canaan
----------------------
terminates this Agreement pursuant to paragraph 7.1.4(a); or (b) if
Parent terminates this Agreement pursuant to paragraph 7.1.5; or (c)
if (i) Canaan or Parent terminates this Agreement pursuant to
paragraph 7.1.2 due to the failure of Canaan's stockholders to approve
and adopt this Agreement, the Merger and the transactions contemplated
hereby or by Parent pursuant to paragraph 7.1.3, and (ii) at the time
of such termination, there exists an Alternative Proposal with respect
to Canaan which has been publicly announced and remains pending and,
prior to or within twelve (12) months of the termination of this
Agreement, Canaan enters into a definitive agreement with any third
party with respect to such Alternative Proposal with respect to Canaan
which is ultimately consummated, then Canaan will pay to Parent
$5,000,000.00 (the "Canaan Termination Fee"). The Canaan Termination
Fee will be paid to Parent: (i) prior to, and will be a pre-condition
to effectiveness of termination of this Agreement pursuant to
paragraph 7.1.4(a); (ii) within three (3) business day after a
termination of this Agreement pursuant to paragraph 7.1.5; and (iii)
within one (1) business day after consummation of a definitive
agreement entered into with a third party with respect to an
Alternative Proposal if this Agreement is terminated pursuant to
paragraph 7.1.2 or paragraph 7.1.3. All payments under this paragraph
5.16 will be made by wire transfer of immediately available funds to
an account designated by Parent.
5.17 Dissenting Stockholder Payments. Any and all payments made to settle
-------------------------------
appraisal rights of Dissenting Stockholders or made pursuant to the
OGCA will be made solely out of Canaan assets and neither Parent nor
Sub will have any liability therefor.
5.18 Name. As of the Effective Time, the Surviving Corporation and Parent
----
hereby release any claim to the use of the name "Canaan" and will
provide an assignment of such rights to LJ Natural Gas Company, an
Oklahoma corporation.
5.19 Related Agreements. As of the Effective Time the parties will execute
------------------
or cause to be executed the Goodwill Protection Agreements and the
Office Space Agreement. The periodic payments to be paid under: (1)
Leo E. Woodard's Goodwill Protection Agreement will be $500,000; (2)
John K. Penton's Goodwill Protection Agreement will be $500,000; and
(3) Michael S. Mewbourn's Goodwill Protection Agreement will be
$300,000.
6. Conditions Precedent. The obligations of the Parties under this Agreement
--------------------
will be subject to the following conditions precedent:
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
----------------------------------------------------------
respective obligations of each of the Parties to effect the Merger
will be subject to the satisfaction, at or prior to the Closing Date,
of the following conditions:
-43-
6.1.1 Stockholder Approval. This Agreement and the Merger will have
--------------------
been duly and validly approved and adopted by a majority of
the outstanding Canaan Common Stock voting as one class.
6.1.2 Other Approvals. If applicable, the waiting period applicable
---------------
to the consummation of the Merger under the HSR Act will have
expired or been terminated and all filings required to be made
prior to the Effective Time with, and all consents, approvals,
permits and authorizations required to be obtained prior to
the Effective Time from, any Governmental Authority in
connection with the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby
by Canaan, Parent and Sub will have been made or obtained (as
the case may be), except where the failure to obtain such
consents, approvals, permits and authorizations would not be
reasonably likely to result in a Material Adverse Effect.
6.1.3 No Injunctions or Restraints. No temporary restraining order,
----------------------------
preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint
or prohibition preventing the consummation of the Merger will
be in effect; provided, however, that prior to invoking this
condition, each party will have complied fully with its
obligations under this Agreement and, in addition, will use
all reasonable efforts to have any such decree, ruling,
injunction or order vacated, except as otherwise contemplated
by this Agreement.
6.2 Conditions to Obligations of Parent and Sub. The obligations of Parent
-------------------------------------------
and Sub to effect the Merger are subject to the satisfaction of the
following conditions, any or all of which may be waived in whole or in
part by Parent and Sub:
6.2.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in this Agreement and any
document delivered in connection herewith: (1) to the extent
qualified by Material Adverse Effect or any other materiality
qualification will be true and correct as of the date of this
Agreement and as of the Closing Date; and (2) to the extent
not qualified by Material Adverse Effect or any other
materiality qualification will be true and correct in all
material respects as of the date of this Agreement and as of
the Closing Date; provided that the foregoing condition will
be deemed to have been satisfied unless the failure of such
representations and warranties to be true and correct (without
regard to any Material Adverse Effect or any other materiality
qualification or threshold set forth in paragraph 3 of this
Agreement), individually or in the aggregate, results in or
would reasonably be expected to result in a Material Adverse
Effect on Canaan. At Closing the Parent will have received a
certificate of the Company, executed on its behalf by its
chief executive officer, dated as of the Closing Date,
certifying to the foregoing.
-44-
6.2.2 Performance of Covenants and Agreements by Canaan. Canaan will
-------------------------------------------------
have performed in all material respects all covenants and
agreements required to be performed by it under this Agreement
at or prior to the Closing Date, and Parent will have received
a certificate signed by the chief executive officer of Canaan
to such effect.
6.2.3 No Adverse Change. From the date of this Agreement through the
-----------------
Closing, there will not have occurred any change in the
condition (financial or otherwise), operations or business of
Canaan that would have or would reasonably be expected to have
a Material Adverse Effect on Canaan.
6.2.4 Dissenting Stockholders. Holders of no more than ten percent
-----------------------
(10%) of the outstanding shares of Canaan Common Stock will
have exercised, nor will they have any continued right to
exercise, appraisal, dissenters' or similar rights under
applicable law with respect to their shares of Canaan Common
Stock by virtue of the Merger.
6.2.5 Releases. Each officer and director of Canaan will have
--------
executed and delivered a Release in substantially the form
attached hereto as Exhibit "D" and resignation as officer and
director.
6.2.6 Opinion of Counsel. Parent will have received from Crowe &
------------------
Dunlevy, counsel to Canaan, an opinion in form and substance
substantially as set forth in Exhibit "E" attached hereto
addressed to Parent and dated as of the Closing Date.
6.3 Conditions to Obligation of Canaan. The obligation of Canaan to effect
-----------------------------------
the Merger is subject to the satisfaction of the following conditions,
any or all of which may be waived in whole or in part by Canaan:
6.3.1 Representations and Warranties. The representations and
------------------------------
warranties of Parent and Sub set forth in paragraph 4 will be
true and correct as of the Closing Date as though made on and
as of that time, and Canaan will have received a certificate
signed by the chief executive officer or the chief financial
officer of Parent to such effect; provided, however, that the
condition set forth in this paragraph 6.3.1 will be deemed to
be satisfied even if one or more of such representations and
warranties are not true and correct, so long as the failure of
such representations and warranties to be true and correct (in
the aggregate) does not result in Parent and/or Sub being
unable to perform its obligations under this Agreement.
6.3.2 Performance of Covenants and Agreements by Parent and Sub.
---------------------------------------------------------
Parent and Sub will have performed in all material respects
all covenants and agreements required to be performed by them
under this Agreement at or prior to the Closing Date, and
Canaan will have received a certificate signed by the chief
executive officer or the chief financial officer of Parent to
such effect.
-45-
7. Termination. This Agreement may be terminated and the Merger may be
-----------
abandoned at any time prior to the Effective Time, whether before or after
approval of this Agreement and the Merger by the stockholders of Canaan on the
following terms.
7.1 Termination Rights. Any termination of this Agreement will be:
------------------
7.1.1 Mutual Consent. By mutual written consent of Parent and
--------------
Canaan;
7.1.2 Date Certain. By either Canaan or Parent if: (a) the Merger
------------
has not been consummated by December 31, 2002 (provided,
however, that the right to terminate this Agreement pursuant
to this clause (a) will not be available to any party whose
breach of any representation or warranty or failure to perform
any covenant or agreement under this Agreement has been the
cause of or resulted in the failure of the Merger to occur on
or before such date); (b) any Governmental Authority has
issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting
the Merger and such order, decree, ruling or other action has
become final and nonappealable (provided, however, that the
right to terminate this Agreement pursuant to this clause (b)
will not be available to any party until such party has used
all reasonable efforts to remove such injunction, order or
decree); or (c) this Agreement and the Merger have not been
approved by the holders of a majority of the outstanding
Canaan Common Stock voting as one class at the Canaan
Stockholder Meeting or at any adjournment thereof;
7.1.3 By Parent. By Parent if: (a) there has been a breach of any of
---------
the representations and warranties made by Canaan in this
Agreement or the Canaan Disclosure Schedule the aggregate of
which would have a Material Adverse Effect on Canaan and such
breach has not been, or cannot be, cured within twenty (20)
days after notice and demand for cure thereof; or (b) Canaan
has failed to comply in any material respect with any of its
covenants or agreements contained in this Agreement and such
failure has not been, or cannot be, cured within twenty (20)
days after notice and demand for cure thereof, provided
however Parent will not have the right to terminate this
Agreement pursuant to this paragraph 7.1.3 if at the time
Parent is in breach of any representation, warranty or
covenant under this Agreement such that the conditions to
Closing under paragraph 6.3 of this Agreement will not be
satisfied.
7.1.4 By Canaan. By Canaan if: (a) as a result of a Superior
---------
Proposal received by Canaan from a Person other than a party
to this Agreement or any of its Affiliates, Canaan's board of
directors determines to accept such Superior Proposal as
provided in paragraph 5.3.2; provided, however, that prior to
the effective date of any such termination, Canaan will
provide Parent with an opportunity (of not less than five (5)
full business days) to make such adjustments in the terms and
conditions of this Agreement or the Merger as would enable
Canaan to proceed with the transactions contemplated hereby;
-46-
provided, further, that it will be a condition to the
effectiveness of termination by Canaan pursuant to this
paragraph 7.1.4, that Canaan will have paid the Canaan
Termination Fee to Parent required by paragraph 5.16 of this
Agreement; or (b) there has been a breach of the
representations and warranties made by Parent in paragraph 4
of this Agreement the aggregate effect of which would cause
Parent to be unable to perform its obligations under this
Agreement, and the condition described in paragraph 6.3.1,
other than the provision thereof relating to the certificate
signed by the chief executive officer or chief financial
officer of Parent, would not be satisfied if the Closing were
to occur on the day on which Canaan gives Parent notice of
such termination; or (c) Parent has failed to comply in any
material respect with any of its covenants or agreements
contained in this Agreement and such failure has not been, or
cannot be, cured within twenty (20) days after notice and
demand for cure thereof; or
7.1.5 Superior Proposal. By Parent if the board of directors of
-----------------
Canaan: (a) recommends any Alternative Proposal to Canaan's
stockholders; or (b) withdraws or modifies in a manner adverse
to Parent, its approval or recommendation of this Agreement or
the Merger, or, on request by Parent, fails to reaffirm such
approval or recommendation.
7.2 Effect of Termination. If this Agreement is terminated by either
---------------------
Canaan or Parent pursuant to the provisions of paragraph 7.1, this
Agreement will forthwith become void and there will be no further
obligation on the part of any party hereto or its respective
Affiliates, directors, officers or stockholders except pursuant to,
the provisions of this paragraph 7.2 and paragraphs 3.10, 4.7, 5.2,
5.5, 5.15 and 5.16 (which will continue pursuant to their terms). The
termination of this Agreement will not relieve any party hereto from
any liability for damages incurred as a result of a breach by such
party of its representations, warranties, covenants, agreements or
other obligations hereunder occurring prior to such termination.
8. Miscellaneous. It is further agreed as follows:
-------------
8.1 Nonsurvival of Representations and Warranties. None of the
---------------------------------------------
representations and warranties contained in this Agreement or in any
instrument delivered pursuant to this Agreement, and no agreements or
obligations arising under the Confidentiality Agreement, will survive
the consummation of the Merger, except for the agreements contained in
paragraphs 2, 5.8, 5.9, and in this paragraph 8.
8.2 Amendment. This Agreement may be amended by the Parties at any time
---------
before or after approval of the Merger and this Agreement by the
stockholders of Canaan; provided, however, that after any such
approval, no amendment will be made that by law requires further
approval by such stockholders without such further approval. This
Agreement may not be amended except by a written instrument signed on
behalf of each of the Parties.
-47-
8.3 Notices. Any notice or other communication required or permitted hereunder
-------
will be in writing and either delivered personally, by facsimile
transmission or by registered or certified mail (postage prepaid and return
receipt requested) and will be deemed given when received (or, if mailed,
five (5) business days after the date of mailing) at the following
addresses or facsimile transmission numbers (or at such other address or
facsimile transmission number for a party as will be specified by like
notice):
To Parent or Sub: Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Attention: Aubrey K. McClendon
Telephone: 405-879-9226
Facsimile: 405-848-8588
With a copy to: Commercial Law Group, P.C.
2725 Oklahoma Tower
210 Park Avenue
Oklahoma City, Oklahoma 73102
Attention: Ray Lees
Telephone: 405-232-3001
Facsimile: 405-232-5553
To Canaan: Canaan Energy Corporation
211 North Robinson, Suite 1000N
Oklahoma City, Oklahoma 73102
Attention: John K. Penton
Telephone: (405) 604-9200
Facsimile: (405) 604-9295
With a copy to: Crowe & Dunlevy
20 North Broadway, Suite 1800
Oklahoma City, Oklahoma 73102
Attention: Michael M. Stewart
Telephone: (405) 235-7747
Facsimile: (405) 272-5238
8.4 Counterparts. This Agreement may be executed in two or more counterparts,
------------
all of which will be considered one and the same agreement and will become
effective when two or more counterparts have been signed by each of the
Parties and delivered to the other Parties, it being understood that all
Parties need not sign the same counterpart.
8.5 Severability. Any term or provision of this Agreement that is invalid or
------------
unenforceable in any jurisdiction will, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of
this Agreement or affecting the validity or enforceability of any of the
terms or provisions of this Agreement in any other jurisdiction. If any
provision
-48-
of this Agreement is so broad as to be unenforceable, such provision will
be interpreted to be only so broad as is enforceable.
8.6 Entire Agreement; No Third Party Beneficiaries. This Agreement (together
----------------------------------------------
with the documents and instruments delivered by the Parties in connection
with this Agreement): (a) constitutes the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, among
the Parties with respect to the subject matter hereof; and (b) except as
provided in paragraph 2 or paragraphs 5.8 or 5.9, is solely for the benefit
of the Parties and their respective successors, legal representatives and
assigns and does not confer on any other Person any rights or remedies
hereunder.
8.7 Applicable Law. This Agreement will be governed in all respects, including
--------------
validity, interpretation and effect, by the laws of the State of Oklahoma
regardless of the laws that might otherwise govern under applicable
principles of conflicts of laws thereof.
8.8 No Remedy in Certain Circumstances. Each party agrees that, should any
----------------------------------
court or other competent authority hold any provision of this Agreement or
part hereof to be null, void or unenforceable, or order any party to take
any action inconsistent herewith or not to take an action consistent
herewith or required hereby, the validity, legality and enforceability of
the remaining provisions and obligations contained or set forth herein will
not in any way be affected or impaired thereby, unless the foregoing
inconsistent action or the failure to take an action constitutes a material
breach of this Agreement or makes this Agreement impossible to perform, in
which case this Agreement will terminate pursuant to paragraph 7 hereof.
Except as otherwise contemplated by this Agreement, to the extent that a
party hereto took an action inconsistent herewith or failed to take action
consistent herewith or required hereby pursuant to an order or judgment of
a court or other competent Governmental Authority, such party will not
incur any liability or obligation unless such party breached its obligation
under paragraph 5.10 or did not in good faith seek to resist or object to
the imposition or entering of such order or judgment.
8.9 Enforcement of Agreement. The Parties agree that irreparable damage would
------------------------
occur in the event that any of the provisions of this Agreement were not
performed in accordance with the terms hereof or were otherwise breached.
Accordingly, the Parties hereby agree that each party hereto will be
entitled to specific performance of the terms and provisions hereof in
addition to any other remedy at law or in equity.
8.10 Assignment. Neither this Agreement nor any of the rights, interests or
----------
obligations hereunder will be assigned by any of the Parties (whether by
operation of law or otherwise) without the prior written consent of the
other Parties, except that Sub may assign, in its sole discretion, any or
all of its rights, interests and obligations hereunder to any newly formed
direct or indirect wholly-owned subsidiary of Parent. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the
benefit of and be enforceable by the Parties and their respective
successors and assigns.
-49-
8.11 Waivers. At any time prior to the Effective Time, the Parties may, to the
-------
extent legally allowed: (a) extend the time for the performance of any of
the obligations or other acts of the other Parties; (b) waive any
inaccuracies in the representations and warranties contained herein or in
any document delivered pursuant hereto; and (c) waive performance of any of
the covenants or agreements, or satisfaction of any of the conditions,
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver will be valid only if set forth in a written instrument
signed on behalf of such party. Except as provided in this Agreement, no
action taken pursuant to this Agreement, including any investigation by or
on behalf of any party, will be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties,
covenants or agreements contained in this Agreement. The waiver by any
party hereto of a breach of any provision hereof will not operate or be
construed as a waiver of any prior or subsequent breach of the same or any
other provisions hereof.
8.12 References and Titles. All references in this Agreement to Exhibits,
---------------------
Schedules, Sections, paragraphs, subsections and other subdivisions refer
to the corresponding Exhibits, Schedules, Sections, paragraphs, subsections
and other subdivisions of or to this Agreement and/or the schedules
attached hereto unless expressly provided otherwise. Except for the defined
terms in paragraph 1, titles appearing at the beginning of any Sections,
paragraphs, subsections or other subdivisions of this Agreement are for
convenience only, do not constitute any part of this Agreement, and will be
disregarded in construing the language hereof.
8.13 Incorporation. Exhibits and Schedules referred to herein are attached to
-------------
and by this reference incorporated herein for all purposes.
[SIGNATURE PAGES TO FOLLOW]
-50-
SIGNATURE PAGE
--------------
(Agreement and Plan of Merger)
IN WITNESS WHEREOF, the Parties have executed and delivered this Agreement
as of the date first above written.
ATTEST: CANAAN ENERGY CORPORATION, an Oklahoma
corporation
By__________________________ By___________________________________________
Sue Barnard, Secretary Leo E. Woodard, Chairman and Chief Executive
Officer
ATTEST:
By__________________________ By___________________________________________
Sue Barnard, Secretary John K. Penton, President
("Canaan")
-51-
SIGNATURE PAGE
--------------
(Agreement and Plan of Merger)
IN WITNESS WHEREOF, the Parties have executed and delivered this Agreement
as of the date first above written.
ATTEST: CHESAPEAKE ENERGY CORPORATION, an Oklahoma
corporation
By__________________________ By____________________________________________
Secretary Aubrey K. McClendon, Chief Executive Officer
("Parent")
ATTEST: CHK ACQUISITION, INC., an Oklahoma
corporation
By__________________________ By____________________________________________
Secretary Aubrey K. McClendon, Chief Executive Officer
("Sub")
-52-
AGREEMENT AND LIMITED IRREVOCABLE PROXY
---------------------------------------
This Agreement and Irrevocable Proxy, dated as of April 19, 2002 (the
"Agreement"), is by and between Chesapeake Energy Corporation, an Oklahoma
corporation ("Chesapeake"), and the party identified as the "Stockholder" on the
signature page hereof (the "Stockholder").
RECITALS:
WHEREAS, Chesapeake, CHK Acquisition, Inc., an Oklahoma corporation and
wholly owned subsidiary of Chesapeake ("Merger Sub"), and Canaan Energy
Corporation, an Oklahoma corporation ("Canaan"), propose to enter into an
Agreement and Plan of Merger, dated as of the date hereof (the "Merger
Agreement"), providing, among other things, for the merger of Merger Sub with
and into Canaan in accordance with the terms and provisions of, and subject to
the conditions set forth in, the Merger Agreement (the "Merger"); and
WHEREAS, the Stockholder is the owner, beneficially and of record, of the
number of shares of Canaan Common Stock (the "Shares") identified on the
signature page of this Agreement; and
WHEREAS, the Stockholder has agreed to vote the Shares in favor of the
Merger Agreement and the consummation of the Merger at the Canaan Stockholder
Meeting;
NOW, THEREFORE, to induce Chesapeake and Merger Sub to enter into the
Merger Agreement and in consideration of the aforesaid and the representations,
warranties, covenants and agreements set forth herein and in the Merger
Agreement, including the benefits that the parties hereto expect to derive from
the Merger, the receipt and sufficiency of all of which are hereby acknowledged
by the parties, the parties hereto agree as follows:
1. Revocation of Prior Proxies. The Stockholder hereby revokes all previous
---------------------------
proxies granted with respect to any of the Shares owned by the Stockholder that
would conflict with the terms of the Proxy granted hereby.
2. Grant of Limited Irrevocable Proxy. The Stockholder, solely in such
----------------------------------
capacity, hereby irrevocably constitutes and appoints Chesapeake and Aubrey K.
McClendon, Chairman of the Board and Chief Executive Officer of Chesapeake, Tom
L. Ward, President and Chief Operating Officer of Chesapeake, and Marcus C.
Rowland, Executive Vice President and Chief Financial Officer of Chesapeake, in
their respective capacities as officers of Chesapeake, and any individual who
hereafter succeeds to the office of Chairman of the Board and Chief Executive
Officer, President or Chief Financial Officer, respectively, of Chesapeake, and
each of them individually, as the Stockholder's true and lawful proxy and
attorney-in-fact (the "Agents"), with full power of substitution, for and in the
name, place and stead of the Stockholder, to call and attend any and all
meetings of Canaan's stockholders, including the Canaan Stockholder Meeting, at
which the Merger Agreement or the Merger are to be considered and voted upon by
Canaan's stockholders, and any adjournments thereof, to execute any and all
written consents of stockholders of Canaan and to vote all of the Shares and any
and all shares of any other class of capital stock of Canaan presently or at
Exhibit "A"
Page 1 of 5 Pages
any future time owned beneficially or of record by the Stockholder, including
any and all securities having voting rights issued or issuable in respect
thereof, which the Stockholder is entitled to vote (all of the foregoing being
collectively referred to as the "Subject Stock"), and to represent and otherwise
act as the Stockholder could act, in the same manner and with the same effect as
if the Stockholder were personally present, at any such annual, special or other
meeting of the stockholders of Canaan (including the Canaan Stockholder
Meeting), and at any adjournment thereof (a "Meeting"), or pursuant to any
written consent in lieu of meeting or otherwise; provided, however, that this
Proxy will be limited to any such vote or consent in lieu thereof or any other
action so taken will be solely for the purposes of voting in favor of the Merger
and the Merger Agreement and any transactions contemplated thereby. The Agents
are hereby authorized to vote the Subject Stock in accordance with the terms of
the Proxy contemplated hereby.
3. Vote in Favor of Merger and Merger Agreement. If Chesapeake is unable or
--------------------------------------------
declines to exercise the power and authority granted by the Proxy for any
reason, the Stockholder covenants and agrees to vote all the Subject Stock in
favor of approval of the Merger and the Merger Agreement at any Meeting at which
such matters are considered and voted upon and, upon request of Chesapeake, to
provide the Stockholder's written consent thereto.
4. No Action Without Chesapeake's Consent. The Stockholder hereby covenants
--------------------------------------
and agrees that the Stockholder will not vote or take any action by written
consent of stockholders in lieu of meeting on any matter that is subject to the
Proxy without Chesapeake's prior written consent.
5. Negative Covenants of the Stockholder. Except to the extent contemplated
-------------------------------------
herein or in the Merger Agreement, the Stockholder hereby covenants and agrees
that the Stockholder will not, and will not agree to, directly or indirectly:
(a) sell, transfer, assign, cause to be redeemed or otherwise dispose of any of
the Subject Stock or enter into any contract, option or other agreement or
understanding with respect to the sale, transfer, assignment, redemption or
other disposition of any Subject Stock; or (b) grant any proxy,
power-of-attorney or other authorization or interest in or with respect to such
Subject Stock pertaining or relating to the Merger Agreement, the Merger or any
of the transactions contemplated thereby; or (c) deposit such Subject Stock into
a voting trust or enter into a voting agreement or arrangement with respect to
such Subject Stock, unless and until, in the case of (a), (b) or (c) above, the
Stockholder has taken all actions (including, without limitation, the
endorsement of a legend on the certificates evidencing such Subject Stock)
reasonably necessary to ensure that such Subject Stock will at all times be
subject to all the rights, powers and privileges granted or conferred, and
subject to all the restrictions, covenants and limitations imposed, by this
Agreement and has caused any transferee of any of the Subject Stock to execute
and deliver to Chesapeake, an Agreement and Irrevocable Proxy, in substantially
the form of this Agreement with respect to the Subject Stock. Nothing contained
herein will be construed in any way as affecting the right of the Stockholder to
grant a security interest, by way of pledge, by hypothecation or otherwise, in
the Subject Stock in connection with bona fide credit arrangements or as
requiring the lender in such bona fide credit arrangement to be bound by the
terms of this Agreement, provided that the Stockholder will promptly notify
Chesapeake of any such grant.
6. Stockholder's Representations and Warranties. The Stockholder represents
--------------------------------------------
and warrants to Chesapeake that: (a) the Stockholder has duly authorized,
executed and delivered this Agreement and
Exhibit "A"
Page 2 of 5 Pages
this Agreement constitutes a valid and binding agreement, enforceable in
accordance with its terms and neither the execution and delivery of this
Agreement nor the consummation by the Stockholder of the transactions
contemplated hereby will constitute a violation of, a default under, or conflict
with any contract, commitment, agreement, understanding, arrangement or
restriction of any kind to which the Stockholder is a party or by which the
Stockholder is bound; (b) consummation by the Stockholder of the transactions
contemplated hereby will not violate, or require any consent, approval, or
notice under, any provision of law other than filing on Form 13D that may be
required under the Securities Exchange Act of 1934, as amended; (c) the Subject
Stock and the certificates representing same are now and at all times during the
term of this Agreement will be held by the Stockholder, or by a nominee or
custodian for the benefit of the Stockholder, free and clear of all liens,
claims, security interests, proxies, voting trust or agreement or any other
encumbrances whatsoever ("Encumbrances") with respect to the ownership or voting
of the Subject Stock or otherwise, other than Encumbrances created by or arising
pursuant to this Agreement, and there are no outstanding options, warrants or
rights to purchase or acquire, or proxies, powers-of-attorney, voting
agreements, trust agreements or other agreements relating to, the Subject Stock
other than this Agreement; (d) the Subject Stock constitutes all of the
securities of Canaan owned beneficially or of record by the Stockholder on the
date hereof; and (e) the Stockholder has the present power and right to vote all
of the Subject Stock as contemplated herein.
7. Certain Defined Terms. Unless otherwise expressly provided herein, all
---------------------
capitalized terms used herein without definition will have the meanings assigned
to them in the Merger Agreement.
8. Choice of Law. The terms and provisions of this Agreement will be governed
-------------
by and construed in accordance with the laws of the State of Oklahoma without
giving effect to the provisions thereof relating to conflicts of law.
9. Binding Effect; Assignability. The terms and provisions of this Agreement
-----------------------------
will be binding upon, inure to the benefit of, and be enforceable by the
successors and permitted assigns of the parties hereto. This Agreement and the
rights hereunder may not be assigned or transferred by Chesapeake, except with
the prior written consent of the Stockholder.
10. Term. This Agreement will terminate, and the Proxy granted hereby will be
----
automatically revoked, at the earlier of: (a) the Effective Time; (b) the
termination of the Merger Agreement in accordance with its terms; or (c) upon
written notice of termination of this Agreement given by Chesapeake to the
Stockholder expressly referring to this paragraph.
11. Irrevocable Proxy Coupled with an Interest. The Stockholder acknowledges
------------------------------------------
that Chesapeake will enter into the Merger Agreement in reliance upon this
Agreement, including the Proxy, and that the Proxy is granted in consideration
for the execution and delivery of the Merger Agreement by Chesapeake. THE
STOCKHOLDER AGREES THAT THE PROXY AND ALL OTHER POWER AND AUTHORITY INTENDED TO
BE CONFERRED HEREBY IS COUPLED WITH AN INTEREST SUFFICIENT IN LAW TO SUPPORT AN
IRREVOCABLE POWER AND, EXCEPT AS PROVIDED IN PARAGRAPH 10 ABOVE, WILL NOT BE
TERMINATED BY ANY ACT OF THE STOCKHOLDER BY LACK OF APPROPRIATE POWER OR
AUTHORITY OR BY THE OCCURRENCE OF ANY OTHER EVENT OR EVENTS.
Exhibit "A"
Page 3 of 5 Pages
12. Specific Performance. The parties acknowledge and agree that performance of
--------------------
their respective obligations hereunder will confer a unique benefit on the other
and that a failure of performance will result in irreparable harm to the other
and will not be compensable by money damages. The parties therefore agree that
this Agreement, including the Proxy, will be specifically enforceable and that
specific enforcement and injunctive relief will be a remedy properly available
to Chesapeake and the Stockholder for any breach of any agreement, covenant or
representation of the other hereunder.
13. Further Assurance. The Stockholder will, upon request, execute and deliver
-----------------
any additional documents and take such further actions as may reasonably be
deemed by Chesapeake or its counsel to be necessary or desirable to carry out
the provisions hereof.
14. Severability. If any term, provision, covenant or restriction of this
------------
Agreement, or the application thereof to any circumstance, is, to any extent,
held by a court of competent jurisdiction to be invalid, void or unenforceable,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement or the application thereof to any other circumstance, will remain in
full force and effect, will not in any way be affected, impaired or invalidated
and will be enforced to the fullest extent permitted by law.
15. Counterparts. This Agreement may be executed in counterparts, each of which
------------
will be deemed to be an original but all of which together will constitute one
and the same document.
16. Notice. All notices, requests, claims, demands and other communications
------
under this Agreement will be in writing and will be deemed given if delivered
personally or sent by overnight courier (providing proof of delivery) to the
parties at the following addresses (or such other address for a party as will be
specified by like notice): (a) if to Chesapeake, to the address set forth in
paragraph 8.3 of the Merger Agreement, and (b) if to a Stockholder, to the
address set forth on the signature page hereof, or such other address as may be
specified in writing by such Stockholder.
IN WITNESS WHEREOF, Chesapeake and the Stockholder have duly executed
this Agreement or caused this Agreement to be duly executed as of the date first
set forth above.
STOCKHOLDER
[NAME]
_____________________________
Shares Owned:
________ shares of Canaan Common Stock
Exhibit "A"
Page 4 of 5 Pages
Address:
_____________________________________
_____________________________________
_____________________________________
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By ___________________________________
Aubrey K. McClendon, Chief Executive
Officer
Exhibit "A"
Page 5 of 5 Pages
GOODWILL PROTECTION AGREEMENT
-----------------------------
THIS GOODWILL PROTECTION AGREEMENT (this "Agreement") is made
effective the _____ day of ____________, 2002, among _______________, an
individual (the "Restricted Party"), CHESAPEAKE ENERGY CORPORATION, an Oklahoma
corporation ("Chesapeake"), and CHK ACQUISITION, INC., an Oklahoma corporation
("CHK").
W I T N E S S E T H:
WHEREAS, Chesapeake, CHK and Canaan Energy Corporation, an
Oklahoma corporation ("Canaan"), entered into that certain Agreement and Plan of
Merger dated April 19, 2002 (the "Merger Agreement");
WHEREAS, the Restricted Party is an officer and shareholder of
Canaan with special expertise in the oil and gas business and as a result the
obligations of Chesapeake and CHK to close the transactions contemplated under
the Merger Agreement are expressly conditioned upon the execution and delivery
of this Agreement by the Restricted Party; and
WHEREAS, to induce Chesapeake and CHK to perform the Merger
Agreement and to protect the goodwill acquired by Chesapeake and CHK under the
Merger Agreement, the Restricted Party has agreed to execute, deliver and
perform this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Defined Terms. Except as otherwise defined herein, all terms defined in the
-------------
Merger Agreement will have the same meanings herein as therein defined unless
the context otherwise requires. The following terms will have the following
meanings when used in this Agreement:
1.1. Chesapeake Companies. Chesapeake, CHK and all of their wholly
--------------------
owned subsidiary companies, whether owned directly or indirectly
by Chesapeake or CHK, including, without implied limitation,
corporations, partnerships and limited liability companies.
1.2 Confidential Information. All information relating to Canaan
------------------------
and/or Canaan's Oil and Gas Interests, including information
relating to title matters, environmental matters, financial
statements and other financial matters, estimates of reserves,
quality of reserves, geological matters, asset listings,
production and operating costs, production capabilities,
marketing, tax, forecasts and projections, in whatever form
(whether documentary, computer storage or other). Notwithstanding
the foregoing, information which is generally available to the
public or becomes generally available to the public through no
action of the Restricted Party Group will not be considered
Confidential Information.
1.3 Derivative Information. Any notes, summaries, evaluations,
----------------------
analyses and other material derived by the Restricted Party from
any of the Confidential Information.
Exhibit "B"
Page 1 of 8 Pages
1.4 Lands. Any and all lands lying within one (1) mile of: (a) any
-----
well and drilling or spacing unit within which such well lies in
which Canaan had an interest as of the Effective Time of the
Merger, and (b) the boundary of any Oil and Gas Interest in which
Canaan had an interest as of the Effective Time of the Merger.
1.5 Oil and Gas Business. Owning, managing, operating, controlling or
--------------------
developing Oil and Gas Interests or engaging in or being
connected with, as a partner, limited liability company member,
investor, stockholder, advisor, employee, independent contractor
or consultant, any of the foregoing activities or the oil and gas
exploration and production business.
1.6 Oil and Gas Interests. All: (a) oil and gas leases, mineral
---------------------
interests, oil, gas and mineral leasehold interests, fee
interests, royalty interests (including, without implied
limitation, landowner royalty interests, nonparticipating royalty
interests and overriding royalty interests), production payments,
net profits interests, subleases, mineral servitudes, licenses,
easements, pooling orders and other interests in oil, gas and
other hydrocarbons; (b) contract rights, joint operating
agreements, farm out agreements, pooling agreements, seismic
agreements, cost sharing arrangements and other agreements
relating to the interests under the foregoing clause (a) or the
oil and gas exploration and production business; (c) wells,
equipment, associated personal property, pipelines, fixtures and
other assets related to the foregoing; and (d) other businesses,
operations, rights, titles and interests relating directly or
indirectly to the drilling, exploration, development, operation,
marketing, sale or other disposal of the foregoing assets and
interests.
1.7 Restricted Party Group. The Restricted Party together with: (a)
----------------------
the immediate family members of the Restricted Party; (b) any
successors or assigns of the Restricted Party; (c) any Person in
which the Restricted Party owns or has the right to acquire an
equity interest in excess of twenty percent (20%); and (d) any
entity in which the Restricted Party, ____________ and
_____________ (collectively, the "Related Parties") own or have
the right to acquire a combined equity interest in excess of
forty percent (40%).
2. Restriction on Activities. During the period commencing on the date of
-------------------------
this Agreement and ending on the date two (2) years after the date of this
Agreement (the "Protection Period"), each member of the Restricted Party Group
will not, without the prior written consent of Chesapeake or as otherwise
specifically permitted under paragraph 2.2 hereof, directly or indirectly: (a)
own, acquire or solicit the acquisition of (or assist any other Person to own,
acquire or solicit the acquisition of) any Oil and Gas Interests, or any option
or other right to acquire any Oil and Gas Interests, in any case pertaining to
or covering, in whole or in part, the Lands; (b) conduct (or assist any third
person to conduct) any Oil and Gas Business on or with respect to the Lands; or
(c) acquire any interest or the right to acquire any interest in a Person that
owns Oil and Gas Interests included in clause (a) or conducts activities
included in (b) that results in the Restricted Party Group and the Related
Parties owning or having the right to acquire more than forty percent (40%) of
such Person. In addition to the foregoing, during the Protection Period, each
member of the Restricted Party Group will not,
Exhibit "B"
Page 2 of 8 Pages
without the prior consent of Chesapeake, directly or indirectly terminate, own,
acquire, solicit or otherwise interfere with any of Canaan's Oil and Gas
Interests pertaining to or covering in whole in part the Lands or in anyway
attempt to do any of the foregoing or assist any third person to do any of the
foregoing.
2.1 The limitations in this paragraph 2 will not prohibit any
investment by the Restricted Party or the Restricted Party Group
in securities which are listed on a public exchange or the
National Association of Securities Dealers Automated Quotation
System issued by a company, firm, corporation, partnership, trust
or other entity involved in or conducting an Oil and Gas
Business, provided that the Restricted Party and the Restricted
Party Group own no more than fifteen percent (15%) of the
outstanding voting securities of such entity.
2.2 The parties hereto recognize that, during the Protection Period,
the Restricted Party and/or the Restricted Party Group may desire
to acquire one or more packages of Oil and Gas Interests which
include Oil and Gas Interests both inside and outside the Lands
(each a "Package"). Nothing in this Agreement will prohibit any
such acquisition of a Package, and no such acquisition or the
resulting ownership of such Oil and Gas Interests will constitute
a violation of this paragraph 2, as long as the number of Oil and
Gas Interests included in such Package is greater than twenty
five (25) and the value of the Oil and Gas Interests lying
outside the Lands exceeds seventy-five percent (75%) of the
purchase price of the Package. In the event the Restricted Party
Group acquires a Package which contains more than twenty five
(25) Oil and Gas Interests but does not satisfy the foregoing or
which contains less than twenty five (25) Oil and Gas Interests,
such acquisition and the resulting ownership of such Oil and Gas
Interests will not constitute a violation of this Agreement, if
within twenty (20) days after any such acquisition, the
Restricted Party: (a) notifies Chesapeake of such acquisition,
specifying the Oil and Gas Interests acquired in the Lands (the
"Offered Interests") and specifying the portion of the
acquisition price for such Package allocated to the Offered
Interests; and (b) grants the Chesapeake Companies the right, for
a period of twenty (20) days after receipt of such notice, to
acquire the Offered Interests from the Restricted Party or the
Restricted Party Group at the same acquisition price paid
therefor by the Restricted Party or the Restricted Party Group.
Notwithstanding the foregoing, in the event any of the Offered
Interests are subject to an existing preferential right to
purchase ("Third Party Rights"), the Restricted Party will
provide Chesapeake with all notices of Third Party Rights as and
when provided to the holders thereof and will take such actions
as may be prudent to permit the Chesapeake Companies to step into
the shoes of the Restricted Party during the period such Third
Party Rights are outstanding so that, in the event such Third
Party Rights are not exercised in accordance with the terms
thereof, the Chesapeake Companies will have the ability to
acquire such Offered Interests without the necessity of
re-instituting another Third Party Rights offer. For purposes of
calculating the number of Oil and Gas Interests in a Package, the
following will be considered an individual Oil and Gas Interest
under this paragraph: (y) all of the Restricted Group's rights
and ownership in a governmental spacing or production
Exhibit "B"
Page 3 of 8 Pages
unit for a producing well; and (z) with respect to non-producing
assets, all of the Restricted Group's rights and ownership in the
area covered by a single prospect.
2.3 Nothing in this Agreement will prevent or prohibit any member of
the Restricted Party Group from being employed by any Person
which is not a member of the Restricted Party Group or, so long
as the member of the Restricted Party Group does not use
Confidential Information or Derivative Information, from
assisting any such Person as an advisor, consultant or
independent contractor, regardless of whether such person or
entity owns, acquires or solicits the acquisition of any Oil and
Gas Interests, or any option or other right to acquire any Oil
and Gas Interests, pertaining to or covering, in whole or in
part, any of the Lands, or conducts any Oil and Gas Business on
or with respect to the Lands.
3. Confidentiality. The Restricted Party hereby acknowledges that, during the
---------------
term of the Restricted Party's relationship with Canaan, the Restricted Party
has developed and had access to Confidential Information and Derivative
Information. The Restricted Party hereby agrees as follows with respect to all
Confidential Information and Derivative Information:
3.1 Upon execution of this Agreement, the Restricted Party will, and
will cause each member of the Restricted Party Group to,
immediately return to Canaan all Confidential Information and
Derivative Information in the possession of the Restricted Party
or any member of the Restricted Party Group.
3.2 For a period of two (2) years after the date hereof, the
Restricted Party will, and will cause the members of the
Restricted Party Group to, keep all Confidential Information and
Derivative Information and the results of any analyses of such
data and information strictly confidential and will not, and will
cause the members of the Restricted Party Group not to, use any
of such data, information or results or disclose any such data,
information or results to any Person unless otherwise required by
law or regulation and then only after written notice to Canaan of
the determination of the need for disclosure.
3.3 In the event that the Restricted Party or any member of the
Restricted Party Group becomes legally compelled to disclose any
Confidential Information and/or Derivative Information, the
Restricted Party will provide Canaan with prompt notice so that
Canaan may seek a protective order or other appropriate remedy
and/or waive the Restricted Party's compliance with the
confidentiality and non-disclosure provisions of this Agreement.
In the event that such protective order or other remedy is not
obtained, the Restricted Party will furnish only that portion of
the Confidential Information and/or Derivative Information which
it is advised by counsel is legally required.
4. Separate Covenants. This Agreement will be deemed to consist of a series of
------------------
separate covenants independent from any provision of the Merger Agreement. The
Restricted Party expressly agrees that the character, duration and geographical
scope of this Agreement are reasonable in light
Exhibit "B"
Page 4 of 8 Pages
of the circumstances as existing on the date of this Agreement. However, should
a determination nonetheless be made by a court of competent jurisdiction at a
later date that the character, duration or geographical scope of this Agreement
is unreasonable in light of the circumstances as then existing or existing at
the execution of this Agreement, then it is the intention and the agreement of
the Restricted Party, Chesapeake and CHK that this Agreement be construed by the
court and given effect in such a manner as to impose only the restrictions on
the conduct of the Restricted Party which are reasonable in light of the
circumstances as then existing and as are necessary to assure Chesapeake and CHK
of the intended benefit of this Agreement and the Merger Agreement. If, in any
judicial proceeding, a court refuses to enforce all of the separate covenants
included herein because, taken together such covenants are more extensive than
necessary to assure Chesapeake and CHK of the intended benefit of this
Agreement, it is expressly understood and agreed between the parties that those
covenants not to be enforced in such proceeding will, for the purpose of such
proceeding, be deemed eliminated from the provisions hereof.
5. Periodic Payments. As additional consideration for the Restricted Party's
-----------------
execution, delivery and performance of this Goodwill Protection Agreement,
Chesapeake agrees to pay to the Restricted Party the sum of $_____________
payable in three (3) equal payments of $_____________ each. The first payment
will be due on the execution of this Agreement, the second payment will be due
on the date which is one (1) year after the execution of this Agreement and the
third payment will be due on the date which is two (2) years after the execution
of this Agreement.
6. Default. The Restricted Party will be responsible for any violation of
-------
provisions hereof by any member of the Restricted Party Group. If the Restricted
Party fails to perform any obligation contained in this Agreement or fails to
cause the Restricted Party Group to perform the terms of this Agreement,
Chesapeake or CHK may serve written notice to the Restricted Party specifying
the nature of such default and demanding performance. If such default has not
been cured within five (5) business days after receipt of such default notice,
Chesapeake and/or CHK will be entitled to demand specific performance, suspend
performance of any obligation under this Agreement, or exercise all remedies
available at law or in equity. Given the nature of the assets to be acquired by
Chesapeake under the Merger Agreement, the parties acknowledge and agree that
the goodwill purchased by Chesapeake cannot be protected if the provisions of
this Agreement are not strictly enforced. Accordingly, the parties acknowledge
and agree that, if there is a breach by the Restricted Party of the provisions
of this Agreement, money damages alone will not be adequate and the Chesapeake
Companies will be entitled to an injunction restraining the Restricted Party or
the Restricted Party Group from violating the provisions of this Agreement. The
remedies provided by this Agreement are cumulative and will not exclude any
other remedy to which a party might be entitled under this Agreement. In the
event a party elects to selectively and successively enforce such party's rights
under this Agreement, such action will not be deemed a waiver or discharge of
any other remedy.
7. Miscellaneous. It is further agreed as follows:
-------------
7.1 Notices. Except as expressly provided herein, any notice, demand or
-------
communication required or permitted to be given by any provision of
this Agreement will be in writing and will be deemed to have been
given and received when delivered
Exhibit "B"
Page 5 of 8 Pages
personally or by telefacsimile to the party designated to receive such
notice, or on the date following the day sent by overnight courier, or
on the third (3rd) business day after the same is sent by certified
mail, postage and charges prepaid, directed to the following addresses
or to such other or additional addresses as any party might designate
by written notice to the other parties:
To any of the Chesapeake
Companies: Mr. Henry J. Hood
Chesapeake Energy Corporation
6100 North Western
Oklahoma City, Oklahoma 73118
Telephone: (405) 879-9400
Fax: (405) 405.879.9561
With a copy to: Ray Lees, Esquire
Commercial Law Group, P.C.
2725 Oklahoma Tower
210 Park Avenue
Oklahoma City, Oklahoma 73102
Telephone: (405) 232-3001
Fax: (405) 232-5553
To the Restricted Party: ________________________________
Telephone: (___) ___-____
Fax: (___) ___-____
7.2 Severability. If any clause or provision of this Agreement is illegal,
------------
invalid or unenforceable under any present or future law, the
remainder of this Agreement will not be affected thereby. It is the
intention of the parties that if any such provision is held to be
illegal, invalid or unenforceable, there will be added in lieu thereof
a provision as similar in terms to such provisions as is possible and
to be legal, valid and enforceable.
7.3 Entire Agreement. This Agreement, together with the Merger Agreement
----------------
and the other instruments executed in connection therewith, constitute
the entire agreement between the parties with respect to the subject
matter hereof and there are no agreements, understandings, warranties
or representations except as set forth herein and therein. Neither
this Agreement nor any of the provisions hereof can be changed,
waived, discharged or terminated except by an instrument signed by the
party against whom enforcement of the change, waiver, discharge or
termination is sought.
7.4 Attorneys' Fees. If any party institutes an action or proceeding
---------------
against any other party relating to the provisions of this Agreement,
the party to such action or proceeding
Exhibit "B"
Page 6 of 8 Pages
which does not prevail will reimburse the prevailing party therein for
the reasonable expenses of attorneys' fees and disbursements incurred
by the prevailing party.
7.5 Waiver. Waiver of performance of any obligation or term contained in
------
this Agreement by any party, or waiver by one party of the other's
default hereunder will not operate as a waiver of performance of any
other obligation or term of this Agreement or a future waiver of the
same obligation or a waiver of any future default.
7.6 Assignment. No party hereto may assign all or any portion of his or
----------
its rights or obligations hereunder without the prior written consent
of the other parties hereto; provided, however, CHK may assign all or
any portion of its rights hereunder to (a) any other entity or person
which at any time controls or is under common control with CHK, or (b)
any entity or person which acquires all of CHK's Oil and Gas Business
with respect to the Lands.
7.7 Governing Law. This Agreement will be interpreted, construed and
-------------
enforced in accordance with the laws of the State of Oklahoma.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
CHESAPEAKE ENERGY CORPORATION, an
Oklahoma corporation
By__________________________________________________
Aubrey K. McClendon, Chief Executive Officer
("Chesapeake")
CHK ACQUISITION, INC., an Oklahoma corporation
By__________________________________________________
Aubrey K. McClendon, Chief Executive Officer
("CHK")
Exhibit "B"
Page 7 of 8 Pages
____________________________________________________
______________________________________, individually
(the "Restricted Party")
Exhibit "B"
Page 8 of 8 Pages
OFFICE SPACE AGREEMENT
----------------------
THIS AGREEMENT (this "Agreement") is made effective the _____ day of
__________, 2002, between LJ NATURAL GAS COMPANY, an Oklahoma corporation (the
"Option Holder"), and CANAAN ENERGY CORPORATION, an Oklahoma corporation
("Canaan").
W I T N E S S E T H:
WHEREAS, Chesapeake Acquisition, Inc., an Oklahoma corporation
("CHK"), Chesapeake Energy Corporation, an Oklahoma corporation, and Canaan
entered into that certain Agreement and Plan of Merger dated April 19, 2002 (the
"Merger Agreement");
WHEREAS, Canaan entered into a Lease Agreement with LSQ Investors,
L.L.C., an Oklahoma limited liability company, dated December 4, 2000, as
amended by the First Amendment to Lease Agreement dated effective July 18, 2001,
and the Second Amendment to Lease Agreement dated October 8, 2001 (the "Lease"),
covering certain office space in downtown Oklahoma City, Oklahoma (the "Office
Space");
WHEREAS, Canaan owns office equipment together with nonproprietary
information concerning oil and gas properties such as scout cards and other
information generally available for purchase or subscription (collectively, the
"Equipment") and leases office equipment ("Equipment Leases") located in the
Office Space which Equipment and items covered by the Equipment Leases are
listed at Schedule "1" attached as a part hereof detailing the items and the
book value of each such item (collectively, the "Office Equipment"); and
WHEREAS, in connection with the Merger Canaan has determined that the
Office Space and Office Equipment may be surplus and as a result Canaan is
extending to the Option Holder the right to acquire all or part of the Office
Space the Office Equipment.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Temporary Office Space. For a period of ninety (90) days after the date of
----------------------
this Agreement (the "Use Period") the Option Holder will have the right to
occupy that portion of the Office Space being leased by Canaan on April 1, 2002,
without paying rent on such Office Space and use the Office Equipment. The
foregoing use of the Office Space and Office Equipment is conditioned on: (a)
any consents or other actions which Chesapeake determines is necessary or
appropriate to permit the use by the Option Holder of the Office Space and the
items covered by the Equipment Leases; (b) the payment by the Option Holder of
all expenses (other than base rent under the Lease) allocable or chargeable to
the Use Period including, without implied limitation, any taxes, utilities,
telephone charges, repairs, communication charges, line access charges and other
expenses of occupying the Office Space; and (c) the payment of all charges under
the Equipment Leases allocable to the Use Period. Notwithstanding anything
herein to the contrary, Chesapeake, CHK and Canaan (the "Canaan Parties") will
not be required to take any actions which will impose any expense, liability or
Exhibit "C"
Page 1 of 6 Pages
payment obligation on the Canaan Parties in excess of the amounts that were
being paid by Canaan under the Lease or the Equipment Leases prior to the date
of the Merger Agreement and the Canaan Parties will not be required to amend,
renew, extend or expand the Lease or any of the Equipment Leases.
2. Office Space Acquisition. The Option Holder will also have the right to
------------------------
acquire all or part of the Office Space on the following terms:
2.1 Option. During the Use Period the Option Holder will have the right to
------
sublease or acquire all or part of the Office Space by providing
written notice to Canaan specifying the portion of the Office Space to
be sublet or acquired by the Option Holder. The portion of the Office
Space to be subleased or acquired hereunder will be a single
contiguous block of space and will not render the remaining Office
Space unrentable or unusable at the then current rates in effect in
the building where the Office Space is located as reasonably
determined by Chesapeake. The terms of the sublease will be on the
same terms as the Lease and will be for the remaining term of the
Lease with respect to such Office Space except that the Option Holder
will be solely responsible for all costs and expenses relating to the
separation of the designated space from the remaining Office Space. At
the election of Canaan, the Option Holder agrees to enter into a new
lease covering the Office Space covered by the Option Holder's notice
under this paragraph in order to release the Canaan Parties for any
liability under the Lease with respect to that portion of the Office
Space. Each of the actions and agreements under this paragraph are
expressly subject to any and all consents or waivers by the landlord
under the Lease which Canaan and Chesapeake reasonably determine are
necessary or appropriate.
2.2 Right of First Refusal. Subject to the Option Holder exercising the
----------------------
Option under paragraph 2.1 for a portion of the Office Space, Canaan
grants to the Option Holder a right of first refusal on that portion
of the Office Space which the Option Holder does not elect to sublease
or acquire under paragraph 2.1 of this Agreement to run for the period
commencing on the last day of the Use Period and ending on the date
which is two (2) years after the date of this Agreement (the "ROFR
Period"). In the event that during the ROFR Period Canaan desires to
sublease, convey, transfer or surrender a portion of the Office Space,
Canaan will provide written notice (the "Transfer Notice") to the
Option Holder which states: (a) the portion of the Office Space to be
sublet, transferred, conveyed or surrendered; and (b) the proposed
terms of such sublease, conveyance, transfer or surrender. For ten
(10) days after the receipt of the Transfer Notice, the Option Holder
will have the preemptive option to acquire the portion of the Office
Space which is the subject of the Transfer Notice on the terms set
forth in the Transfer Notice. In the event of a surrender of the Lease
to the landlord, such terms will include a full release of the Canaan
Parties from any obligations with respect to the portion of the Office
Space covered by the Transfer Notice and the payment to the Option
Holder of any amount payable to the Landlord by Canaan. If the Option
Holder does not elect to exercise the Option Holder's rights hereunder
with respect to all of the portion of Office Space covered by the
Transfer
Exhibit "C"
Page 2 of 6 Pages
Notice, Canaan will have the right to sublet, transfer, convey or
surrender the Office Space covered by the Transfer Notice on terms no
better to the prospective tenant or landlord than the terms set forth
in the Transfer Notice. The rights under this paragraph will expire
without any further action by any party on the date which is two (2)
years after the date of this Agreement. Each of the actions and
agreements under this paragraph are expressly subject to any and all
consents or waivers by the landlord under the Lease which Canaan and
Chesapeake reasonably determine are necessary or appropriate.
3. Equipment. During the period commencing on the date of this Agreement and
---------
ending on the date sixty (60) days after the date of this Agreement, the Option
Holder will have the one (1) time right to: (a) purchase all or part of the
Equipment; and (b) sublease or acquire Canaan's rights under one or more of the
Equipment Leases. Such right will be exercised by the Option Holder providing
written notice to Canaan specifying the Equipment or Equipment Lease to be
acquired, delivering with such notice the cash purchase price for such Equipment
and the appropriate consents and assumption documents for the Equipment Leases.
The purchase price for the Equipment will be equal to: (y) twenty five percent
(25%) of the book value for all of the items of Equipment to be purchased under
this paragraph reduced to the nearest multiple of Twenty-Five Thousand Dollars
($25,000.00); plus (z) all costs and expenses associated with the assumption of
the acquired Equipment Leases. For purposes of the foregoing computation the
book value will be determined as of the later of December 31, 2001, or the date
of the purchase of the item of Equipment. In the event the Option Holder elects
to acquire one or more Equipment Leases the Option Holder will be responsible
for all lease payments and charges under such Equipment Leases and agrees to
hold Canaan harmless with respect to such Equipment Leases. Any computer
purchased under this paragraph will, subject to the terms of the applicable
license, include all software that is validly installed on such computer in
accordance with such license and all rights with respect to the applicable
software license. The Option Holder agrees to hold Canaan harmless from any and
all liability, obligations and losses from breach of such software license.
Although the option under this paragraph can be exercised on a piece by piece
basis, systems or integrated items of Equipment (such as the phone system) must
be purchased in their entirety.
4. Default. In the event that either party fails to perform such party's
-------
obligations hereunder (except as excused by the other party's default), the
party claiming default will make written demand for performance. If the Option
Holder fails to comply with such written demand within five (5) days after
receipt thereof, Canaan will have the option of waiving such default, to
exercise any other remedy available at law or in equity, or to terminate this
Agreement. If Canaan fails to comply with such written demand within five (5)
days after receipt thereof, the Option Holder will have the option of waiving
such default or to exercise any other remedy available at law or in equity. The
remedies provided by this Agreement are cumulative and will not exclude any
other remedy to which a party might be entitled under this Agreement. In the
event a party elects to selectively and successively enforce such party's rights
under this Agreement, such action will not be deemed a waiver or discharge of
any other remedy.
Exhibit "C"
Page 3 of 6 Pages
5. Miscellaneous. It is further agreed as follows:
-------------
5.1 Notices. Except as expressly provided herein, any notice,
-------
demand or communication required or permitted to be given by
any provision of this Agreement will be in writing and will be
deemed to have been given and received when delivered
personally or by telefacsimile to the party designated to
receive such notice, or on the date following the day sent by
overnight courier, or on the third (3rd) business day after
the same is sent by certified mail, postage and charges
prepaid, directed to the following addresses or to such other
or additional addresses as any party might designate by
written notice to the other parties:
To Canaan: Mr. Doug Jacobson
Chesapeake Energy Corporation
6100 North Western
Oklahoma City, Oklahoma 73118
Telephone: (405) 879-9233
Fax: (405) 879-9546
With a copy to: Ray Lees
Commercial Law Group, P.C.
2725 Oklahoma Tower
210 Park Avenue
Oklahoma City, Oklahoma 73102
Telephone: (405) 232-3001
Fax: (405) 232-5553
To the Option Holder: LJ Natural Gas Company
211 North Robinson, Suite 1000N
Oklahoma City, Oklahoma 73102
Attention: John K. Penton
Telephone: (405) 604-9200
Facsimile: (405) 604-9295
5.2 Severability. If any clause or provision of this Agreement is
------------
illegal, invalid or unenforceable under any present or future
law, the remainder of this Agreement will not be affected
thereby. It is the intention of the parties that if any such
provision is held to be illegal, invalid or unenforceable,
there will be added in lieu thereof a provision as similar in
terms to such provisions as is possible and to be legal, valid
and enforceable.
5.3 Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties with respect to the subject matter hereof and
there are no agreements, understandings, warranties or
representations except as set forth herein and therein. Neither
this Agreement nor any of the provisions hereof can be changed,
waived,
Exhibit "C"
Page 4 of 6 Pages
discharged or terminated except by an instrument signed by the party
against whom enforcement of the change, waiver, discharge or termination
is sought.
5.4 Attorneys' Fees. If any party institutes an action or proceeding against
---------------
any other party relating to the provisions of this Agreement, the party
to such action or proceeding which does not prevail will reimburse the
prevailing party therein for the reasonable expenses of attorneys' fees
and disbursements incurred by the prevailing party.
5.5 Waiver. Waiver of performance of any obligation or term contained in this
------
Agreement by any party, or waiver by one party of the other's default
hereunder will not operate as a waiver of performance of any other
obligation or term of this Agreement or a future waiver of the same
obligation or a waiver of any future default.
5.6 Assignment. No party hereto may assign all or any portion of his or its
----------
rights or obligations hereunder without the prior written consent of the
other parties hereto; provided, however, Canaan may assign all or any
portion of its rights hereunder to any other entity or person which at
any time controls or is under common control with Canaan.
5.7 Governing Law. This Agreement will be interpreted, construed and enforced
-------------
in accordance with the laws of the State of Oklahoma.
5.8 Cooperation. At all times during the term of this Agreement the parties
-----------
agree to execute and deliver, or cause to be executed and delivered, such
documents and do, or cause to be done, such other acts and things as
might reasonably be requested by the other party to this Agreement to
assure that the benefits of this Agreement are realized by the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
CANAAN ENERGY CORPORATION, an Oklahoma
corporation
By____________________________________________
Aubrey K. McClendon, Chief Executive Officer
("Canaan")
Exhibit "C"
Page 5 of 6 Pages
LJ NATURAL GAS COMPANY, an Oklahoma
corporation
By______________________________________
John K. Penton, President
(the "Option Holder")
Exhibit "C"
Page 6 of 6 Pages
RELEASE
-------
THIS RELEASE is being executed and delivered in accordance with paragraph
6.2.6 of that certain Agreement and Plan of Merger dated effective April 19,
2002 (the "Agreement"), among Canaan Energy Corporation, an Oklahoma corporation
("Canaan"), CHK Acquisition, Inc., an Oklahoma corporation ("Sub"), and
Chesapeake Energy Corporation ("Parent"). Capitalized terms used in this Release
without definition have the respective meaning given to them in the Agreement.
The undersigned acknowledges that execution and delivery of this Release is
a condition to Parent's obligation to effect the closing of the transaction
contemplated by the Agreement and that Parent is relying on this Release in
consummating such closing.
The undersigned, for good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged and intending to be legally bound,
in order to induce Parent to effect the closing pursuant to the Agreement,
hereby agrees as follows:
The undersigned, on behalf of the undersigned and each of the undersigned's
representatives, agents and Affiliates, hereby releases and forever discharges
Parent, Sub and Canaan and each of their respective individual, joint or mutual,
past, present and future Parent Representatives, Affiliates, stockholders,
controlling persons, subsidiaries, successors and assigns (individually, a
"Released Party" and collectively, the "Released Parties") from any and all
claims, demands, proceedings, causes of action, orders, obligations, contracts,
agreements, debts and liabilities whatsoever, whether known or unknown,
suspected or unsuspected, both at law and in equity, which the undersigned, or
any of the undersigned's representatives, agents and Affiliates now has, have
ever had or may hereafter have against the respective Released Parties arising
contemporaneously with or prior to the Effective Time of the Merger or on
account of or arising out of any matter, cause or event occurring
contemporaneously with or prior to the Effective Time of the Merger, including,
but not limited to, any rights to payment or reimbursement from Canaan, whether
pursuant to its certificate of incorporation, bylaws, contract or otherwise and
whether or not relating to claims pending on, or asserted after, the Effective
Time of the Merger. Notwithstanding the foregoing, the following are expressly
excluded from this Release:(a) all rights of indemnification in favor of the
undersigned pursuant to paragraph 5.8 of the Agreement; (b) rights of the
undersigned, if any, under any employment agreement or consulting agreement
entered into by Parent in connection with the Agreement; (c) any severance
payments described in that certain change of control agreement dated
_______________ between the undersigned and Canaan as disclosed in the
Agreement; (d) any rights under the Office Space Agreement executed in
connection with the Merger Agreement; and (e) any rights under the Goodwill
Protection Agreement of even date herewith among the undersigned, Parent and
Sub.
The undersigned hereby irrevocably covenants to refrain from, directly or
indirectly, asserting any claim or demand, or commencing, instituting or causing
to be commenced, any proceeding of any kind against any Released Party which is
based upon any matter purported to be released hereby.
Exhibit "D"
Page 1 of 2 Pages
If any provision of this Release is held invalid or unenforceable by any
court of competent jurisdiction, the other provisions of this Release will
remain in full force and effect. Any provision of this Release held invalid or
unenforceable only in part or degree will remain in full force and effect to the
extent not held invalid or unenforceable.
This Release may not be changed except in a writing signed by the person(s)
against whose interest such change will operate. This Release will be governed
by and construed under the laws of the State of Oklahoma without regard to
principles of conflicts of law.
IN WITNESS WHEREOF, the undersigned has executed and delivered this Release
as of this _____ day of ________________, 2002.
________________________________________________
[Name of Releasing Party]
Exhibit "D"
Page 2 of 2 Pages
[Crowe & Dunlevy]
________ __, 200_
Chesapeake Energy Corporation
CHK Acquisition, Inc.
6100 North Western Avenue
Oklahoma City, Oklahoma 73118
Re: Agreement and Plan of Merger among Chesapeake
Energy Corporation, CHK Acquisition, Inc.,
and Canaan Energy Corporation
---------------------------------------------
Gentlemen:
We have acted as special counsel to Canaan Energy Corporation, an Oklahoma
corporation ("Canaan"), in connection with the execution, delivery and
consummation of the transactions contemplated by the Agreement and Plan of
Merger dated April 19, 2002 (the "Agreement"), among Chesapeake Energy
Corporation, an Oklahoma corporation, CHK Acquisition , Inc., an Oklahoma
corporation, and Canaan. This opinion is provided to you pursuant to paragraph
6.2.6 of the Agreement. Capitalized terms used herein and not otherwise defined
will have the meanings assigned to such terms in the Agreement.
For purposes of the opinions expressed herein we have examined executed
originals or counterparts of the Agreement and all other agreements and
documents known to us which we have considered relevant to the opinions
hereinafter expressed.
We have also examined the certificate of incorporation and bylaws of
Canaan, as amended to date, and have examined the originals or copies certified
or otherwise identified to our satisfaction of the corporate records of Canaan,
including minute books furnished to us by Canaan, certificates of public
officials and certificates of representatives of Canaan, statutes and other
instruments and documents as we have deemed relevant and necessary as a basis
for the opinions hereinafter expressed. As to all questions of fact material to
this opinion, we have made no independent investigation of the facts relied upon
in certificates or comparable documents of officers and representatives of
Canaan and upon the representations and warranties of Canaan contained in the
Agreement, all of which we assume have been and continue to be true and
accurate.
In such examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as certified or photostatic copies and the authenticity of the
originals of such latter documents.
Exhibit "E"
Page 1 of 3 Pages
Chesapeake Energy Corporation
CHK Acquisition, Inc.
__________ __, 200_
Page 2
On the basis of the foregoing, and subject to the assumptions,
limitations and qualifications set forth herein, we are of the opinion that:
1. Canaan (a) is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Oklahoma, and (b) has all requisite
corporate power and authority to conduct its business as presently conducted.
Canaan has all requisite corporate power and authority to execute and deliver
the Agreement and the other documents and instruments contemplated thereunder to
be executed and delivered by Canaan and to consummate the transactions
contemplated thereunder.
2. The execution and delivery of the Agreement and the consummation of the
transactions contemplated thereunder by Canaan have been duly and validly
authorized by all requisite corporate action on the part of Canaan and the
Agreement has been duly and validly executed and delivered by Canaan.
3. The authorized capital stock of Canaan consists of 50,000,000 shares of
Canaan Common Stock and 1,000,000 shares of preferred stock, 25,000 of which
have been designated as Series A Junior Participating Preferred Stock , par
value $.01. As of ____________, 2002: (a) 4,353,646 shares of Canaan Common
Stock were validly issued and outstanding; (b) 500,000 shares of Canaan Common
Stock were reserved for issuance pursuant to the Canaan Plans, of which Canaan
Stock Options to purchase a total of 470,450 shares of Canaan Common Stock were
issued and outstanding; (c) there are no shares of capital stock of Canaan of
any class authorized, issued or outstanding other than the Canaan Common Stock ;
and (d) 578,169 shares of Canaan Common Stock were held by Canaan as treasury
stock. Except as described as described in Section of the Canaan Disclosure
Schedule and the Canaan Rights under the Canaan Rights Plan, there are: (i) no
outstanding shares of capital stock or other voting securities of Canaan; (ii)
no outstanding securities of Canaan or any other Person convertible into or
exchangeable or exercisable for shares of capital stock or other voting
securities of Canaan; and (iii) no outstanding subscriptions, options, warrants,
calls, rights (including preemptive rights, stock appreciation rights, phantom
stock rights, conversion rights, commitments, understandings or agreements to
which Canaan is a party or by which it is bound) obligating Canaan to issue,
deliver, sell, purchase, redeem or acquire shares of capital stock or other
securities of Canaan or obligating Canaan to grant, extend or enter into any
such subscription, option, warrant, call, right, commitment, understanding or
agreement. All outstanding shares of capital stock of Canaan are validly issued,
fully paid and nonassessable and not subject to any preemptive right. There is
not stockholder agreement, voting trust or other agreement or understanding to
which Canaan is a party or by which it is bound relating to the voting of any
shares of the capital stock of Canaan.
The foregoing opinions are subject to the following assumptions,
limitations and qualifications:
1. The opinions set forth herein are subject to the General Qualifications as
such term is defined and set forth in the Legal Opinion Accord of the ABA
Section of Business Law (1991) and to the
Exhibit "E"
Page 2 of 3 Pages
Chesapeake Energy Corporation
CHK Acquisition, Inc.
__________ ___, 200_
Page 3
effect of (a) applicable bankruptcy, insolvency, reorganization, fraudulent
transfer or conveyance, moratorium, conservatorship and similar laws affecting
creditors' rights and remedies generally, (b) general principles of equity
(whether considered in a proceeding in equity or at law) including, without
limitation, concepts of materiality and commercial reasonableness, and (c) any
implied covenants of good faith or fair dealing.
2. For purposes of this opinion, we have assumed that each person executing
the Agreement other than Canaan has all requisite power and authority and legal
capacity and has taken all necessary action, partnership, corporate or
otherwise, to execute and deliver the Agreement and the other documents to be
executed in connection therewith, to the extent a party thereto, and to effect
the transactions contemplated thereby, and that each such agreement is the valid
and binding obligations of each such person.
3. We express no opinion concerning the enforceability of (a) provisions
relating to specific performance, or (b) indemnification provisions to the
extent such provisions are deemed to violate public policy.
4. Any opinions provided herein that are limited by the provision "to our
knowledge," "known to us" or "to the best of our knowledge" or similar
expressions, will be deemed to express that we have not performed any
investigation except (a) a review of files and records of the Canaan Companies
physically retained at our offices, and (b) the receipt of certificates from
appropriate representatives of the Canaan Companies relating to and verifying
the facts which would support the basis for our opinions.
The foregoing opinions are limited in all respects to the laws of the
State of Oklahoma and the federal laws of the United States of America, each as
in effect on the date hereof, and no opinion is expressed herein as to any
matters governed by the laws of any other jurisdiction. We undertake no
obligation or responsibility to update or supplement this opinion in response to
subsequent changes in the law or future events affecting any of the transactions
contemplated by the Agreement. The opinions expressed herein are solely for your
benefit in connection with the transactions to be consummated on the date hereof
pursuant to the Agreement and may not be relied on by, or described, furnished
or quoted to any other person, firm or entity other than you without, in each
instance, our prior written consent.
Very truly yours,
Exhibit "E"
Page 3 of 3 Pages