SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
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(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
CANAAN ENERGY CORPORATION
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(Name of Registrant as Specified in its Charter)
NOT APPLICABLE
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CANAAN ENERGY CORPORATION
211 NORTH ROBINSON, SUITE 1000N
OKLAHOMA CITY, OKLAHOMA 73102
May 22, 2002
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders of
Canaan Energy Corporation to be held at The Stanhope Park Hyatt New York, 995
5th Avenue, New York, New York 10028, on June 28, 2002, at 10:00 a.m., local
time. At the special meeting, you will be asked to consider and approve the
acquisition of Canaan Energy Corporation by Chesapeake Energy Corporation
("Chesapeake") by means of a merger of CHK Acquisition, Inc., a wholly-owned
subsidiary of Chesapeake, with and into Canaan, pursuant to an Agreement and
Plan of Merger ("Merger Agreement"), dated as of April 19, 2002. You should
carefully read the Merger Agreement, a copy of which is attached as Appendix A
to the accompanying proxy statement.
Upon completion of the merger, each share of our common stock that is issued
and outstanding immediately prior to the completion of the merger, other than
those owned by Chesapeake and shares held by shareholders who exercise
dissenter's appraisal rights, will be converted automatically into the right to
receive the merger consideration of $18.00 in cash. We can only complete the
merger if the holders of a majority of the outstanding shares approve the
Merger Agreement.
Our board of directors unanimously approved the Merger Agreement, declared
the Merger Agreement advisable and in the best interests of our shareholders
and unanimously recommended that our shareholders approve the Merger Agreement.
The proxy statement provides you with a summary of the merger and additional
information about the parties involved. If the Merger Agreement is approved by
the requisite holders of our common stock, the closing of the merger will occur
promptly following the special meeting if all of the other conditions to the
closing of the merger are satisfied.
Please give all of this information your careful attention. Whether or not
you plan to attend the special meeting, you are requested to promptly complete,
sign and date the enclosed proxy card and return it in the envelope provided.
This will not prevent you from voting your shares in person if you subsequently
choose to attend the special meeting. If you have any questions regarding the
proposed transaction, please call Sue Barnard at (405) 604-9200.
Sincerely,
/s/ LEO E. WOODARD
Leo E. Woodard
Chairman of the Board and
Chief Executive Officer
CANAAN ENERGY CORPORATION
211 North Robinson, Suite 1000N
Oklahoma City, Oklahoma 73102
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 28, 2002
To the Shareholders of
Canaan Energy Corporation:
A special meeting of shareholders of Canaan Energy Corporation, an Oklahoma
corporation, will be held at The Stanhope Park Hyatt New York, 995 5th Avenue,
New York, New York 10028, on June 28, 2002, at 10:00 a.m., local time, for the
following purposes:
1. To consider and act upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of April 19, 2002, among Canaan
Energy Corporation, Chesapeake Energy Corporation and CHK Acquisition, Inc.,
a wholly-owned subsidiary of Chesapeake, relating to the merger of
CHK Acquisition, Inc. with and into Canaan, with Canaan surviving the merger
and becoming a wholly-owned subsidiary of Chesapeake; and
2. To transact any other business as may properly come before the
special meeting and any adjournments or postponements of that meeting.
Our board of directors has fixed the close of business on May 10, 2002 as
the record date for the special meeting. Accordingly, only shareholders of
record on that date will be entitled to notice of and to vote at the special
meeting and any adjournment or postponement of that meeting. On the record
date, Canaan had outstanding 4,353,709 shares of common stock. A form of proxy
and a proxy statement containing more detailed information with respect to
matters to be considered at the special meeting accompany and form a part of
this notice.
All shareholders are cordially invited to attend the special meeting. To
ensure your representation at the special meeting, however, you are urged to
complete, date, sign and return the enclosed proxy as promptly as possible. We
have enclosed a postage-prepaid envelope for that purpose. If you attend the
special meeting, you may vote in person even if you have already returned a
proxy. IF YOU COMPLETE, SIGN, AND MAIL YOUR PROXY WITHOUT INDICATING HOW YOU
WANT TO VOTE, YOUR SHARES WILL BE VOTED IN FAVOR OF ADOPTION OF THE MERGER
AGREEMENT. IF YOU ABSTAIN OR DO NOT VOTE, IT WILL HAVE THE SAME EFFECT AS IF
YOU VOTED AGAINST THE MERGER.
By Order of the Board of Directors,
/s/ SUE BARNARD
Sue Barnard
Secretary
The accompanying proxy statement of Canaan Energy Corporation is dated May
22, 2002 and the accompanying proxy statement and proxy are first being mailed
to shareholders of record on or about May 24, 2002.
Oklahoma City, Oklahoma
May 22, 2002
CANAAN ENERGY CORPORATION
211 North Robinson, Suite 1000N
Oklahoma City, Oklahoma 73102
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 28, 2002
TABLE OF CONTENTS
SUMMARY............................................................ 1
The Parties To The Merger.......................................... 1
The Merger......................................................... 1
Recommendation Of Our Board Of Directors And Reasons For The Merger 2
Opinion Of Our Financial Advisor................................... 2
Interests Of Certain Persons In The Merger......................... 2
The Special Meeting Of Shareholders................................ 3
Record Date And Voting Power....................................... 3
Vote Required...................................................... 3
Irrevocable Proxies................................................ 3
Proxies, Voting And Revocation..................................... 4
Exchange Of Stock Certificates..................................... 4
Solicitation Of Proposals From Other Parties....................... 4
Termination Of The Merger Agreement................................ 5
Termination Fee.................................................... 5
Dissenting Shareholder Shares...................................... 5
Federal Income Tax Consequences.................................... 6
FORWARD LOOKING STATEMENTS......................................... 7
THE SPECIAL MEETING................................................ 8
Date, Time And Place Of The Special Meeting........................ 8
Purpose Of The Special Meeting..................................... 8
Record Date And Voting Power....................................... 8
Quorum And Vote Required........................................... 8
Proxies, Voting And Revocation..................................... 8
Solicitation Of Proxies And Expenses............................... 9
THE PARTIES TO THE MERGER.......................................... 9
Canaan Energy Corporation.......................................... 9
Chesapeake Energy Corporation...................................... 10
CHK Acquisition, Inc............................................... 10
THE MERGER......................................................... 11
General............................................................ 11
Background Of The Merger........................................... 11
Recommendation Of Our Board of Directors And Reasons For The Merger 15
Opinion Of Our Financial Advisor................................... 17
Financing Arrangements............................................. 20
Interests Of Certain Persons In The Merger......................... 20
Irrevocable Proxies................................................ 23
Some Effects Of The Merger......................................... 24
Method Of Accounting............................................... 24
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TABLE OF CONTENTS--(Continued)
THE MERGER AGREEMENT............................................ 25
Effective Time Of The Merger.................................... 25
Conversion Of Shares Pursuant To The Merger..................... 25
Exchange Of Stock Certificates.................................. 25
Representations And Warranties.................................. 26
Covenants and Agreements........................................ 27
Conditions To The Merger........................................ 31
Termination Of The Merger Agreement............................. 32
YOU HAVE APPRAISAL RIGHTS IN THE MERGER......................... 33
General......................................................... 33
Exercising Procedures........................................... 33
Fair Value Determination........................................ 34
Costs........................................................... 35
Withdrawal; Loss Of Appraisal Rights............................ 35
FEDERAL INCOME TAX CONSEQUENCES................................. 36
REGULATORY AND OTHER APPROVALS.................................. 36
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.. 37
OTHER MATTERS................................................... 38
PROPOSALS OF SHAREHOLDERS....................................... 38
WHERE YOU CAN FIND MORE INFORMATION............................. 38
APPENDIX A--Merger Agreement.................................... A-1
APPENDIX B--Fairness Opinion of CIBC World Markets.............. B-1
APPENDIX C--Section 1091 of the Oklahoma General Corporation Act C-1
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SUMMARY
This summary highlights selected information from this proxy statement and
may not contain all of the information that is important to you. To understand
the merger fully and for a more complete description of the legal terms of the
merger, you should carefully read this document and the additional documents to
which we refer you, including the Merger Agreement attached as Appendix A.
The Parties To The Merger (page 9)
CANAAN ENERGY CORPORATION
211 North Robinson, Suite 1000N
Oklahoma City, Oklahoma 73102
(405) 604-9200
The company is referred to as "Canaan" or "we" in this proxy statement.
Canaan is an independent oil and natural gas company headquartered in Oklahoma
City, Oklahoma, formed in March 1987 as an Oklahoma corporation by Leo E.
Woodard and John K. Penton. Mr. Woodard continues to serve as Chief Executive
Officer and Mr. Penton continues to serve as President. Our common stock is
traded on the NASDAQ National Market under the symbol "KNAN."
CHESAPEAKE ENERGY CORPORATION
6100 N. Western Ave.
Oklahoma City, Ok 73118
(405) 848-8000
In this proxy statement, we call this company "Chesapeake." Chesapeake is an
Oklahoma corporation and is one of the largest independent natural gas
producers in the United States headquartered in Oklahoma City. Chesapeake's
operations are focused on developmental drilling and property acquisitions in
the Mid-Continent region of the United States. Chesapeake's common stock is
traded on the New York Stock Exchange under the symbol "CHK".
CHK ACQUISITION, INC.
6100 N. Western Ave.
Oklahoma City, Ok 73118
(405) 848-8000
CHK Acquisition, Inc. ("CHK") is an Oklahoma corporation and a wholly-owned
subsidiary of Chesapeake. CHK was formed to facilitate the consummation of the
merger and has conducted no activities other than in connection with the merger
and the Merger Agreement.
The Merger (page 11)
CHK will be merged with and into Canaan, with Canaan being the surviving
corporation, pursuant to the Merger Agreement dated as of April 19, 2002, among
Chesapeake, CHK and Canaan (the "Merger Agreement").
At the effective time of the merger, each outstanding share of our common
stock (other than shares owned by Chesapeake and shareholders who exercise
dissenter's appraisal rights) will be converted automatically into the right to
receive $18.00 per share in cash. Also, each outstanding Canaan stock option
will become fully vested, will be cancelled and the holders will be entitled to
receive the difference between $18.00 per share and the option exercise price
of such option, subject to all applicable federal and state tax withholding
requirements.
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The closing of the merger will take place promptly following the approval
and adoption of the Merger Agreement at the Canaan special meeting of
shareholders and the satisfaction of the conditions to the merger. The
effective time of the merger will be when the Certificate of Merger is accepted
for filing by the Oklahoma Secretary of State or at a later time on which the
companies agree, which is to be stated in the Certificate of Merger.
Recommendation Of Our Board Of Directors And Reasons For The Merger (page 15)
After an evaluation of a variety of business, financial and market factors
and consultation with our legal and financial advisors, at a meeting on April
19, 2002, our board of directors determined that the Merger Agreement was fair
to, and in the best interests of, our shareholders. The board also unanimously
approved the merger, adopted the Merger Agreement and the transactions
contemplated by that agreement, determined the merger to be advisable and
unanimously voted to recommend that our shareholders approve the Merger
Agreement.
In reaching its recommendation, our board considered, among other things,
the following factors:
. the $18 per share price represents a significant premium to the
historical trading prices for our common stock and is more likely than
not superior to the value of an investment in Canaan as a stand alone
company;
. our financial condition, assets, results of operations, business and
prospects and the risks inherent in achieving those prospects;
. the judgment, advice and analysis of senior management of Canaan that
the merger was the best alternative available for maximization of
shareholder value;
. the fairness opinion of CIBC World Markets Inc. ("CIBC"); and
. the terms and conditions of the merger.
Opinion Of Our Financial Advisor (page 17)
On April 19, 2002, CIBC rendered an opinion to our board of directors that,
as of the date of that opinion, the $18.00 per share in cash to be received by
holders of our common stock was fair from a financial point of view to our
shareholders.
The full text of the written opinion of CIBC, which sets forth the
assumptions made, matters considered and limitations on the review undertaken
in connection with the opinion, is attached as Appendix B to, and is
incorporated by reference in, this proxy statement. The opinion of CIBC does
not constitute a recommendation as to how any holder of our common stock should
vote with respect to the merger. You should carefully read the opinion in its
entirety.
Interests Of Certain Persons In The Merger (page 20)
Several of our officers and employees have agreements providing for the
payment of severance benefits upon involuntary termination, other than for
cause, within two years after a change in control of Canaan. In the event of
involuntary termination within two years after a change in control, the
agreements provide that the officers and employees will receive a lump sum
severance payment ranging from three times to one time the sum of the officer's
or employee's annual compensation immediately prior to the change in control
plus the highest annual bonus received by such officer or employee in the three
years immediately preceding the change in control, or any lesser period the
officer or employee has been employed by Canaan. In connection with the merger,
Canaan and Chesapeake agreed that any officer or employee having a change in
control agreement will be entitled to receive any amounts due thereunder at the
closing of the merger provided he agrees to resign on such date.
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In addition, the officers, directors and employees of Canaan hold stock
options issued under the 2000 Stock Option Plan. At the effective time of the
merger, all unexercised options will be vested, all outstanding options shall
be cancelled and the holders shall be entitled to receive the difference
between the merger consideration of $18.00 per share and the option exercise
price of such option, subject to all applicable federal and state tax
withholding requirements. Essentially, each stock option will be treated as if
it were fully vested and exercised and the underlying common stock were cashed
out in the merger.
Mr. Leo E. Woodard, our Chairman and Chief Executive Officer, Mr. John K.
Penton, our President, and Mr. Michael S. Mewbourn, our Chief Financial
Officer, will enter into Goodwill Protection Agreements with Chesapeake at the
closing of the merger, which will restrict each of them from competing with
Chesapeake in areas in which Canaan owns properties for a period of two years
following the closing, except under certain circumstances. Chesapeake has
agreed to pay them $500,000, $500,000 and $300,000, respectively, over the
two year period in exchange for these agreements.
Messrs. Woodard, Penton and Mewbourn expect to form a new oil and gas
company, LJ Natural Gas Company. Chesapeake has agreed to permit LJ Natural Gas
to occupy Canaan's offices for up to 90 days rent free after the closing of the
merger, agreed to grant to LJ Natural Gas an option to sublease all or a
portion of the office space thereafter at the rent specified in the existing
lease and also agreed to grant to LJ Natural Gas Company an option to purchase
all or a portion of Canaan's office equipment at a price of 25% of its year end
2001 book value.
The Special Meeting Of Shareholders (page 8)
The special meeting will be held on June 28, 2002 at The Stanhope Park Hyatt
New York, 995 5th Avenue, New York, New York 10028, at 10:00 a.m. At the
special meeting, our shareholders will be asked to consider and vote upon a
proposal to approve and adopt the Merger Agreement.
Record Date And Voting Power (page 8)
Our board of directors has fixed the close of business on May 10, 2002 as
the record date for determining shareholders entitled to notice of, and to vote
at, the special meeting.
On the record date, Canaan had 4,353,709 outstanding shares of common stock
held by approximately 300 shareholders of record. There are no shares of
capital stock of Canaan of any class issued or outstanding other than the
Canaan common stock. Shareholders of record on the record date will be entitled
to one vote per share of common stock on any matter that may properly come
before the special meeting and any adjournment or postponement of that meeting.
Vote Required (page 8)
Approval and adoption of the Merger Agreement requires the affirmative vote
of the holders of a majority of outstanding shares of our common stock. The
failure of a holder of common stock to vote, an abstention or broker non-vote
has the same effect as a vote against the adoption of the Merger Agreement.
Irrevocable Proxies (page 23)
All of our officers and directors who own shares of our common stock, who
collectively own approximately 27% of the outstanding common stock, have each
entered into an agreement with Chesapeake in which they appointed executive
officers of Chesapeake as their proxies for purposes of voting in favor of the
adoption of the Merger Agreement.
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Proxies, Voting And Revocation (page 8)
Shares of common stock represented at the special meeting by properly
executed proxies received prior to or at the special meeting, and not revoked,
will be voted at the special meeting, and at any adjournments or postponements
of that meeting, in accordance with the instructions on the proxies. If a proxy
is duly executed and submitted without instructions, the shares of common stock
represented by that proxy will be voted "For" the approval of the Merger
Agreement. Proxies are being solicited on behalf of our board of directors.
A proxy may be revoked by the person who executed it at, or before, the
special meeting by:
. delivering to our secretary a written notice of revocation of a
previously-delivered proxy bearing a later date than the proxy;
. duly executing, dating and delivering to our secretary a subsequent
proxy; or
. attending the special meeting and voting in person.
Attendance at the special meeting will not, in and of itself, constitute
revocation of a proxy.
Exchange Of Stock Certificates (page 25)
At the effective time of the merger, Chesapeake will deposit with UMB Bank,
N.A., the exchange agent, cash in an amount sufficient to pay the holders of
shares of common stock outstanding immediately prior to the effective time of
the merger (other than amounts payable to dissenting shareholders, amounts
payable with respect to the stock options and amounts with respect to shares
held by Chesapeake), the cash merger consideration to which they are entitled
under the Merger Agreement.
As soon as practicable after the effective time of the merger, the exchange
agent will send to each shareholder of record of Canaan's common stock, as of
the date immediately prior to the effective time, a letter of transmittal with
detailed instructions specifying the procedures to be followed in exchanging
Canaan common stock for the merger consideration of $18.00 per share. You
should not send any stock certificates to the exchange agent or to anyone else
until you receive the letter of transmittal. Upon the surrender of a stock
certificate, the exchange agent will issue to the surrendering holder the
consideration described above.
Solicitation Of Proposals From Other Parties (page 28)
We agreed to terminate existing discussions with other parties regarding
proposals to acquire all or a portion of our stock or material portion of
assets and not to solicit or initiate any offer to acquire our common stock,
any offer to acquire a material portion of Canaan's assets, or any transaction
that would interfere with the merger.
If we receive an unsolicited bona fide written "alternative proposal," we
may, after written notice to Chesapeake and execution of a confidentiality
agreement, supply confidential information and engage in discussions with the
proponent of such proposal. In addition, if our board of directors determines
in good faith that an alternative proposal is a Superior Proposal, it may
recommend the Superior Proposal or withdraw its recommendation regarding the
merger. A Superior Proposal is one which the board determines, based on the
advice of our counsel, the failure to recommend such proposal would constitute
a breach of the board's fiduciary duties, and based on the advice of Canaan's
financial advisor, such alternative proposal, if consummated, would result in a
transaction more favorable to Canaan's shareholders from a financial point of
view than the transaction contemplated by the Merger Agreement, and the person
making such Superior Proposal has the financial means, or the ability to obtain
the necessary financing, to conclude such transaction. We must notify
Chesapeake promptly in writing with respect to any unsolicited inquiry or
proposal which we have received that is reasonably likely to lead to an
alternative proposal.
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Termination Of The Merger Agreement (page 32)
The Merger Agreement may be terminated at any time prior to the effective
time of the merger by, among other things, the mutual written agreement of the
parties or, after the occurrence of certain events or actions, by one of the
parties acting independently. For example, either party may independently
terminate the Merger Agreement if:
. the merger has not been completed by December 31, 2002;
. shareholders holding in excess of a majority of our common stock do not
vote to approve the merger; or
. a court or governmental authority takes any action prohibiting the
merger.
Canaan may terminate the Merger Agreement if as a result of a Superior
Proposal received by Canaan, Canaan's board of directors determines to accept
the Superior Proposal, provided that prior to the effective date of the
termination, Canaan provides Chesapeake with an opportunity to adjust the terms
and conditions of the Merger Agreement to enable Canaan to proceed with the
merger; if there has been a breach of Chesapeake's representations and
warranties, which would cause Chesapeake to be unable to perform its
obligations under the Merger Agreement, and the conditions would not be
satisfied if the closing were to occur on the day on which Canaan gives
Chesapeake notice of such termination; or if Chesapeake has failed to comply in
any material respect with any of its covenants or agreements contained in the
Merger Agreement and such failure has not been, or cannot be, cured within
twenty (20) days after notice and demand for cure.
In addition, Chesapeake may terminate the Merger Agreement if Canaan
breaches any of the representations and warranties contained in the Merger
Agreement which would have a Material Adverse Effect and such breach has not
been, or cannot be, cured within twenty (20) days after notice and demand for
cure; if Canaan has failed to comply in any material respect with any of its
covenants or agreements contained in the Merger Agreement and such failure has
not been, or cannot be, cured within twenty (20) days after notice and demand
for cure, provided, however, Chesapeake may not terminate this Merger Agreement
if at the time Chesapeake is in breach of any representation, warranty or
covenant such that the conditions to closing will not be satisfied; or if the
Canaan board of directors recommends a Superior Proposal or withdraws the
merger approval or recommendation.
Termination Fee (page 33)
We must pay a $5 million Termination Fee if:
. the Merger Agreement is terminated by Canaan as a result of a Superior
Proposal, which is accepted;
. the Agreement is terminated by Chesapeake because our board recommends
an alternative proposal or withdraws its recommendation relating to the
merger;
. either party terminates the Merger Agreement because the requisite
shareholder vote was not obtained or Chesapeake terminates the Merger
Agreement because of a breach by Canaan, and in either case, at such
time there was a pending alternative proposal, which was publicly
announced and prior to or within 12 months of the termination Canaan
enters into a definitive agreement with the third party who made the
alternative proposal which is subsequently consummated.
Dissenting Shareholder Shares (page 33)
If you do not vote in favor of the proposal to approve and adopt the Merger
Agreement, you comply strictly with the applicable provisions of the Oklahoma
General Corporation Act, the requisite number of our shareholders approve the
Merger Agreement and the merger is completed, you have the right to dissent and
be
5
paid cash for the "fair value" of your shares. This payment may be more than,
the same as, or less than the merger consideration you would be entitled to
receive in the merger. To perfect these dissenter's appraisal rights, you must
follow the required procedures precisely. The applicable provisions of the
Oklahoma General Corporation Act are attached to this document as Appendix C.
It is a condition to the completion of the merger that holders of not more than
ten percent of the outstanding voting shares entitled to vote at the special
meeting elect to exercise their dissenter's rights.
Federal Income Tax Consequences (page 36)
If the merger is completed, the exchange of our common stock by any of our
shareholders in return for the merger consideration will be a taxable
transaction under the Internal Revenue Code of 1986. BECAUSE OF THE
COMPLEXITIES OF THE TAX LAWS, WE ADVISE YOU TO CONSULT YOUR OWN TAX ADVISORS
CONCERNING THE APPLICABLE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES RESULTING FROM THE MERGER.
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FORWARD LOOKING STATEMENTS
This proxy statement includes "forward looking statements" as defined by the
Securities and Exchange Commission. All statements, other than statements of
historical facts, included in this proxy statement that address activities,
events or developments that we expect, believe or anticipate will or may occur
in the future are forward looking statements.
These forward looking statements are based on assumptions, which we believe
are reasonable, but which are open to a wide range of uncertainties and
business risks. Factors that could cause actual results to differ materially
from those anticipated are discussed in the pertinent sections of this proxy
statement and in our periodic filings with the Securities and Exchange
Commission, including our annual report on Form 10-K for the year ended
December 31, 2001.
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THE SPECIAL MEETING
Date, Time And Place Of The Special Meeting
Canaan will hold a special meeting of shareholders at The Stanhope Park
Hyatt New York, 995 5th Avenue, New York, New York 10028, on June 28, 2002, at
10:00 a.m., local time.
Purpose Of The Special Meeting
At the special meeting, you will be asked to consider and vote upon the
adoption of the Merger Agreement under which CHK, a wholly-owned subsidiary of
Chesapeake, will merge with and into Canaan, and each share of outstanding
Canaan common stock (other than shares owned by Chesapeake and shares owned by
shareholders who exercise dissenter's appraisal rights) will be converted into
the right to receive $18.00 in cash. Shareholders will also consider and vote
upon any other matters that may properly be brought before the meeting. As of
the date of this proxy statement, Canaan knows of no business that will be
presented for consideration at the meeting other than the matters described in
this proxy statement.
Record Date And Voting Power
Our board of directors has fixed the close of business on May 10, 2002 as
the record date for the determination of shareholders entitled to notice of,
and to vote at, the special meeting. As of the record date, there were
4,353,709 outstanding shares of common stock held by approximately 300 holders
of record. There are no shares of capital stock of Canaan of any class issued
or outstanding other than the Canaan common stock. Shareholders of record on
the record date will be entitled to one vote per share of common stock on any
matter that properly comes before the special meeting and any adjournment or
postponement of that meeting.
Quorum And Vote Required
Our bylaws require the presence, in person or by duly executed proxy, of the
holders of shares of common stock representing a majority of all of the shares
of the stock entitled to vote at the special meeting in order to constitute a
quorum. Approval and adoption of the Merger Agreement requires the affirmative
vote of the holders of a majority of the outstanding shares of our common
stock. For purposes only of determining the presence or absence of a quorum for
the transaction of business, we intend to count abstentions and broker
non-votes as present at the special meeting. Abstentions and broker non-votes
are not, however, counted as favorable votes and, therefore, have the same
effect as a vote against the merger.
Broker non-votes are proxies from brokers or other nominees indicating that
they have not received instructions from the beneficial owner or other person
entitled to vote the shares, which are the subject of the proxy on a particular
matter with respect to which the broker or other nominee does not have
discretionary voting power.
Proxies, Voting And Revocation
Shares of our common stock represented at the special meeting by properly
executed proxies received prior to, or at, the special meeting, and not
revoked, will be voted at the special meeting, and at any adjournment or
postponement of that meeting, in accordance with the instructions on those
proxies. If a proxy is duly executed and submitted without instructions, the
shares of our common stock represented by that proxy will be voted "For" the
approval and adoption of the Merger Agreement. Proxies are being solicited on
behalf of our board.
In the event that a quorum is not present at the special meeting, or if for
any other reason we believe that additional time should be allowed for the
solicitation of proxies, we may adjourn the special meeting with or without a
vote of the shareholders.
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A proxy may be revoked at any time before it is voted at the special
meeting, other than proxies which have been granted by our directors and
officers covering approximately 27% of the outstanding shares which are
irrevocable. A proxy may be revoked by the person who executed it at, or
before, the special meeting by:
. delivering to our secretary a written notice of revocation of a
previously-delivered proxy bearing a later date than the proxy;
. duly executing, dating and delivering to our secretary a subsequent
proxy; or
. attending the special meeting and voting in person.
Attendance at the special meeting will not, in and of itself, constitute
revocation of a previously delivered proxy.
Any written notice revoking a proxy should be delivered to Canaan Energy
Corporation, 211 North Robinson, Suite 1000N, Oklahoma City, Oklahoma 73102,
Attention: Sue Barnard.
Solicitation Of Proxies And Expenses
The enclosed proxy is being solicited by the Canaan board of directors. We
will bear the entire cost of solicitation of proxies from our shareholders,
including preparation, assembly, printing and mailing of this proxy statement,
the proxy, and any additional information furnished to shareholders. Copies of
solicitation materials will be furnished to banks, brokerage houses,
fiduciaries and custodians holding in their names shares of our common stock
beneficially owned by others to forward to those beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone or personal
solicitation by our directors, officers or other regular employees. No
additional compensation will be paid to our directors, officers or other
regular employees for these services, but these individuals may be reimbursed
for out-of-pocket expenses incurred in connection with the solicitation. We
have retained Morrow & Co., Inc. to assist us in the solicitation of proxies
for a fee of $5,000 and $6.50 per call, plus out-of-pocket expenses. Upon
request, we will reimburse brokers, dealers, banks or similar entities acting
as nominees for their reasonable expenses incurred in forwarding copies of the
proxy materials to the beneficial owners of the shares of common stock they
hold of record.
THE PARTIES TO THE MERGER
Canaan Energy Corporation
Canaan, formerly known as Coral Reserves Group, Ltd., is an independent oil
and natural gas company headquartered in Oklahoma City, Oklahoma. Canaan was
formed in March 1987 as an Oklahoma corporation by Leo E. Woodard and John K.
Penton. Mr. Woodard continues to serve Canaan as Chief Executive Officer and
Mr. Penton continues to serve as President.
From inception, Canaan engaged in and achieved growth through the
acquisition and exploitation of producing properties. Between 1990 and 1996
Canaan formed eight limited partnerships (the "Partnerships"). Coral Reserves,
Inc. ("Coral Inc.") and Coral Reserves Energy Corp. ("Coral Corp."),
subsidiaries of Canaan, (collectively referred to as the "General Partners")
served as general partners of the Partnerships and Canaan provided management
services to Coral Inc. and Coral Corp. The purposes of the Partnerships were to
acquire producing oil and natural gas properties primarily in Oklahoma and to
conduct limited additional development activity relating to the acquired
properties. Canaan Securities, Inc. ("CSI"), an unaffiliated broker/dealer,
served as placement agent in connection with the private placement of the
limited partnership interests in the Partnerships.
In 1997, Canaan and the General Partners began to consider the possibility
of combining the Partnerships into a publicly held oil and natural gas company
in order to achieve the benefits of a corporate entity with a larger asset base
and greater growth potential than available to an individual partnership. In
February 1999,
9
Indian Oil Company ("Indian"), a privately held Oklahoma corporation which was
engaged in oil and natural gas exploration, development and production, Canaan
and the General Partners entered into an agreement for Canaan to acquire all
the outstanding stock of Indian. Shortly thereafter, management initiated a
plan to effect a series of combination transactions whereby Canaan would
acquire all of the limited partners' interests in the Partnerships and 100% of
the stock of Coral Inc., Coral Corp., CSI and Indian with registered common
shares of Canaan. Canaan and the other entities entered into a plan of
combination in February 2000 providing for the terms of the combination
transactions.
On October 23, 2000, the combination transactions were overwhelmingly
approved at meetings of the former shareholders of Indian, Coral Inc., Coral
Corp., CSI and the limited partners. Canaan issued 4,368,815 shares of our
common stock as consideration for the acquired entities. Canaan also paid a
stock dividend of 562,368 shares to our shareholders of record immediately
prior to the transaction for the purpose of increasing Canaan's existing shares
to the amount allocated to Canaan's existing shareholders under the terms of
the combination transaction. Trading of Canaan's common shares on the NASDAQ
National Market under the ticker symbol of "KNAN" commenced on October 26, 2000.
As of December 31, 2001, Canaan operated 190 of the 949 wells in which it
owned a working interest, and these operated wells accounted for 35% of total
net production based on estimated production for January 2002. For the month of
January 2002, Canaan's daily net production averaged 20.8 MMcfe, consisting of
18.2 MMcf of natural gas and 435 Bbls of oil. Total net proved reserves as of
December 31, 2001 were 94.9 Bcfe, of which 91% were natural gas, with proved
developed reserves representing 77% of the total and proved undeveloped
reserves accounting for the remaining 23%. All historical information in this
document relating to Canaan includes information relating to the Partnerships
and the General Partners.
Chesapeake Energy Corporation
Chesapeake is an Oklahoma corporation and is one of the ten largest
independent natural gas producers in the United States. Chesapeake began
operations in 1989 and completed its initial public offering in 1993. Its
common stock trades on the New York Stock Exchange under the symbol CHK.
At the end of 2001, Chesapeake owned interests in approximately 8,700
producing oil and gas wells. Its primary operating area is the Mid-Continent
region of the United States, which includes Oklahoma, western Arkansas,
southwestern Kansas and the Texas Panhandle. Other operating areas include the
Deep Giddings field in Texas, a portion of the Permian Basin region of
southeastern New Mexico and a portion of the Williston Basin located in eastern
Montana and western North Dakota.
CHK Acquisition, Inc.
CHK Acquisition, Inc. is an Oklahoma corporation recently formed by
Chesapeake to facilitate the consummation of the merger. It has not conducted
any business or activity except in connection with activities related to the
merger.
10
THE MERGER
The discussion of the merger in this proxy statement is qualified by
reference to the Merger Agreement, which is attached to this proxy statement as
Appendix A. You should carefully read the entire Merger Agreement.
General
The Merger Agreement provides for the merger of CHK with and into Canaan,
with Canaan being the surviving corporation. As of the effective time of the
merger, holders of shares of Canaan common stock will have no further ownership
interest in the surviving corporation. Instead, each holder of common stock
issued and outstanding immediately prior to the effective time of the merger
(other than shares owned by Chesapeake and dissenters' shares) will be entitled
to receive $18.00 in cash per share, without interest. Upon completion of the
merger, each outstanding Canaan stock option will become fully vested and will
be cancelled and the holders will be entitled to receive the difference between
the merger consideration of $18.00 per share and the exercise price of such
option, subject to all applicable federal and state tax withholding
requirements.
Background Of The Merger
Since becoming a public company in October, 2000, Canaan began a number of
efforts to enhance shareholder value through the development of our property
base and sought methods of improving our public float and liquidity through
possible public offerings or business combinations with other oil and gas
companies. Since our inception as a public company, however, our common stock
price has traded in only limited amounts and at prices substantially below what
we believe to be the inherent net asset value of Canaan. As a result, the
implementation of any potential plans which involve raising of additional
equity capital or issuance of shares in acquisitions has been difficult due to
the possible value dilution that would be experienced by our existing
shareholders.
On May 23, 2001, Chesapeake presented to our board a written proposal to
acquire Canaan in exchange for cash or Chesapeake common stock at a price of
$18.00 per share, subject to completion of customary due diligence and the
negotiation of acceptable definitive documentation. At the time this proposal
was submitted, our common stock was trading at approximately $12.50 per share.
Chesapeake indicated a desire to work together to reach a consensual agreement
and stated that it intended the discussions to be confidential.
On May 29, 2001, our board of directors met to consider the proposal. After
consultation with our legal counsel, Crowe & Dunlevy, the board concluded that
the proposal represented a significant premium to Canaan's current market price
and authorized management to engage a financial advisor to assist in the
evaluation of the proposal as well as Canaan's other strategic alternatives. On
June 4, 2001, we advised Chesapeake that we intended to engage a financial
advisor to assist our board in the evaluation of the Chesapeake proposal and
would advise Chesapeake after such evaluation process was completed. We also
advised Chesapeake of our belief that our common stock price was undervalued
relative to other small cap E&P companies because of the unique manner by which
we became a public company and because of the limited time our stock was
publicly traded.
Between June 4 and August 7, 2001, we and Chesapeake exchanged communication
in which Chesapeake encouraged us to consider its proposal as quickly as
possible and solicited opportunities to address our board. We advised
Chesapeake that we intended to evaluate the Chesapeake proposal and our
strategic alternatives only after a complete review by our board with the
assistance of our financial and legal advisors. During the course of these
exchanges, Chesapeake reiterated its position that its proposal should be
confidential. During June and July, we interviewed several potential financial
advisors and ultimately the board approved the engagement of Hibernia
Southcoast Capital ("Hibernia") to assist us in evaluating our strategic
alternatives and the Chesapeake proposal.
11
On August 7, 2001, our board met with representatives of Hibernia and
members of Crowe & Dunlevy to review our strategic alternatives and the
Chesapeake proposal. Our counsel reviewed the board's fiduciary
responsibilities. Hibernia presented its analysis of Canaan's potential value
and strategic alternatives. Management expressed its view that only limited
time had been provided to management to implement the business plan for Canaan
as a publicly held company, but that it continued to believe it could do so to
enhance shareholder value. Additionally, management believed that the Company
possessed two significant unproven projects, either of which could add
significant value to the Company with a relatively minimal investment. It was
noted that testing of these two unproven projects was scheduled to commence
prior to December 31, 2001. Management also reported that a number of contacts
had already been made to discuss possible strategic acquisitions and mergers
and it was possible that such efforts could be successful. After a full review
and discussion of the alternatives available to Canaan, the board concluded
that Chesapeake's proposal was inadequate and authorized representatives of
Hibernia to communicate such decision to Chesapeake. On August 27, 2001,
representatives of Hibernia advised Chesapeake that we were not interested in a
business combination transaction.
On September 21, 2001, Canaan engaged CIBC as a financial advisor to assist
Canaan in seeking a strategic partner with a preliminary list of prospective
parties. All the prospective parties were contacted either by Canaan or CIBC
over the next several months to determine their level of interest in a possible
business combination transaction. Contacts with the prospective parties did not
lead to substantive negotiations.
On November 19 and 20, 2001, we were notified of proposed sales of 560,169
shares of our common stock by certain former shareholders of Indian Oil Company
("Indian") to Chesapeake at a price of $12.00 per share. Such notification was
given to us pursuant to our rights under a shareholders' agreement with these
former shareholders by which we retained a right of first refusal in connection
with any proposed sales. The board of directors met on November 21 and 23,
2001, and determined that it would be in the best interest of Canaan and its
shareholders to exercise the right of first refusal. Accordingly, on November
30, 2001, we purchased 560,169 shares of common stock from the former Indian
shareholders for a total purchase price of $6.7 million.
Subsequently, on December 4, 2001, certain former shareholders of Indian
notified us that they proposed to sell an additional 221,231 shares of Canaan
common stock to Chesapeake for a purchase price of $12.00 per share or a total
purchase price of $2.7 million. Our board elected not to exercise Canaan's
option to purchase such shares primarily due to lack of available funding for
such purpose.
On December 13, 2001, Chesapeake filed a Schedule 13D with the Securities
and Exchange Commission disclosing its ownership of 333,149 shares, or 7.7% of
our total outstanding shares, acquired at $12.00 per share for an aggregate
cost of $4.0 million. In the Schedule 13D, Chesapeake indicated that it was
considering seeking a business combination or other transaction with Canaan or
its shareholders for the purpose of acquiring control. It indicated its intent
to retain legal and financial advisors to assist it in reviewing and evaluating
Chesapeake's strategic alternatives with respect to Canaan.
On December 27, 2001, Chesapeake, as a shareholder of Canaan, requested a
copy of the shareholders list to enable it to solicit proxies from shareholders
regarding future meetings and to make offers to purchase additional stock and
to take one or more of the actions listed in its Schedule 13D. Canaan complied
with this request and provided a shareholders list to Chesapeake.
On Tuesday, January 8, 2002, Leo E. Woodard, our Chairman and Chief
Executive Officer and John K. Penton, our President, met personally with Aubrey
K. McClendon, Chesapeake's Chairman and Chief Executive Officer, and Tom Ward,
its Chief Operating Officer. Messrs. McClendon and Ward reiterated Chesapeake's
interest in acquiring Canaan but did not make a specific proposal at that time.
Messrs. Woodard and Penton requested that Chesapeake be patient and expressed
their belief that Canaan's business plan would over time enhance shareholder
value. Messrs. McClendon and Ward indicated that they would consider this and
would advise Canaan before taking further action.
12
On March 11, 2002, Chesapeake delivered to our board and publicly announced
a proposal that Chesapeake acquire the remaining outstanding common stock for a
price of $12.00 per share in cash and indicated its intent to commence a tender
offer at that price within the next few days.
On March 13, 2002, the board of directors of Canaan convened a meeting.
Representatives of CIBC and Crowe & Dunlevy were present. At that meeting, the
board modified the terms of its existing engagement of CIBC as its financial
advisor to include assistance in evaluating the Chesapeake proposal and to
advise Canaan with respect to all of its strategic alternatives. The board also
formally approved a shareholders rights plan which had been under consideration
by the board of directors well before the announcement of the proposed tender
offer by Chesapeake. Pursuant to the board's direction, representatives of CIBC
advised Mr. McClendon that CIBC had been engaged as a financial advisor, that
the Canaan board would be evaluating the proposal and would meet with
Chesapeake at a later date after completion of the evaluation. On March 14,
2002, we publicly announced the adoption of the rights plan and the engagement
of CIBC. Chesapeake publicly announced on March 15, 2002, that it was
postponing its proposed tender offer in light of the willingness of senior
management and the financial advisors of Canaan to discuss the proposal with
Chesapeake.
On March 25, 2002, the board of directors met with representatives of CIBC
and counsel present to consider the preliminary valuation analysis of Canaan
and a review of its strategic alternatives presented by CIBC. Management
expressed its firm opinion that the $12.00 per share offer from Chesapeake was
inadequate in relation to Canaan's underlying reserve value and indicated
management's view that the board should reject the Chesapeake proposal at that
price. Management also recommended to the board that the process of soliciting
alternative proposals which had been commenced in the fall of the preceding
year should be accelerated to establish a competitive environment and a better
benchmark for Canaan's value. The board discussed the various events that had
occurred since the original Chesapeake proposal in 2001 and the circumstances
of Canaan at that time compared to the current circumstances. Management
expressed its view to the board that the circumstances were not significantly
different from the circumstances Canaan faced when Chesapeake first made its
$18.00 per share offer in May 2001. Although the unproved prospects the Company
had in May 2001 were not successful, management noted other new prospects had
been generated since that time. After discussion, the board authorized CIBC to
communicate the position to Chesapeake that the $12.00 offer was inadequate and
to offer Chesapeake the opportunity to conduct due diligence.
On March 25, 2002, representatives of CIBC met with Mr. McClendon and
communicated the board's position that the price was inadequate, but that the
board would authorize access to nonpublic information, subject to Chesapeake
signing a confidentiality agreement with appropriate standstill provisions. In
response, on the same day, Chesapeake orally increased its offer to $16.00 per
share in cash subject to Canaan's providing exclusivity to Chesapeake during a
two week due diligence period.
On March 26, 2002, our board met again to discuss the new $16.00 cash offer.
Management indicated its view that the $16.00 cash offer was more competitive,
but was still inadequate. Management also recommended that solicitation of
additional prospective buyers be accelerated. After a full discussion of the
alternatives available, the board authorized CIBC and management to continue to
pursue other alternative buyers and authorized Canaan to provide nonpublic
information to Chesapeake subject to the conditions that Canaan not be
restricted from seeking other offers and that Chesapeake agree to appropriate
confidentiality and "standstill" provisions. On March 29, 2002, Canaan and
Chesapeake entered into a confidentiality agreement permitting Chesapeake
access on a nonexclusive basis to nonpublic information concerning Canaan's
reserves and other properties. In such agreement, Chesapeake agreed not to
pursue any unilateral action relating to an acquisition of Canaan until after
April 5, 2002. Over the weekend of March 30 and 31, Chesapeake reviewed
Canaan's information and on April 1, 2002, representatives of Chesapeake had
due diligence meetings with representatives of Canaan at Canaan's offices.
On April 2, 2002, Mr. McClendon advised representatives of CIBC that
Chesapeake was increasing its offer to $18.00 per share.
13
On April 4, 2002, our board met to consider the most recent proposal by
Chesapeake. Representatives of CIBC and Crowe & Dunlevy were present in person
or by telephone. Management advised that none of the other parties that had
been solicited had yet proposed a price comparable to the $18.00 per share
price. Management indicated that they felt the Chesapeake offer at this price
was very compelling and recommended that they and CIBC be authorized to
negotiate further with Chesapeake. Management advised that at $18.00 per share
or above, the sale of Canaan would be the most desirable alternative for the
shareholders. Further, management indicated that Chesapeake's announced hostile
intent significantly impaired Canaan's ability to execute a business plan that
would involve Canaan remaining independent because of the time required to
deliver the comparable value. However, management, CIBC and counsel all
recommended that negotiations with Chesapeake continue on a non-exclusive basis
if possible to permit additional time for other possible offers to be received.
The board also discussed the possibility of suggesting to Chesapeake that its
offer include a component consisting of Chesapeake common stock. After
extensive discussion, the board concluded that an all cash transaction would be
preferable given the complications that a stock transaction would potentially
entail, the difficulties in evaluating Chesapeake stock and the possibility
that Chesapeake would not offer equivalent consideration in its own stock.
Accordingly, the board authorized Canaan's management to continue to negotiate
with Chesapeake for a share price greater than $18.00 on a non-exclusive basis.
On the afternoon of April 4, 2002, representatives of CIBC met with
representatives of Chesapeake to negotiate an increase in the purchase price
and provided Chesapeake with additional information about Canaan's probable and
possible reserves. An additional meeting was held on the afternoon of April 8
between Mr. Penton and Mr. McClendon. On Monday and Tuesday, April 8 and 9, Mr.
McClendon advised Mr. Penton that Chesapeake could not increase its $18.00 per
share price and further proposed certain additional terms of a transaction,
including that Messrs. Woodard and Penton and possibly others would be required
to execute agreements to refrain from competing with Chesapeake in areas in
which Canaan owns properties, that Chesapeake would be willing to consider a
possible sublease of Canaan's office space to former management of Canaan and
that the termination fee if Canaan accepted an alternative transaction after a
definitive agreement was executed be $7.5 million.
On Tuesday, April 9, 2002, the board met again to consider the most recent
developments, with representatives of Crowe & Dunlevy present. Management
reported on the continuing interest of other prospective acquirors, three of
which had conducted, or were scheduled to conduct, on site due diligence during
the weeks of April 1 and 8, 2002, but noted that no other prospective acquiror
had submitted an indication of interest at a price level comparable to
Chesapeake. Management presented the new proposed transaction terms relating to
the proposed non-compete and office space agreements and the proposed
termination fee. At such meeting, the board authorized management, legal
counsel and financial advisors to commence negotiation of definitive agreements
with Chesapeake for further presentation to the board. The board also directed
management and CIBC to continue discussions with other potential bidders to
determine whether their prices could be increased to be more competitive.
During the period from April 9 to April 19, representatives of Canaan and
Chesapeake negotiated the terms of a proposed agreement and plan of merger,
including an irrevocable proxy from members of the board to vote any shares
they owned in favor of the merger, a goodwill protection agreement pursuant to
which Messrs. Woodard, Penton and Mewbourn would agree not to compete with
Chesapeake in certain areas for a period of two years and an office space
agreement pursuant to which a company to be organized by former members of
Canaan management would have the right to occupy the Canaan office space after
closing of the merger and an offer to sublease all or a portion of such space
and to acquire certain office equipment. During the course of these
negotiations, Chesapeake agreed to a reduction in the proposed termination fee
to $5.0 million after Canaan's advisors proposed a $4.0 million fee.
On April 19, 2002, our board, together with representatives of CIBC and
Crowe & Dunlevy met again to consider the final terms of the proposed Merger
Agreement and the transactions contemplated by that agreement. Management,
together with our legal and financial advisors, reviewed the background of the
proposed merger,
14
the potential benefits of the merger to our shareholders, financial and
valuation analysis of the transaction, and the terms of the Merger Agreement
and related agreements. CIBC delivered to our board its oral opinion,
subsequently confirmed in writing, that based on matters presented to our board
and as set forth in its opinion, the consideration received by the holders of
common stock pursuant to the Merger Agreement was fair to such holders from the
financial point of view. The board reviewed with management the terms of the
proposed goodwill protection agreements and office space agreements to
determine whether in the opinion of management the terms of such agreements had
any effect on the merger consideration offered to the shareholders.
Messrs. Woodard, Penton and Mewbourn were then excused from the meeting and the
board, together with its legal and financial advisors, discussed the terms of
such agreements. The disinterested board members reached a consensus that the
terms of such arrangements did not affect the merger consideration being
offered to shareholders. Messrs. Woodard, Penton and Mewbourn were invited to
return to the meeting. After considering the presentations of management and
our legal advisor and the presentation and opinion of CIBC, along with various
other factors discussed below, our board unanimously:
. Approved and adopted the Merger Agreement and transactions contemplated
by that agreement and determined it to be advisable;
. Authorized our officers to execute the Merger Agreement on our behalf;
. Approved a recommendation that our shareholders vote in favor of the
approval of the Merger Agreement;
. Approved the amendment to our rights agreement which would render the
rights inapplicable to the merger and the other transactions
contemplated by the Merger Agreement; and
. Approved a change in control severance policy for employees without
pre-existing change in control or employment agreements.
On Friday, April 19, 2002, after the markets closed, officers of Chesapeake
and Canaan executed and delivered the Merger Agreement and all of our directors
and officers who owned shares of common stock executed irrevocable proxies
appointing Chesapeake as proxy to vote all of their shares of common stock in
favor of merger and the Merger Agreement.
On Monday, April 22, 2002, before the markets opened, Chesapeake and Canaan
issued a joint press release announcing the proposed merger.
Recommendation Of Our Board of Directors And Reasons For The Merger
As described above in the section entitled "Background of the Merger," our
board unanimously approved and adopted the Merger Agreement and determined that
the Merger Agreement is advisable and in the best interest of Canaan and its
shareholders. Accordingly, our board recommends approval and adoption of the
Merger Agreement by our shareholders.
Our board determined the merger is in the best interests of shareholders
because it believes the $18.00 per share merger consideration is more likely
than not to be superior to the value of an investment in Canaan as a
stand-alone company. Our board considered the following factors in reaching its
decision:
. The $18.00 per share consideration to be received by our shareholders in
the merger represents a premium of:
. 137% over the closing price of $7.60 per share on November 26, 2001,
which was one day prior to the announcement by Canaan of the exercise
of its right of first refusal to purchase shares proposed to be sold
to Chesapeake for $12.00 per share.
. 97% over the closing price of $9.15 per share on March 11, 2002,
which was one day prior to the announcement by Chesapeake of its
proposed tender offer;
15
. 30% over the closing price of $13.89 per share on April 19, 2002,
which was one day prior to the public announcement of execution of
the Merger Agreement; and
. 50% above the originally proposed tender offer price of $12.00 per
share by Chesapeake.
. The judgment, advice and analysis of senior management of Canaan,
including senior management's analysis of the underlying value of
Canaan's net assets and the strategic alternatives available to Canaan,
including the risks and challenges associated with Canaan's continued
pursuit of its business plan as an independent company. Senior
management of Canaan recommended to the Board that the merger was the
best alternative available for maximization of shareholder value.
. The judgment and analysis of senior management of Canaan relating to the
difficulties associated with establishing improved stock liquidity and
investor relations program and larger public float for our common stock.
. A review of the discussions that Canaan management and CIBC had had over
the last several weeks with various third parties regarding their
interest in a potential business combination transaction and the
negotiations with Chesapeake leading to the belief that the value of the
Chesapeake proposal represented the highest price per share that could
be negotiated for Canaan common stock.
. The discussions with Canaan's counsel regarding the terms of Merger
Agreement and the irrevocable proxy and the ability of Canaan under
certain conditions to consider unsolicited alternative proposals, the
ability to terminate the Merger Agreement in certain situations and the
termination fee payable in the event of the occurrence of certain
termination events. The board also considered that the prohibition on
soliciting further acquisition proposals and the requirement of the
payment of the termination fee on the occurrence of certain events would
have the effect of deterring alternative acquisition proposals. The
board concluded that this effect was not so great as to preclude the
emergence of a superior offer for Canaan and that the Merger Agreement
contains appropriate provisions allowing the board to terminate the
merger in order to accept such an offer if one were made.
. The opinion of CIBC described below that, as of the date of such opinion
and subject to the limitations and assumptions set forth in the opinion,
the consideration to be received by Canaan shareholders in the merger
was fair from a financial point of view to Canaan's shareholders.
. The possibility that the market price of our common stock would have
dropped sharply if the board rejected the Chesapeake proposal and we
announced a decision to remain independent.
. An analysis of the potential benefits to certain directors, officers and
employees as discussed in the section entitled "Interest of Certain
Persons in the Merger" including the change in control payments to be
made to Messrs. Woodard, Penton, Mewbourn and Henson and various other
employees under their respective change in control agreements, the
severance payments potentially to be made to each of the other eligible
employees, the goodwill protection agreement payments to be made to
Messrs. Woodard, Penton and Mewbourn, the terms of the office space
agreement and the acceleration of vesting of all outstanding options to
acquire common stock.
. The fact that the merger is a taxable transaction, and as a result,
holders of our common stock will be required to pay taxes on any
built-in gain as a result of their receipt of the cash consideration in
the transaction. The board considered the value being offered by
Chesapeake to outweigh any potentially adverse tax consequences.
. A review of the existing financial condition, assets, results of
operations, business and prospects of Canaan, including limitations on
capital availability to fund drilling projects or new acquisitions.
. The conditions to Chesapeake's obligation to consummate the merger are
reasonably limited and thus the risk that the merger will not be
consummated is reasonably small;
. The fact that Chesapeake has sufficient funds to consummate the merger.
16
The Merger Agreement was the end product of a process involving contacts
with a number of companies that included several interested parties who
received presentations by management of Canaan or its investment bankers. Three
of these companies devoted significant time and effort to study non-public data
concerning Canaan and a possible acquisition of Canaan, but none submitted an
indication of interest in acquiring Canaan at a price comparable to the $18.00
per share price offered by Chesapeake.
In reaching its decision to approve the Merger Agreement and the merger and
to recommend adoption of the Merger Agreement by Canaan shareholders, our board
did not view any single factor as determinative, and did not find it necessary
or practicable, to assign any relative or specific weights to the various
factors considered. Furthermore, individual directors may have given differing
weights to different factors. Our board believes that each of the factors
listed above supports the decision to adopt the Merger Agreement. Our board did
not specifically adopt CIBC's opinion, but did rely on it in reaching its
conclusion that the merger is advisable and fair and in the best interest of
Canaan and its shareholders. The board also considered it an important factor
in determining whether to approve the Merger Agreement.
Opinion Of Our Financial Advisor
At the April 19, 2002 meeting of our board of directors, CIBC delivered its
oral opinion, which was subsequently confirmed in a written opinion (the
"Opinion") dated as of April 19, 2002, to our board of directors, to the effect
that, as of that date and based upon the assumptions made, matters considered
and limits of review set forth in the Opinion, the consideration to be received
by holders of Canaan's common stock (including the associated preferred share
purchase rights issued pursuant to Canaan's Rights Agreement), excluding
Chesapeake, in the merger pursuant to the Merger Agreement is fair from a
financial point of view.
The full text of the Opinion, which sets forth the assumptions made, matters
considered and certain limitations on the scope of review undertaken by CIBC,
is attached as Appendix B to this proxy statement. Shareholders of Canaan are
urged to read the Opinion in its entirety. The Opinion was provided for the use
and benefit of our board of directors in its evaluation of the merger, was
directed only to the fairness to the holders of our common stock, excluding
Chesapeake, of the consideration to be received pursuant to the Merger
Agreement from a financial point of view, and does not constitute a
recommendation as to how any shareholder should vote with respect to the merger
or any other matters relating to the merger. This summary of the Opinion is
qualified in its entirety by reference to the full text of the Opinion.
In arriving at the Opinion CIBC:
(a) reviewed a draft Merger Agreement, dated April 16, 2002 (the "Proposed
Agreement"), which did not differ materially from the Merger Agreement;
(b) reviewed Canaan's audited financial statements for the three fiscal
years ended December 31, 2001;
(c) reviewed certain financial projections of Canaan prepared by the
management of Canaan and furnished to CIBC by Canaan;
(d) reviewed Canaan's Annual Reports and Forms 10-K for the three fiscal
years ended December 31, 2001;
(e) reviewed the historical market prices and trading volume for Canaan's
common stock;
(f) held discussions with senior management of Canaan with respect to the
business and prospects for future growth of Canaan;
(g) reviewed and analyzed certain publicly available financial data for
certain companies CIBC deemed comparable to Canaan;
(h) performed discounted cash flow analyses of Canaan using certain
assumptions of future performance provided by the management of Canaan;
17
(i) reviewed and analyzed an independent reserve report with respect to
Canaan prepared by Netherland, Sewell & Associates, Inc., dated December
31, 2001 (without independent verification or investigation that such
report was reasonably prepared on a basis reflecting the best available
information, estimates and judgement);
(j) reviewed and analyzed certain publicly available financial information
for transactions CIBC deemed comparable to the merger;
(k) compared the financial and operating performance of Canaan with publicly
available information concerning certain other companies deemed
relevant; and
(l) performed such other analyses and reviewed such other information as
CIBC deemed appropriate.
In rendering the Opinion, CIBC relied upon and assumed, without independent
verification or investigation, the accuracy and completeness of all of the
financial and other information provided to them by Canaan and its employees,
representatives and affiliates and Netherland, Sewell & Associates, Inc. With
respect to forecasts of future financial condition and operating results
provided by Canaan, CIBC assumed at the direction of Canaan's management,
without independent verification or investigation, that such forecasts were
reasonably prepared on bases reflecting the best available information,
estimates and judgment of Canaan and its management. At the direction of
representatives of Canaan, CIBC also assumed that the final terms of the Merger
Agreement would not vary materially from those set forth in the Proposed
Agreement reviewed by CIBC. CIBC has neither made nor obtained any independent
evaluations or appraisals of the assets, liabilities or oil and gas reserves of
Canaan other than the independent reserve report prepared by Netherland Sewell
& Associates, Inc. provided to CIBC by Canaan. CIBC is not expressing any
opinion as to the underlying valuation, future performance or long-term
viability of the surviving corporation following the merger. CIBC has not been
asked to consider, and its opinion does not address, the relative merits of the
merger as compared to any alternative business strategies that might exist for
Canaan, or the effect of any other transaction in which Canaan might engage.
CIBC's opinion is necessarily based on the information available to CIBC and
general economic, financial and stock market conditions and circumstances as
they exist and can be evaluated by CIBC as of the date of the Opinion. It
should be understood that, although subsequent developments may affect the
Opinion, CIBC does not have any obligation to update, revise or reaffirm the
Opinion.
The following is a summary of certain financial and comparative analyses
performed by CIBC in arriving at the Opinion.
Net Asset Value Analysis. CIBC reviewed the estimated net asset value of
Canaan at three different commodity price cases: (i) the current "strip case"
using natural gas prices per thousand cubic feet ("Mcf") of $3.18 in 2002 and
$3.68 in 2003 and beyond and crude oil prices per barrel: $21.64 in 2002,
$21.00 in 2003 and $20.00 in 2004 and beyond (ii) the "flat case" using $3.00
per Mcf of natural gas and $21.00 per barrel of oil and (iii) the "SEC case"
using $2.65 per Mcf of natural gas and $16.75 per barrel of oil. This analysis
produced a range of equity values for Canaan of $6.36 to $16.28 per share.
Precedent Corporate Transactions Premiums Paid. CIBC reviewed premiums paid
in comparable transactions involving the sale of natural gas companies that
have occurred over the last two years. The average one-day, one-week and
one-month premiums prior to announcement were 16.9%, 17.3% and 19.7%,
respectively. This analysis was applied to Canaan's one-day, one-week and
one-month prior to announcement trading prices, and produced equity values for
Canaan of $9.72, $10.46 and $8.91 per share, respectively, with an average of
$9.69 per share.
Discounted Cash Flow Analysis. CIBC performed a discounted cash flow
("DCF") analysis using projected cash flow as estimated by Canaan. CIBC applied
a range of discount rates from 8.5% to 11.5% to the cash flows, and earnings
before interest, taxes, depreciation, depletion and amortization expenses
("EBITDA") terminal value multiples of 4.5x to 6.5x. The average EBITDA
terminal value multiple of 5.5x at the respective discount rates applied
indicated a range of equity values from $12.61 to $15.45 per share.
18
Precedent Mid-Continent Asset Transactions Analysis. CIBC reviewed
transactions involving the sale of natural gas and oil assets located in the
Mid-Continent area that have occurred over the last two years. CIBC derived an
implied per share value for Canaan by applying a range of transaction value /
thousand cubic feet equivalent ("Mcfe") of proved reserves from these precedent
transactions to the proved reserves of Canaan (range calculated as one-half
standard deviation above and below the average). The values ranged from
$0.62/Mcfe of proved reserves to $0.85/Mcfe of proved reserves, with an average
value of $0.74/Mcfe of proved reserves. This analysis produced a range of
equity values for Canaan of $6.13 to $11.56 per share, with an average of $8.85
per share.
Precedent Corporate Transactions Analysis. CIBC reviewed transactions
involving the sale of natural gas and oil companies with operations primarily
in the Mid-Continent area that have occurred over the last two years. CIBC
derived an implied per share value for Canaan by applying a range of
transaction value / Mcfe of proved reserves and transaction value / last twelve
months' EBITDA ("LTM EBITDA") multiples from these precedent transactions
(range calculated as one-half standard deviation above and below the average).
The values ranged from $0.94/Mcfe of proved reserves to $1.16/Mcfe of proved
reserves with an average transaction value of $1.05/Mcfe of proved reserves and
LTM EBITDA multiples ranging from 4.8x to 7.6x with an average of 6.2x LTM
EBITDA for transactions less than $1.0 billion in value. This analysis produced
a range of equity values for Canaan of $11.65 to $19.42 per share, with an
average of $15.53 per share.
Comparable Company Trading Analysis. CIBC analyzed publicly-traded natural
gas exploration and production companies with operations comparable to those of
Canaan. CIBC derived an implied per share equity value for Canaan by applying a
range of multiples of 2002 estimated EBITDA (range of 2.4x to 7.9x with an
average of 6.1x), 2002 estimated Cash Flow (range of 1.5x to 8.6x with an
average of 4.7x) and $/Mcfe of proved reserves (range of $0.83/Mcfe to
$2.00/Mcfe with an average of $1.42/Mcfe). This analysis produced a range of
equity values for Canaan of $3.48 to $21.29 per share, with an average of
$13.04 per share.
The summary set forth above does not purport to be a complete description of
the analyses performed by CIBC in arriving at the Opinion. Arriving at a
fairness opinion is a complex process not necessarily susceptible to a partial
analysis or summary description. CIBC believes that its analyses must be
considered as a whole and that selecting a portion of the analysis or the
factors considered by CIBC, without considering all such factors and analyses,
could create a misleading view of the processes underlying the Opinion. CIBC
did not assign relative weights to any of its analyses in preparing the
Opinion. The matters considered by CIBC in its analyses were based on numerous
macroeconomic, operating and financial assumptions with respect to industry
performance, general business and economic conditions and other matters, many
of which are beyond Canaan's and Chesapeake's control and involve the
application of complex methodologies and educated judgment. Any estimates
incorporated in the analyses performed by CIBC are not necessarily indicative
of actual past or future results or values, which may be significantly more or
less favorable than such estimates. Estimated values do not purport to be
appraisals and do not necessarily reflect the prices at which businesses or
companies may be sold in the future, and such estimates are inherently subject
to uncertainty. None of the comparable companies used in the comparable public
companies analysis described above is identical to Canaan or Chesapeake, and
none of the comparable transactions used in the comparable transactions
analysis described above is identical to the merger. Accordingly, an analysis
of publicly traded comparable companies and transactions is not mathematical;
but, it involves complex considerations and judgments concerning differences in
financial and operating characteristics of the comparable companies and other
factors that could affect the public trading value of the comparable companies
or company to which they are being compared.
Our board of directors selected CIBC to act as its financial advisor on the
basis of the reputation of CIBC as an internationally recognized investment
banking firm with substantial expertise in transactions similar to the merger
and because it is familiar with Canaan and its business. As part of its
financial advisory business, CIBC is continually engaged in the valuation of
businesses and related securities in connection with mergers and acquisitions
and valuations for estate, corporate and other purposes. CIBC has acted as a
financial advisor to Canaan's board of directors in connection with the merger
and will receive a fee for its services. In the ordinary
19
course of business, CIBC or its affiliates may trade in the debt and equity
securities of Canaan and Chesapeake for CIBC's own account and for the accounts
of CIBC's customers, and accordingly may at any time hold a long or short
position in such securities.
The terms of the engagement of CIBC by the board of directors are set forth
in a letter dated March 13, 2002 (the "Engagement Agreement"). Pursuant to the
terms of the Engagement Agreement, Canaan has agreed to pay to CIBC a fee of
approximately $1.9 million upon the closing of the merger. In addition to this
compensation, Canaan has also agreed to reimburse CIBC for its reasonable
out-of-pocket expenses (including the fees of its legal counsel) and to
indemnify CIBC and certain related persons from and against certain liabilities
in connection with its engagement, including certain liabilities under the
federal securities laws, arising out of its engagement.
Canaan also has an agreement dated July 20, 2001 with Hibernia. Pursuant to
this agreement, Canaan paid Hibernia an advisory fee of $115,000 for its review
of Canaan's strategic alternatives presented to the Canaan Board in August
2001. Under the terms of the agreement with Hibernia, Hibernia is not entitled
to any further fees.
Financing Arrangements
Chesapeake estimates that it will require approximately $130 million in
order to finance the merger. These funds will be used to:
. pay the merger consideration, including payments for the surrender of
outstanding stock options and payments to dissenting shareholders;
. repay outstanding debt under Canaan's bank credit facility; and
. pay the fees and expenses incurred in connection with the merger,
including change of control and severance payments.
Chesapeake expects to fund all amounts from cash on hand. In the Merger
Agreement, Chesapeake represents and warrants to Canaan that Chesapeake has
available adequate funds or the means to obtain adequate funds to pay the
merger consideration to our shareholders and all associated merger costs.
Interests Of Certain Persons In The Merger
Change in Control Agreements
Messrs. Leo E. Woodard, John K. Penton, Michael S. Mewbourn and Thomas H.
Henson, who are officers and directors, each have an agreement with Canaan
entered into in October 2000 when Canaan became a public company, providing for
the payment of severance benefits on involuntary termination, other than for
cause, within two years after a change in control of Canaan. The agreements are
intended to promote the retention of these officers by providing them with an
extra measure of financial security in the event of a change of control of
Canaan. In the event of involuntary termination within two years after a change
in control, the agreements provide that each officer will receive a lump sum
severance payment equal to three times the sum of the officer's annual
compensation immediately prior to the change in control plus the highest annual
bonus received by the officer in the three years immediately preceding the
change in control or any lesser period the officer has been employed by Canaan.
The amounts payable under the agreements are subject to a limitation that is
equal to the amount that would be deductible by Canaan under applicable
Internal Revenue Code (golden parachute) payment limitations, after taking into
consideration all payments to the officer covered by such limitation, which
would include payments deemed to have been received due to any acceleration of
vesting of stock options or other benefits. Canaan has entered into similar
agreements with an additional 15 key employees of Canaan providing severance
benefits ranging from one time to three times annual compensation, including
Michael O'Kelly, Vice President--Drilling and Production, and Sue Barnard,
Secretary, who are entitled to payments of one time and two times annual
compensation, respectively.
20
Chesapeake has agreed that the amounts payable under these change in control
agreements will be paid at the closing of the merger provided such employees
tender their resignation. Messrs. Woodard, Penton, Mewbourn and Henson will not
be employed after the closing and their payments would be made in any event. It
is possible that other employees may receive change in control payments at the
closing but may be offered employment by Chesapeake after the closing. The
amounts payable under these change in control agreements are:
Name Amount
---- ----------
Leo E. Woodard.................................... $ 856,000
Chairman and Chief Executive Officer
John K. Penton.................................... 852,000
President
Michael S. Mewbourn............................... 253,000
Senior Vice President and Chief Financial Officer
Thomas H. Henson.................................. 343,000
Senior Vice President--Investor Relations
Sue Barnard....................................... 132,000
Secretary
Michael D. O'Kelley............................... 114,480
Vice President--Drilling and Production
All Other Employees............................... 2,057,520
----------
Total.......................................... $4,569,399
==========
Stock Options
The executive officers, directors and employees of Canaan hold stock options
issued under the 2000 Stock Option Plan covering an aggregate of 470,287 shares
of common stock as of the record date. At the effective time of the merger, all
outstanding options will become vested, all options shall be cancelled and the
holders of any outstanding options shall be entitled to receive the difference
between the merger consideration of $18.00 per share and the option exercise
price of such option subject to all applicable federal and state tax
withholding requirements. In effect, each stock option will be treated as if it
were fully vested, exercised and the underlying common stock were cashed out in
the merger. The weighted average Canaan stock option exercise price for all
outstanding options is $9.37. Canaan estimates the aggregate amount to be paid
to all executive officers and directors in consideration of their stock options
at approximately $3,100,150. An additional $917,967 will be paid to all other
employees. The following table shows the amount to be paid to each director and
executive officer, assuming that no stock options are exercised after the
record date for the special meeting:
Weighted Average
Per Share Option Shares of Common
Name Exercise Price Stock Subject to Option Option Value in Merger
---- ---------------- ----------------------- ----------------------
Leo E. Woodard..... $ 9.44 100,000 $ 856,000
John K. Penton..... 9.44 100,000 856,000
Michael S. Mewbourn 9.44 75,000 642,000
Thomas H. Henson... 9.44 75,000 642,000
Michael D. O'Kelley 9.00 8,750 78,750
Sue Barnard........ 9.00 2,500 22,500
Mischa Gorkuscha... 9.00 100 900
Randy Harp......... 9.00 100 900
Scott Rayburn...... 12.50 100 550
Kevin White........ 12.50 100 550
------- ----------
Total........... 361,650 $3,100,150
======= ==========
21
Goodwill Protection Agreements
Messrs. Woodard, Penton, and Mewbourn have agreed to enter into Goodwill
Protection Agreements ("Goodwill Protection Agreements") with Chesapeake at the
closing of the merger to induce Chesapeake to perform the Merger Agreement, to
protect the goodwill acquired by Chesapeake under the Merger Agreement and to
provide for certain payments to such officers. For two years following the
closing, each of these persons agrees not to directly or indirectly:
. 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,
pertaining to or covering any and all lands in a "restricted area" lying
within one mile of any well and drilling or spacing unit in which Canaan
had an interest as of the effective time of the merger;
. conduct (or assist any third person to conduct) any oil and gas business
on or with respect to the restricted area;
. acquire any interest or the right to acquire any interest in a person
that owns or acquires oil and gas interests in the restricted area that
results in the individual (or Messrs. Woodard, Penton and Mewbourn
collectively) owning or having the right to acquire more than forty
percent (40%) of such person, without the prior written consent of
Chesapeake; or
. without the prior consent of Chesapeake, terminate, own, acquire,
solicit or otherwise interfere with any of Canaan's oil and gas
interests in the restricted area.
The Goodwill Protection Agreements apply to each of Messrs. Woodard, Penton
and Mewbourn individually, to their immediate family members, and to any entity
in which they individually own or have the right to acquire 20% of the equity
interest or they collectively own or have the right to acquire 40% of the
equity interest. The Goodwill Protection Agreements do not prevent the affected
individuals from being employed by an entity that competes in the restricted
area so long as no confidential information is used.
These limitations will not prohibit the individual from investing 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, as long as the individual owns no more than fifteen
percent (15%) of the outstanding voting securities of such entity. The
limitations also do not apply to acquisitions involving at least 25 separate
properties with at least 75% of the total value of the acquisition outside of
the restricted area. In connection with acquisitions not meeting these
criteria, Chesapeake is granted a preferential right to purchase any properties
acquired within the restricted area.
The Goodwill Protection Agreements also require these individuals to return
to Chesapeake all confidential information relating to Canaan in their
possession. Each individual agrees that for a period of two years, he will keep
all confidential information strictly confidential and will not use any of the
data, information or results or disclose any of the data, information or
results to any person, unless otherwise required by law or regulation, and then
only after written notice to Chesapeake.
As consideration for their execution, delivery and performance of the
Goodwill Protection Agreements, Chesapeake has agreed to pay Messrs. Woodard,
Penton and Mewbourn $500,000, $500,000 and $300,000, respectively, payable in
three equal payments. The first payment is due on the execution of the Goodwill
Protection Agreement, the second payment is due one year after the execution of
the agreement and the third payment is due two years after the execution of the
agreement. The payments to Messrs. Woodard and Penton are subject to possible
adjustment as described below under "Employee Severance Policy."
22
Office Space Agreement
Messrs. Woodard, Penton and Mewbourn expect to form a new oil and gas
company, LJ Natural Gas Company. At the closing of the merger, LJ Natural Gas
and Canaan will enter into an Office Space Agreement ("Office Agreement"),
whereby Canaan will agree to permit LJ Natural Gas, for a period of ninety (90)
days after the closing of the merger, to use the office space currently leased
by Canaan, without paying rent and to use the office equipment, some of which
is also equipment leased by Canaan. The use of the office space and equipment
is subject to receipt of any required consents and the payment by LJ Natural
Gas of all expenses other than rent on the office space.
The Office Agreement will also give LJ Natural Gas an option, exercisable at
any time during the 90-day use period, to sublease all or a portion of the
office space after the expiration of the 90 day use period, at the rent and for
the remaining term specified in the existing lease with Canaan. LJ Natural Gas
also will have an option to purchase all or a portion of Canaan's office
equipment and nonproprietary oil and gas information at a purchase price equal
to twenty five percent (25%) of the book value for all of the items of
equipment to be purchased reduced to the nearest multiple of $25,000, plus all
costs and expenses associated with the assumption of any acquired equipment
leases. If LJ Natural Gas subleases a portion of the office space, the Office
Agreement further gives LJ Natural Gas a right of first refusal for two years
after the closing of the merger on the portion of the office space which LJ
Natural Gas is not subleasing in the event of future subleases, assignments or
surrenders by Canaan.
Employee Severance Policy
For employees who do not have change in control agreements, our board
approved a change of control severance policy at the same time it approved the
merger. Under this policy, any eligible employee who remains employed until the
closing date of the merger and is not offered continuing employment in a
comparable position and salary is entitled to a severance payment of one month
for each year of service with a minimum severance of 3 months. If all eligible
employees received severance, the aggregate severance benefit would be
approximately $606,000. To the extent this cost exceeds $406,000, Messrs.
Woodard and Penton have each agreed that the last payments due them under the
Goodwill Protection Agreements may be reduced by 50% of the excess.
Indemnification
Under the terms of the Merger Agreement, Canaan's existing directors and
officers will be entitled to indemnification in some circumstances, as more
fully described in the section entitled "The Merger Agreement--Covenants and
Agreements--Indemnification."
Irrevocable Proxies
All of our officers and directors who own shares of common stock of Canaan
(who collectively own approximately 27% of the outstanding common stock) have
entered into agreements with Chesapeake whereby they granted irrevocable
limited proxies to executive officers of Chesapeake for purposes of voting in
favor of adoption of the Merger Agreement. The persons who have executed these
proxies are Messrs. Woodard, Penton, Mewbourn, Henson and Gorkuscha. If the
executive officers of Chesapeake are unable or decline to exercise the power
and authority granted by the proxy for any reason, the shareholder agrees to
vote in favor of adoption of the merger and the Merger Agreement at any meeting
at which such matters are considered and voted upon. The persons executing
these proxies also agree not to, directly or indirectly sell, transfer, assign,
cause to be redeemed or otherwise dispose of any of the stock or grant any
proxy, power-of-attorney or other authorization with respect to the stock
pertaining or relating to the Merger Agreement.
23
Some Effects Of The Merger
If the merger is completed, holders of shares of our common stock will not
have an opportunity to continue their equity interest in Canaan as an ongoing
corporation and, therefore, will not have the opportunity to share in Canaan's
future earnings, dividends or growth, if any. In addition, upon completion of
the merger, Canaan's common stock will no longer be listed on the NASDAQ
National Market and will cease to be registered with the Securities and
Exchange Commission.
Method Of Accounting
Chesapeake will account for the merger under the purchase method of
accounting. Purchase accounting requires that the purchase price and costs of
the acquisition be allocated to all of the assets acquired and liabilities
assumed, based upon relative fair values.
24
THE MERGER AGREEMENT
The terms of and conditions to the merger are contained in the Merger
Agreement, a copy of which is attached to this proxy statement as Appendix A
and incorporated in this document by reference. Set forth below is a
description of the material terms and conditions of the merger. This
description is qualified in its entirety by, and made subject to, the more
complete information set forth in the Merger Agreement.
Effective Time Of The Merger
The closing of the merger will take place no later than the second business
day following the day after the shareholders of Canaan have adopted the Merger
Agreement and all other conditions to the merger have been satisfied. The
merger will become effective immediately when the Secretary of State of the
State of Oklahoma has accepted for filing the Certificate of Merger in
accordance with the Oklahoma General Corporation Act or at a later time as
specified in the Certificate of Merger. At that time, CHK will be merged with
and into Canaan, CHK will cease to exist as a separate entity and Canaan will
become a wholly-owned subsidiary of Chesapeake. We expect the merger to become
effective as soon as practicable after approval of the merger by our
shareholders and the satisfaction of all other conditions to closing the merger.
Conversion Of Shares Pursuant To The Merger
At the effective time of the merger and without any action on the part of
any of our shareholders, each issued and outstanding share of our common stock
(other than shares owned by Chesapeake and shares owned by shareholders who
exercise dissenter's appraisal rights) will be converted into the right to
receive $18.00 in cash, without interest. Also at the effective time, each
stock option outstanding under our stock option plan, whether or not currently
exercisable, will become fully vested and cancelled and will be converted into
the right to receive an amount of cash equal to the difference between $18.00
and the exercise price of the option, subject to applicable federal and state
tax withholding requirements. Treasury shares and shares held by Chesapeake
will be cancelled and no consideration will be paid or payable in exchange for
such shares.
Exchange Of Stock Certificates
Chesapeake has designated UMB Bank, N.A., to act as exchange agent in the
merger. The Merger Agreement provides that as soon as reasonably practicable
after the effective time of the merger, the exchange agent will mail a letter
of transmittal to each record holder of an outstanding stock certificate or
certificates, which immediately prior to the effective time represented shares
of Canaan common stock and were converted into the right to receive the merger
consideration. The letter of transmittal will specify that delivery will be
effected and risk of loss and title to stock certificates will pass only upon
delivery of the stock certificate to the exchange agent. In addition, the
exchange agent will also mail to each record holder instructions on how to
properly surrender the stock certificates for payment. You should not surrender
your stock certificates until you receive a letter of transmittal and
instructions.
Upon the surrender to the exchange agent of your stock certificate, together
with a duly completed and executed letter of transmittal and any other required
documents, and subject to any required withholding of taxes, you will be paid
the merger consideration for each share of Canaan common stock previously
represented by your stock certificate, and the stock certificate will then be
canceled. No interest will be paid or accrued on the cash payable upon the
surrender of your stock certificate. Until surrendered in accordance with the
provisions stated above, each certificate will, after the effective time of the
merger, represent only the right to receive the merger consideration.
After the effective time of the merger, there will be no transfers of
certificates that previously represented shares of our common stock on Canaan's
stock books. If, after the effective time, stock certificates are presented to
the surviving corporation or the exchange agent for payment, they will be
canceled and exchanged for the
25
merger consideration, without interest. However, no holder of a stock
certificate will have any greater rights against the surviving corporation than
may be accorded to general creditors of the surviving corporation under
applicable law.
If you have a lost, stolen or destroyed certificate, in order to receive the
merger consideration, you will have to sign an affidavit stating that your
certificate was lost, stolen or destroyed. In addition, if Chesapeake requires,
you may have to post a bond indemnifying Chesapeake against any claims against
it with respect to the lost, stolen or destroyed certificate.
Any cash held by the exchange agent that has not been paid to Canaan's
shareholders pursuant to the Merger Agreement one year following the closing of
the merger will be delivered to Chesapeake upon Chesapeake's request. From and
after that time, if you have not yet exchanged your shares of common stock for
the merger consideration, you must surrender your certificates to Chesapeake,
rather than the exchange agent, to receive the merger consideration.
Representations And Warranties
The Merger Agreement contains a number of representations and warranties
made by the parties customary in a transaction of this type, including those
relating to:
. corporate organization;
. authority and enforceability;
. authorizations;
. consents and approvals;
. broker's fees;
. restrictions;
. litigation;
. no knowledge of breach of representations; and
. this proxy statement.
In the Merger Agreement, Canaan also makes various representations and
warranties to Chesapeake, concerning Canaan business and assets. These
representations and warranties cover various matters, such as:
. absence of conflicts with law, contracts, certificate of incorporation,
or bylaws;
. SEC documents;
. financial statements;
. capital structure;
. government regulation;
. absence of certain changes or events, including material adverse change
since December 31, 2001;
. taxes;
. employee benefit plans;
. labor and employment matters;
. environmental matters;
. compliance with laws;
26
. vote required;
. insurance;
. intangible property;
. title to assets;
. oil and gas operations;
. financial and commodity hedging;
. books and records;
. other entities;
. account information;
. powers of attorney;
. plugging status;
. opinion of financial adviser;
. board recommendation;
. equipment;
. current commitments;
. payout balances;
. gas imbalances, and take or pay;
. certain agreements; and
. affiliate transactions.
Chesapeake also has made representations and warranties with respect to
adequate funding, interim operations of CHK and prior purchases of Canaan stock.
Covenants and Agreements
Conduct Of The Business Before The Merger
We have agreed that, prior to the merger, Canaan will carry on its business
in the ordinary course consistent with past practices, subject to certain
restrictions concerning the conduct of business, including with respect to the
following matters:
. amending Canaan's organizational documents;
. issuing, selling, pledging, disposing of, granting, encumbering, or
authorizing capital stock, options, warrants, convertible securities or
other rights to acquire shares of capital stock, or Canaan's assets,
except for sales of oil and gas production in the ordinary course of
business;
. declaring dividends and distributions of our capital stock;
. splitting, combining, reclassifying, subdividing, redeeming or
purchasing any capital stock or amending or modifying any warrant or
other right to acquire capital stock;
. acquiring another entity or material amount of assets other than in the
ordinary course of business, incurring indebtedness in excess of the
borrowing base under Canaan's existing credit agreement, issuing debt
securities, assuming, guaranteeing or endorsing the obligations of any
person, making loans or advances to or investments in any other person,
except in the ordinary course of business and less than $100,000;
27
. increasing employee or officer compensation unless in accordance with
past practices, granting severance pay, establishing, adopting, entering
into or modifying any collective bargaining, bonus, profit sharing or
other type of benefit or compensation plan;
. making a material tax election or settling any tax liability;
. discharging certain claims or liabilities other than in the ordinary
course business;
. undertaking capital commitments, leases or capital expenditures in
excess of $10,000;
. making material changes in accounting methods;
. entering into, renewing, modifying or waiving any material provisions in
any material agreements;
. entering into any non-compete agreements or similar agreements limiting
our ability to compete in any line of business; or
. amending, modifying, terminating, or waiving any right of first refusal
or similar preferential right.
Access to Information
We have agreed to furnish information to Chesapeake pertaining to the
business affairs of Canaan and Chesapeake has agreed to keep confidential all
such information and any other information provided under the Merger Agreement.
No Solicitation
The Merger Agreement contains detailed provisions prohibiting Canaan from
seeking an acquisition proposal as an alternative to the merger. For this
purpose, an "alternative proposal" is any proposal to acquire any of Canaan's
common stock (other than upon exercise of employee stock options), to acquire
all or any material portion of Canaan's assets, business or equity interests,
or relating to a transaction the consummation of which would or could
reasonably be expected to impede, interfere with, prevent or materially delay
the consummation of the merger, whether by merger, purchase of assets, tender
offer, exchange offer or otherwise. Under these "no solicitation" provisions,
Canaan has agreed that:
. we will terminate any and all existing activities, discussions and
negotiations with other parties regarding alternative proposals;
. we will not solicit, initiate or encourage any offer relating to an
alternative proposal;
. we will not engage in negotiations or discussions concerning or provide
any non-public information to any person relating to an alternative
proposal; and
. we will not agree to, approve or recommend, or otherwise facilitate any
effort or attempt to make or implement, any alternative proposal, or
withdraw Canaan's board of directors recommendation with respect to the
merger.
However, the Merger Agreement permits Canaan's board of directors to
disclose a position regarding an alternative proposal if necessary to comply
with Rules 14d-9 and 14e-2 under the Securities Exchange Act.
If Canaan receives an unsolicited bona fide written alternative proposal, we
may, after written notice to Chesapeake, engage in discussions or negotiations
with such third party and may supply confidential information if, prior to
furnishing such information to the third party, the third party executes a
confidentiality agreement not materially less favorable to Canaan than the
Confidentiality Agreement dated March 28, 2002, between Canaan and Chesapeake.
In addition, our board of directors may recommend such alternative proposal or
withdraw, modify or not make its recommendation relating to the merger, if and
only to the extent the Canaan board of directors determines in good faith that,
based on the advice of our counsel, the failure to recommend such alternative
proposal would constitute a breach of the board's fiduciary duties, and based
on the advice of our
28
financial advisor, such alternative proposal, if consummated, would result in a
transaction more favorable to our shareholders from a financial point of view
than the transaction contemplated by the Merger 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. We must keep Chesapeake informed of the receipt of, and proposed
actions with respect to, any alternative proposals.
Shareholder Approval
Canaan has agreed to promptly distribute this proxy statement and call a
meeting of shareholders to obtain approval of the merger. The board of
directors, subject to its fiduciary duties as described above in
"No Solicitation", has agreed to recommend the merger to the shareholders.
Proxy Statement
Canaan and Chesapeake have agreed to promptly prepare and file with the
Securities and Exchange Commission this proxy statement. Both parties must
approve the distribution to Canaan's shareholders of the proxy statement and
any amendments.
Public Announcements
The parties consulted with each other and mutually agreed upon a joint press
release on the execution of the Merger Agreement. Canaan is required to consult
with Chesapeake prior to issuing a press release or public announcement
pertaining to the merger, unless as may be otherwise required by law.
Notification of Certain Matters
Both parties must promptly notify the other of the occurrence or impending
or threatened occurrence of any event likely to cause any of the
representations or warranties to be untrue and any failure to satisfy any
covenant or condition set forth in the Merger Agreement.
Indemnification
Chesapeake has agreed that it will indemnify the present and former officers
and directors of Canaan prior to the effective time, against all actions by
them in their capacities as officers or directors of Canaan, whether commenced
or asserted before or after the effective time. All existing indemnification
arrangements will remain in effect. The indemnified party must promptly notify
Chesapeake upon learning of a claim. Chesapeake may assume the defense and will
not be liable to the indemnified party for other counsel. However, if
Chesapeake does not assume the defense, the counsel retained by the indemnified
party must be reasonably satisfactory to Chesapeake. All settlements must be
approved by Chesapeake, which approval will not be unreasonably withheld.
Employee and Severance Matters
On the closing date, Canaan will pay all amounts payable to each employee
with a change in control agreement if such employee has tendered his
resignation. Canaan will also pay severance amounts to its employees who are
not offered comparable positions with Chesapeake. See "The Merger--Interests Of
Certain Persons In The Merger." Neither party is obligated to retain or hire
Canaan employees after the effective time. However, Chesapeake is obligated to
give all continuing employees the opportunity to participate in all Chesapeake
employee benefit plans giving full credit for prior service with Canaan for
purposes of eligibility and vesting and waiving any limitations as to
pre-existing conditions, exclusions or waiting periods and providing credit for
co-payments and deductibles for 2002. For any continuing employee who is
terminated without cause within 6 months following the closing, the terminated
employee will receive severance equal to the greater of the amount payable
under the Canaan Severance Policy or any Chesapeake severance plan.
29
For 18 months following the effective time, Chesapeake or the surviving
corporation must maintain Canaan's health benefit plans for the continuing and
terminated employees or provide these persons with the rights and benefits of
Chesapeake's plans.
Reasonable Best Efforts
Each party agrees to use its reasonable best efforts to do all things
reasonably necessary to effect the transactions contemplated by the Merger
Agreement including: obtaining necessary consents, approvals or waivers from
governmental authorities; making all necessary registrations and filings;
obtaining necessary consents or waivers from third parties; defending any
lawsuits or other proceedings challenging the transaction; and executing and
delivering any documents necessary to consummate the merger. In addition,
Canaan has agreed to take all action necessary to ensure state take over
statutes or similar regulation is not applicable to the merger.
Stock Options
Our board of directors has adopted resolutions and taken other actions
necessary so that (i) all options will be converted into the right to receive
the same consideration that the option holders would have received had the
options been exercised immediately prior to the merger; and (ii) that as of the
effective time of the merger, all unvested options will vest, all outstanding
options will be cancelled and the holders thereof will be entitled to receive
the difference between the merger consideration of $18.00 per share and the per
share option exercise price of such option subject to all applicable federal
and state tax withholding requirements.
Our board of directors will also take the necessary action to cause Canaan's
stock option plans to terminate as of the effective time and the provisions of
any other plan providing for the issuance of any of Canaan's capital stock to
also be terminated as of the effective time.
Shareholder Litigation
Canaan has agreed that Chesapeake will be given the opportunity to
participate in the defense or settlement of any shareholder litigation or
claims against us relating to the merger. Chesapeake must consent before Canaan
may agree to any settlement of such litigation or claims.
Further Assurances
The officers and directors of the surviving corporation are authorized to
execute and deliver any documents or to take any actions necessary to vest, in
the surviving corporation, all right, title and interest in the properties or
assets of Canaan.
Rights Agreement
Canaan's board of directors has agreed that it will take all action
necessary to render the Canaan Rights (preferred share purchase rights issued
pursuant to the Rights Plan) inapplicable to the merger and that Canaan will
not amend the Rights Agreement, redeem the Canaan Rights or take any action
under the Rights Agreement that is adverse to Chesapeake. On April 19, 2002 our
board of directors adopted and approved an amendment to the Rights Agreement to
provide that the execution, delivery and performance of the Merger Agreement
will not result in the Rights becoming exercisable.
Expenses
All costs and expenses incurred in connection with the merger will be paid
by the party incurring the expense regardless whether the merger is consummated.
30
Dissenting Shareholder Payments
Payments made to settle appraisal rights of dissenting shareholders will be
paid out of Canaan's assets.
Conditions To The Merger
Conditions To The Obligation Of Each Party
The obligations of Chesapeake and Canaan to consummate the merger depend
upon the satisfaction of the following conditions:
. the Merger Agreement shall have been approved and adopted by the vote of
the holders of a majority of our outstanding common stock;
. the receipt of all necessary governmental approvals; and
. the absence of any injunction, order or other legal restraint or
prohibition that would prohibit the consummation of the merger.
Conditions To Chesapeake's Obligations
Chesapeake's obligation to consummate the merger is further subject to
satisfaction of the following conditions:
. the representations and warranties of Canaan, to the extent qualified by
a Material Adverse Effect or any other materiality qualification must be
true and correct as of the date of the Merger Agreement and as of the
closing date, and to the extent not qualified by a Material Adverse
Effect or any other materiality qualification must be true and correct
in all material respects as of the date of the Merger Agreement and the
closing date; provided that the condition will be satisfied, unless the
failure of the representations and warranties to be true and correct,
which, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect on Canaan;
. Canaan has performed in all material respects, all covenants and
agreements required to be performed at or prior to the closing date;
. from the date of the Merger Agreement to the closing date, there are no
changes in the condition, operations or business of Canaan that would
have or reasonably be expected to have a Material Adverse Effect on
Canaan;
. no more than 10% of the holders of our outstanding common stock will
have exercised appraisal or dissenter's rights because of the merger;
. the officers and directors of Canaan have executed a release and
resignation as officer and director reasonably acceptable to Chesapeake;
and
. Chesapeake receives an opinion from Canaan's counsel in the form
attached to the Merger Agreement.
For purposes of the Merger Agreement, Material Adverse Effect means an event
or condition or series of related events or conditions that:
. has an adverse financial impact of more than $5 million on Canaan;
. materially and adversely affects the business, assets and liabilities or
financial condition of Canaan; or
. materially and adversely affects Canaan's ability to consummate the
transactions contemplated by the Merger Agreement or fulfill the
conditions to the closing.
However, there will be no Material Adverse Effect to the extent that any
material adverse effect or change is caused by or results from conditions
affecting the United States economy generally or the economy of a nation or
31
region in which Canaan or Chesapeake conducts business or generally affecting
the natural gas industry including, without limitation, the price of natural
gas and oil, or is caused by or results from the announcement or pendency of
the merger.
Conditions To Our Obligation
Our obligation to consummate the merger is further subject to satisfaction
or waiver of the following conditions:
. the representations and warranties of Chesapeake must be true and
correct in all material respects as of the date of the closing date;
provided that, the condition will be deemed satisfied even if one or
more of the representations and warranties are not true and correct, as
long as the failure of such representations and warranties to be true
and correct (in the aggregate) does not result in Chesapeake being
unable to perform its obligations under the Merger Agreement; and
. Chesapeake has performed in all material respects, all covenants and
agreements required to be performed at or prior to the closing date.
Termination Of The Merger Agreement
The Merger Agreement may be terminated at any time prior to the effective
time, whether before or after approval by our shareholders:
. by mutual agreement of Chesapeake and Canaan;
. by either Chesapeake or Canaan, if the merger has not been completed by
December 31, 2002, provided however, that the right to terminate for
failure to consummate by December 31, 2002, is not available to any
party whose breach of any representation or warranty or failure to
perform any covenant or agreement has been the cause of or resulted in
the failure of the merger to occur on or before that date;
. by either Chesapeake or Canaan, if the requisite shareholder approval is
not obtained by a vote of our shareholders at the special meeting;
. by either Chesapeake or Canaan, if a court or governmental authority
takes any action prohibiting the merger;
. by Chesapeake if Canaan is in breach of any of our representations and
warranties which would have a Material Adverse Effect on Canaan and such
breach has not been, or cannot be, cured within twenty days after notice
and demand for cure, unless Chesapeake is in breach of any of its
representations, warranties or agreements at the time which would result
in Chesapeake being unable to perform its obligations under the Merger
Agreement;
. by Chesapeake if we have failed to comply in any material respect with
any of our covenants or agreements and such failure has not been, or
cannot be, cured within twenty days after notice and demand for cure,
unless Chesapeake is in breach of any of its representations, warranties
or agreements at the time which would result in Chesapeake being unable
to perform its obligations under the Merger Agreement;
. by Chesapeake if our board of directors recommends an alternative
proposal or withdraws or modifies in a manner adverse to Chesapeake its
approval or recommendation of the Merger Agreement or the merger or, on
request of Chesapeake, fails to reaffirm such approval or recommendation;
. by Canaan if Canaan accepts a Superior Proposal and Canaan has given
Chesapeake at least five business days notice prior to such termination
and given Chesapeake an opportunity to adjust the terms and conditions
of the merger;
32
. by Canaan if Chesapeake breaches any representation or warranty the
aggregate effect of which would cause Chesapeake to be unable to perform
its obligations and the conditions to closing would not be satisfied if
the closing were to occur on the day on which Canaan gives Chesapeake
notice of such termination; or
. by Canaan if Chesapeake fails to comply in any material aspect with any
of its covenants or agreements and such failure has not been, or cannot
be, cured within twenty days after notice and demand for cure.
If the Merger Agreement is terminated by either party pursuant to the
conditions above, the Merger Agreement will become void and neither party will
have any further obligations except for representation warranties and covenants
regarding:
. brokers;
. finder's fees;
. this proxy statement;
. payment of expenses; and
. termination fee.
Termination Fee
If the merger is terminated for the following reasons, Canaan must pay to
Chesapeake a cash termination fee of $5 million:
. the Merger Agreement is terminated by Canaan as a result of a Superior
Proposal and Canaan's board of directors resolves to accept the proposal;
. the Merger Agreement is terminated by Chesapeake because our board of
directors recommends an alternative proposal or withdraws its
recommendation relating to the merger; or
. either party terminates the Merger Agreement because the requisite
shareholder vote was not obtained or Chesapeake terminates the Merger
Agreement because of a breach by Canaan, and in either case, at the time
there was an alternative proposal, which was publicly announced and
remained pending, and prior to or within twelve (12) months of the
termination we enter into a definitive agreement with the third party
who made the alternative proposal which is subsequently consummated.
YOU HAVE APPRAISAL RIGHTS IN THE MERGER
General
Our shareholders are entitled to dissent and be paid cash for the "fair
value" of their shares of our common stock. This payment may be more than, the
same as, or less than the merger consideration our shareholders will receive in
the merger. These appraisal rights arise under Section 1091 of the Oklahoma
General Corporation Act, or OGCA. Section 1091 of the OGCA is reprinted in its
entirety as Appendix C to this proxy statement.
Exercising Procedures
The following discussion addresses the material provisions of Section 1091
of the OGCA. If you wish to exercise statutory appraisal rights or preserve
your right to do so, you should review this discussion and Appendix C carefully
to comply strictly with the procedures set forth below and in Appendix C, or
you may lose your appraisal rights.
If you elect to demand the appraisal of your shares, you must deliver to
Canaan before the taking of the vote on the Merger Agreement, a written demand
for appraisal of your shares. You should not vote in favor of the Merger
Agreement.
33
Your demand is in addition to and separate from your proxy or vote against
the Merger Agreement. Voting against, abstaining from voting, or failing to
vote on the Merger Agreement will not constitute a demand for appraisal. If you
elect to demand appraisal rights, you will not be granted appraisal rights if
you have voted in favor of, or consented in writing to, the Merger Agreement,
including by granting the proxy solicited by this proxy statement or by
returning a signed proxy without specifying a vote against the Merger Agreement
or a direction to abstain from the vote. Additionally, appraisal rights will
not be granted if you do not continuously hold your shares of our common stock
for which you demand appraisal through the effective time of the merger.
You must fully and correctly sign your demand for appraisal as your name
appears on the certificate or certificates representing your shares of our
common stock. If your shares of our common stock are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, the fiduciary
must execute the demand. If the shares of our common stock are owned of record
by more than one person, as in a joint tenancy or tenancy in common, only one
of the joint owners must execute the demand. An authorized agent, including an
agent for two or more joint owners, may execute the demand for appraisal.
However, the agent must identify you as the record owner and expressly disclose
the fact that, in exercising the demand, that person is acting as your agent.
If you hold shares of our common stock through a broker who in turn holds the
shares through a central securities depository nominee, a demand for appraisal
must be made on behalf of the depository nominee and must identify the
depository nominee as a holder of record.
If you elect to exercise your appraisal rights, you must mail or deliver
your written demand to Canaan at 211 North Robinson, Suite 1000N, Oklahoma
City, Oklahoma 73102, Attention: Ms. Sue Barnard. Your written demand must
specify:
. your name and mailing address;
. the number of shares of our common stock that you own; and
. that you are demanding appraisal of your shares.
Within 10 days after the effective time of the merger, Canaan, as the
surviving corporation, must provide notice of the effective time to all
shareholders who have complied with Section 1091 and who have not voted for or
consented to the Merger Agreement.
Fair Value Determination
Within 120 days after the effective time of the merger, either Canaan or any
shareholder who has complied with Section 1091 may file a petition in an
Oklahoma district court demanding a determination of the value of the shares of
our common stock held by dissenting shareholders. If a petition for an
appraisal is timely filed, after a hearing on the petition, the district court
will determine which shareholders are entitled to appraisal rights and will
appraise the shares of our common stock owned by those shareholders.
The district court will determine the fair value of those shares exclusive
of any element of value arising from the accomplishment or expectation of the
merger, together with a fair rate of interest to be paid, if any, upon the
amount determined to be the fair value. In determining fair value, the district
court is required to take into account all relevant factors.
If you seek appraisal, you should know that the "fair value" of your shares
of our common stock determined under Section 1091 could be more than, the same
as, or less than the merger consideration you would have received in the
merger, and that the fairness opinion of CIBC is not an opinion as to fair
value under Section 1091. Moreover, we reserve the right to assert in any
appraisal proceeding that, for purposes of Section 1091, the "fair value" of
the common stock is less than $18.00 per share.
34
Costs
The cost of the appraisal proceeding may be determined by the district court
and assessed against the parties as the district court deems equitable in the
circumstances. Upon application of a dissenting shareholder, the district court
may order that all or a portion of the expenses incurred by any dissenting
shareholder in connection with the appraisal proceeding, including reasonable
attorneys' fees and the fees and expenses of experts, be charged pro rata
against the value of all shares of our common stock entitled to appraisal.
Withdrawal; Loss Of Appraisal Rights
At any time within 60 days after the effective time of the merger, you will
have the right to withdraw your demand for appraisal and to accept the terms
offered in the merger. After this period, you may withdraw your demand for
appraisal only with our consent. If no petition for appraisal is filed with the
district court within 120 days after the effective time of the merger,
shareholders' appraisal rights will cease, and all holders of shares of our
common stock will be entitled to receive the merger consideration as provided
in the Merger Agreement. Because Canaan has no obligation to file any petition
for an appraisal, and have no present intention to do so, any dissenting
shareholder is advised to file a petition for appraisal on a timely basis.
However, no petition timely filed by a shareholder in the district court
demanding appraisal will be dismissed without the approval of the district
court, and that approval may be conditioned on any terms that the court deems
just.
YOU SHOULD BE AWARE THAT ANY FAILURE TO PROCEED IN ACCORDANCE WITH THE
PROVISIONS OF SECTION 1091 WILL RESULT IN LOSS OF APPRAISAL RIGHTS. IN
ADDITION, IF THE MERGER IS ABANDONED PRIOR TO ITS CONSUMMATION, NO APPRAISAL
RIGHTS WILL BE AVAILABLE.
35
FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
consequences of the merger to our shareholders. The discussion is based upon
the Internal Revenue Code, Treasury regulations, IRS rulings, and judicial and
administrative decisions in effect as of the date of this proxy statement. This
discussion assumes that your Canaan common stock is generally held for
investment. In addition, this discussion does not address all of the tax
consequences that may be relevant to you in light of your particular
circumstances or to any of our shareholders subject to special rules, such as
non-United States persons, financial institutions, tax-exempt organizations,
dealers in securities or foreign currencies or insurance companies.
Your receipt of cash for Canaan common stock pursuant to the merger will be
a taxable transaction for federal income tax purposes to you, and may be a
taxable transaction for state, local and foreign tax purposes as well. You will
recognize a gain or loss measured by the difference between your tax basis for
the Canaan common stock owned by you at the time of the merger and the amount
of cash you receive for your Canaan common stock. Your gain or loss will be a
capital gain or loss if your Canaan common stock is a capital asset in your
hands. If your Canaan common stock was held as a capital asset, your gain or
loss will be long-term capital gain or loss if you held your stock for more
than one year; otherwise, it will be short-term gain or loss.
THE TAX CONSEQUENCES OF THE MERGER TO YOU MAY VARY DEPENDING UPON YOUR
PARTICULAR CIRCUMSTANCES. THEREFORE, YOU SHOULD CONSULT YOUR TAX ADVISOR TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO YOU, INCLUDING THOSE
RELATING TO STATE, LOCAL AND/OR FOREIGN TAXES.
REGULATORY AND OTHER APPROVALS
There are no federal or state regulatory requirements which remain to be
complied with in order to consummate the merger, other than the filing of the
Certificate of Merger with the Secretary of State of the State of Oklahoma. The
merger did not require filings with the Federal Trade Commission and the
Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
36
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth our information as of May 10, 2002 relating
to the beneficial ownership of our common stock, by
. any person known to Canaan to own beneficially more than 5% of the
outstanding shares of our common stock;
. each of our directors;
. each of our executive officers; and
. all of our current executive officers and directors as a group.
Beneficial Ownership
-------------------
Number of Percentage
Beneficial Owner Shares of Total
---------------- --------- ----------
Chesapeake Energy Corporation(1)............................... 333,149 7.65%
Leo E. Woodard(2).............................................. 517,072 11.81%
John K. Penton(2).............................................. 518,072 11.83%
Thomas H. Henson(3)............................................ 148,862 3.40%
Michael S. Mewbourn(3)......................................... 69,772 1.60%
Michael D. O'Kelley(4)......................................... 2,188 0.05%
Sue Barnard(5)................................................. 625 0.01%
Mischa Gorkuscha(6)............................................ 1,100 0.03%
Randy Harp(6).................................................. 100 --
Scott M. Rayburn(6)............................................ 100 --
Kevin R. White(6).............................................. 100 --
All executive officers and directors as a group (10 persons)(7) 1,257,991 28.30%
- --------
(1) The address of Chesapeake is 6100 North Western Avenue, Oklahoma City, OK
73118. The information is based on Amendment No. 3 to Schedule 13D as filed
with the Securities and Exchange Commission on April 23, 2002. The shares
listed exclude 1,167,278 shares subject to the limited proxy granted to
Chesapeake by certain of our directors and officers as described under "The
Merger--Irrevocable Proxies."
(2) The business address of Messrs. Woodard and Penton is 211 North Robinson,
Suite N1000, Oklahoma City, OK 73102. The shares listed include exercisable
options to acquire 25,000 shares each pursuant to Canaan's stock option
plan.
(3) The shares listed include exercisable options to acquire 18,750 shares each
pursuant to Canaan's stock option plan.
(4) The shares listed include an exercisable option to acquire 2,188 shares
pursuant to Canaan's stock option plan.
(5) The shares listed include an exercisable option to acquire 625 shares
pursuant to Canaan's stock option plan.
(6) The shares listed include an exercisable option to acquire 100 shares each
pursuant to Canaan's stock option plan.
(7) Includes exercisable options to purchase 90,713 shares.
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OTHER MATTERS
Our management knows of no other business to be presented at the special
meeting. If other matters do properly come before the special meeting, it is
the intention of the persons named in the proxy to vote on these matters
according to their best judgment unless the authority to do so is withheld in
the proxy.
PROPOSALS OF SHAREHOLDERS
Due to the contemplated consummation of the merger, Canaan does not
currently expect to hold a 2002 annual meeting of shareholders because,
following the merger, it will not be a publicly held company. However, if the
merger is not consummated for any reason, Canaan will convene an annual meeting
of shareholders as promptly as practicable and will inform shareholders of the
dates by which Canaan must receive shareholder proposals intended to be
presented at that meeting, for inclusion in Canaan's proxy statement and form
of proxy relating to that meeting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any reports, statements or other information we file at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference room.
Our filings with the SEC are also available to the public from commercial
document retrieval services and at the web site maintained by the SEC at
http://www.sec.gov.
You should rely only on the information contained in this proxy statement to
vote on the merger. We have not authorized anyone to give any information that
is different from what is contained in this proxy statement. The delivery of
this proxy statement will not create an implication that there has been no
change in the affairs of Chesapeake or us since the date of this proxy
statement or that the information in this proxy statement is correct as of any
time after the date of this proxy statement.
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APPENDIX A--MERGER AGREEMENT
AGREEMENT AND PLAN OF MERGER
among
CANAAN ENERGY CORPORATION,
CHK ACQUISITION, INC.
and
CHESAPEAKE ENERGY CORPORATION
TABLE OF CONTENTS
1. Definitions..................... A-1
1.1 Affiliate(s)............. A-1
1.2 Agreement................ A-1
1.3 Alternative Proposal..... A-1
1.4 Bank Credit Agreement.... A-1
1.5 Canaan................... A-1
1.6 Canaan Area.............. A-2
1.7 Canaan Certificate....... A-2
1.8 Canaan Common Stock...... A-2
1.9 Canaan Disclosure Schedule A-
1.10 Canaan Employee(s)....... A-2
1.11 Canaan Employee Benefit Plans
1.12 Canaan Financial Statements A
1.13 Canaan Material Agreements A-
1.14 Canaan Permits........... A-2
1.15 Canaan Plans............. A-2
1.16 Canaan Predecessor....... A-2
1.17 Canaan Representative.... A-2
1.18 Canaan Rights............ A-2
1.19 Canaan Rights Agreement.. A-2
1.20 Canaan SEC Documents..... A-2
1.21 Canaan Severance Policy.. A-2
1.22 Canaan Specified Stockholders
1.23 Canaan Stock Option(s)... A-2
1.24 Canaan Stockholder Meeting A-
1.25 Canaan Termination Fee... A-2
1.26 CERCLA................... A-2
1.27 Certificate of Merger.... A-2
1.28 Closing.................. A-3
1.29 Closing Date............. A-3
1.30 COBRA.................... A-3
1.31 Code..................... A-3
1.32 Confidentiality Agreement A-3
1.33 Contract Employee........ A-3
1.34 Defensible Title......... A-3
1.35 Dissenting Stockholders.. A-3
1.36 Effective Time........... A-3
1.37 Environmental Law........ A-3
1.38 ERISA.................... A-3
1.39 Exchange Act............. A-3
1.40 Exchange Agent........... A-3
1.41 Exchange Fund............ A-3
1.42 GAAP..................... A-3
1.43 Goodwill Protection Agreement
1.44 Governmental Authority... A-3
1.45 Hazardous Material....... A-4
1.46 HSR Act.................. A-4
1.47 Hydrocarbons............. A-4
1.48 Indemnified Parties...... A-4
1.49 Irrevocable Proxy........ A-4
A-i
1.50 Lien(s)................................................................... A-4
1.51 Material Adverse Effect................................................... A-4
1.52 Merger.................................................................... A-4
1.53 Merger Consideration...................................................... A-4
1.54 Net Revenue Interests..................................................... A-4
1.55 Office Space Agreement.................................................... A-4
1.56 OGCA...................................................................... A-4
1.57 Oil and Gas Interests..................................................... A-4
1.58 Ownership Interests....................................................... A-5
1.59 Parent.................................................................... A-5
1.60 Parent Companies.......................................................... A-5
1.61 Parent Representative..................................................... A-5
1.62 Parent Subsidiaries....................................................... A-5
1.63 Parties................................................................... A-5
1.64 Payout Balance............................................................ A-5
1.65 Permitted Encumbrances.................................................... A-5
1.66 Per Share Merger Consideration............................................ A-6
1.67 Person(s)................................................................. A-6
1.68 Proxy Statement........................................................... A-6
1.69 Returns................................................................... A-6
1.70 SEC....................................................................... A-6
1.71 Securities Act............................................................ A-6
1.72 Sub....................................................................... A-6
1.73 Sub Common Stock.......................................................... A-6
1.74 Superior Proposal......................................................... A-6
1.75 Surviving Corporation..................................................... A-6
1.76 Tax(es)................................................................... A-6
1.77 Third-Party Consent....................................................... A-6
1.78 Transaction Documents..................................................... A-6
1.79 Working Interest.......................................................... A-6
2. Consummation of the Merger..................................................... A-7
2.1 The Merger................................................................ A-7
2.2 Effect of the Merger...................................................... A-7
2.3 Governing Instruments, Directors and Officers of the Surviving Corporation A-7
2.3.1 Certificate of Incorporation......................... A-7
2.3.2 Bylaws............................................... A-7
2.3.3 Name................................................. A-7
2.3.4 Directors and Officers............................... A-7
2.4 Effect on Securities...................................................... A-7
2.4.1 Sub Common Stock..................................... A-7
2.4.2 Canaan Common Stock.................................. A-7
2.4.3 Canaan Stock Options................................. A-7
2.4.4 Treasury Stock and Parent Owned Stock................ A-8
2.4.5 Dissenting Stockholder Shares........................ A-8
2.5 Exchange of Certificates.................................................. A-8
2.5.1 Exchange Fund........................................ A-8
2.5.2 Notice and Surrender................................. A-9
2.5.3 Full Satisfaction.................................... A-9
2.5.4 Unclaimed Exchange Fund.............................. A-9
2.5.5 No Liability......................................... A-9
2.5.6 Lost, Stolen or Destroyed Certificates............... A-10
A-ii
2.5.7 Investment of Exchange Fund........ A-10
2.6 Closing.............................................. A-10
2.7 Effective Time of the Merger......................... A-10
2.8 Taking of Necessary or Further Action................ A-10
3. Canaan Representations and Warranties..................... A-10
3.1 Corporate Organization............................... A-10
3.2 Authority and Enforceability......................... A-10
3.3 No Violations........................................ A-11
3.4 Consents and Approvals............................... A-11
3.5 Canaan SEC Documents................................. A-12
3.6 Financial Statements................................. A-12
3.7 Capital Structure.................................... A-12
3.8 Governmental Regulation.............................. A-12
3.9 Litigation........................................... A-12
3.10 Brokers.............................................. A-13
3.11 Absence of Certain Changes or Events................. A-13
3.12 Compliance with Laws, Material Agreements and Permits A-13
3.13 No Restrictions...................................... A-13
3.14 Taxes................................................ A-14
3.15 Employee Benefit Plans............................... A-15
3.16 Environmental Matters................................ A-16
3.17 Vote Required........................................ A-17
3.18 Canaan Board of Directors Actions.................... A-17
3.19 Employment Contracts and Benefits.................... A-17
3.20 Labor Matters........................................ A-17
3.21 Insurance............................................ A-17
3.22 Intangible Property.................................. A-18
3.23 Title to Assets...................................... A-18
3.24 Opinion of Financial Advisor......................... A-18
3.25 Oil and Gas Operations............................... A-18
3.26 Financial and Commodity Hedging...................... A-18
3.27 Books and Records.................................... A-18
3.28 Other Entities....................................... A-18
3.29 Account Information.................................. A-18
3.30 Powers of Attorney................................... A-18
3.31 Plugging Status...................................... A-19
3.32 No Knowledge of Breach of Representations............ A-19
3.33 Proxy Statement...................................... A-19
3.34 Equipment............................................ A-19
3.35 Current Commitments.................................. A-19
3.36 Payout Balances, Gas Imbalances and Take or Pay...... A-19
3.37 Full Disclosure...................................... A-19
3.38 Certain Agreements................................... A-20
3.39 Affiliate Transactions............................... A-20
4. Parent and Sub Representations and Warranties............. A-20
4.1 Organization and Standing............................ A-20
4.2 Authority and Enforceability......................... A-20
4.3 No Restriction....................................... A-20
4.4 Consents and Approvals............................... A-20
4.5 Authorization........................................ A-20
4.6 Litigation........................................... A-20
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4.7 Broker's or Finder's Fees...................................... A-21
4.8 Funding........................................................ A-21
4.9 Interim Operations of Sub...................................... A-21
4.10 Proxy Statement................................................ A-21
4.11 No Knowledge of Breach of Representations...................... A-21
4.12 Prior Purchases................................................ A-21
5. Covenants........................................................... A-21
5.1 Conduct of Canaan Business Pending Closing..................... A-21
5.2 Access to Information.......................................... A-23
5.3 No Solicitation................................................ A-23
5.4 Canaan Stockholder Meeting..................................... A-24
5.5 Proxy Statement................................................ A-25
5.6 Public Announcements........................................... A-25
5.7 Notification of Certain Matters................................ A-25
5.8 Indemnification................................................ A-26
5.9 Employee and Severance Matters................................. A-26
5.10 Reasonable Best Efforts........................................ A-28
5.11 Stock Options.................................................. A-29
5.12 Stockholder Litigation......................................... A-29
5.13 Further Assurances............................................. A-29
5.14 Rights Agreement; Consequences if Rights Triggered............. A-29
5.15 Payment of Expenses............................................ A-29
5.16 Canaan Termination Fee......................................... A-30
5.17 Dissenting Stockholder Payments................................ A-30
5.18 Name........................................................... A-30
5.19 Related Agreements............................................. A-30
6. Conditions Precedent................................................ A-30
6.1 Conditions to Each Party's Obligation to Effect the Merger..... A-30
6.1.1 Stockholder Approval..................................... A-30
6.1.2 Other Approvals.......................................... A-30
6.1.3 No Injunctions or Restraints............................. A-31
6.2 Conditions to Obligations of Parent and Sub.................... A-31
6.2.1 Representations and Warranties........................... A-31
6.2.2 Performance of Covenants and Agreements by Canaan........ A-31
6.2.3 No Adverse Change........................................ A-31
6.2.4 Dissenting Stockholders.................................. A-31
6.2.5 Releases................................................. A-31
6.2.6 Opinion of Counsel....................................... A-31
6.3 Conditions to Obligation of Canaan............................. A-31
6.3.1 Representations and Warranties........................... A-31
6.3.2 Performance of Covenants and Agreements by Parent and Sub A-32
7. Termination......................................................... A-32
7.1 Termination Rights............................................. A-32
7.1.1 Mutual Consent........................................... A-32
7.1.2 Date Certain............................................. A-32
7.1.3 By Parent................................................ A-32
7.1.4 By Canaan................................................ A-32
7.1.5 Superior Proposal........................................ A-33
7.2 Effect of Termination.......................................... A-33
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8. Miscellaneous......................................... A-33
8.1 Nonsurvival of Representations and Warranties. A-33
8.2 Amendment..................................... A-33
8.3 Notices....................................... A-33
8.4 Counterparts.................................. A-34
8.5 Severability.................................. A-34
8.6 Entire Agreement; No Third Party Beneficiaries A-34
8.7 Applicable Law................................ A-34
8.8 No Remedy in Certain Circumstances............ A-34
8.9 Enforcement of Agreement...................... A-34
8.10 Assignment.................................... A-35
8.11 Waivers....................................... A-35
8.12 References and Titles......................... A-35
8.13 Incorporation................................. A-35
Exhibit "A"--Irrevocable Proxy
Exhibit "B"--Goodwill Protection Agreement
Exhibit "C"--Office Space Agreement
Exhibit "D"--Release
Exhibit "E"--Opinion
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is entered into effective the 19/th/ 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").
BACKGROUND:
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.
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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.
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.
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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.
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 generally recognized
successor).
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.
A-3
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 byproduct
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 (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
A-4
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.
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
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
A-5
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.
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 amounts imposed 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.
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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.
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
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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 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 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
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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
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
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Stock for a period of three (3) years following the Effective Time (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.
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
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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.
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; (4)
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
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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 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 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
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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, 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.
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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 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.
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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, 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.
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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 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
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facilities owned or 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 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.
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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.
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 329 of the Canaan Disclosure Schedule
contains an accurate list of the name 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.
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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.
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 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.
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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 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
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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 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 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,
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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;
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
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$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);
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:
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
A-23
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.
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
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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 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 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.
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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 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
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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 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.
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
A-27
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 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.
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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.
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
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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 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:
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.
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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.
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.
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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.
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; 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
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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.
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
A-33
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 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.
A-34
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.
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]
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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: /s/ SUE BARNARD By: /s/ LEO E. WOODARD
---------------------------------- ----------------------------------
Sue Barnard, Secretary Leo E. Woodard, Chairman and Chief
Executive Officer
ATTEST:
By: /s/ SUE BARNARD By: /s/ JOHN K. PENTON
---------------------------------- ----------------------------------
Sue Barnard, Secretary John K. Penton, President
("Canaan")
A-36
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: /s/ JENNIFER M. GRIGSBY By: /s/ AUBREY K. MCCLENDON
---------------------------------- ----------------------------------
Secretary Aubrey K. McClendon, Chief
Executive Officer
("Parent")
ATTEST: CHK ACQUISITION, INC., an Oklahoma
corporation
By: /s/ JENNIFER M. GRIGSBY /s/ AUBREY K. MCCLENDON
---------------------------------- ----------------------------------
Secretary Aubrey K. McClendon, Chief
Executive Officer
("Sub")
A-37
APPENDIX B--FAIRNESS OPINION OF CIBC WORLD MARKETS
April 19, 2002
Board of Directors
Canaan Energy Corporation
211 North Robinson, Suite 1000N
Oklahoma City, OK 73102
Gentlemen:
You have asked CIBC World Markets Corp. ("CIBC World Markets") to render a
written opinion ("Fairness Opinion") to the Board of Directors as to the
fairness to the shareholders of Canaan Energy Corporation (the "Company"), from
a financial point of view, of the consideration to be received pursuant to the
Agreement and Plan of Merger (the "Agreement"), dated April 19, 2002, by and
among the Company, CHK Acquisition, Inc. ("Sub"), and Chesapeake Energy
Corporation ("Parent"). The Agreement provides for, among other things, a
transaction whereby Sub will be merged with and into the Company (the
"Merger"). Pursuant to the Merger, each outstanding share of the Company's
common stock (including the associated preferred share purchase rights issued
pursuant to the Company's Rights Agreement) will be converted into the right to
receive $18.00 in cash (the "Merger Consideration") from Parent.
In arriving at our Fairness Opinion we:
(a) reviewed the draft Agreement, dated April 16, 2002 (the "Proposed
Agreement");
(b) reviewed the Company's audited financial statements for the three
fiscal years ended December 31, 2001;
(c) reviewed certain financial projections of the Company prepared by the
management of the Company and furnished to us by the Company;
(d) reviewed the Company's Annual Reports and Forms 10-K for the three
fiscal years ended December 31, 2001;
(e) reviewed the historical market prices and trading volume for the
Company's common stock;
(f) held discussions with senior management of the Company with respect
to the business and prospects for future growth of the Company;
(g) reviewed and analyzed certain publicly available financial data for
certain companies we deemed comparable to the Company;
(h) performed discounted cash flow analyses of the Company using certain
assumptions of future performance provided to us by the management of the
Company;
(i) reviewed and analyzed an independent reserve report as prepared by
Netherland Sewall & Associates as of December 31, 2001 (reflecting the best
available information, estimates and judgment of the Company and its
management);
(j) reviewed and analyzed certain publicly available financial
information for transactions we deemed comparable to the Merger; and
(k) performed such other analyses and reviewed such other information as
we deemed appropriate.
In rendering our Fairness Opinion we relied upon and assumed, without
independent verification or investigation, the accuracy and completeness of all
of the financial and other information provided to us by the Company and its
respective employees, representatives and affiliates and Netherland Sewell &
Associates. With respect to forecasts of future financial condition and
operating results of the Company provided to us, we assumed at the direction of
the Company's management, without independent verification or investigation
that such forecasts were reasonably prepared on bases reflecting the best
available information, estimates
B-1
and judgment of the Company and its management. At the direction of
representatives of the Company, we also assumed that the final terms of the
Agreement will not vary materially from those set forth in the Proposed
Agreement reviewed by us. We have neither made nor obtained any independent
evaluations or appraisals of the assets, liabilities or oil and gas reserves of
the Company or affiliated entities other than the independent reserve report
prepared by Netherland Sewell & Associates. We are not expressing any opinion
as to the underlying valuation, future performance or long-term viability of
the surviving corporation following the Merger, or the price at which the
surviving corporation's common stock will trade subsequent to the Merger. We
have not been asked to consider, and our opinion does not address, the relative
merits of the Merger as compared to any alternative business strategies that
might exist for the Company, or the effect of any other transaction in which
the Company might engage. Our opinion is necessarily based on the information
available to us and general economic, financial and stock market conditions and
circumstances as they exist and can be evaluated by us as of the date hereof.
It should be understood that, although subsequent developments may affect this
opinion, we do not have any obligation to update, revise or reaffirm this
opinion.
As part of our investment banking business, we are regularly engaged in
valuations of businesses and securities in connection with acquisitions and
mergers, underwritings, secondary distributions of securities, private
placements and valuations for other purposes.
We acted as financial advisor to the Company in connection with the Merger
and to the Board of Directors of the Company in rendering this opinion and will
receive a fee for our services and will be indemnified by the Company against
certain liabilities and expenses in connection with the rendering of such
services, including liabilities under Federal securities laws. In the ordinary
course of its business, CIBC World Markets and its affiliates may actively
trade securities of the Company for their own account and for the accounts of
customers and accordingly may at any time hold a long or short position in such
securities.
Based upon and subject to the foregoing, and such other factors as we deem
relevant, it is our opinion that, as of the date hereof, the Merger
Consideration to be received by the Company's shareholders pursuant to the
Agreement is fair to the shareholders of the Company from a financial point of
view. This Fairness Opinion is for the use of the Board of Directors of the
Company. Neither this Fairness Opinion nor the services provided by CIBC World
Markets in connection herewith may be publicly disclosed or referred to in any
manner by the Company without the prior written approval by CIBC World Markets.
CIBC World Markets consents to the inclusion of this opinion in its entirety
and reference to this opinion in any proxy statement required to be distributed
to the Company's shareholders in connection with the Merger.
Very truly yours,
CIBC World Markets Corp.
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APPENDIX C--SECTION 1091 OF THE OKLAHOMA GENERAL CORPORATION ACT
SECTION 1091 OF THE OKLAHOMA GENERAL CORPORATION ACT
SEC. 1091. APPRAISAL RIGHTS.
A. Any shareholder of a corporation of this state who holds shares of stock
on the date of the making of a demand pursuant to the provisions of subsection
D of this section with respect to the shares, who continuously holds the shares
through the effective date of the merger or consolidation, who has otherwise
complied with the provisions of subsection D of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to the provisions of Section 1073 of this title shall be
entitled to an appraisal by the district court of the fair value of the shares
of stock under the circumstances described in subsections B and C of this
section. As used in this section, the word "shareholder" means a holder of
record of stock in a stock corporation and also a member of record of a
nonstock corporation; the words "stock" and "share" mean and include that is
ordinarily meant by those words and also membership or membership interest of a
member of a nonstock corporation; and "depository receipt" means an instrument
issued by a depository representing an interest in one or more shares, or
fractions thereof, solely of stock of a corporation, which stock is deposited
with the depository. The provisions of this subsection shall be effective only
with respect to mergers or consolidations consummated pursuant to an agreement
of merger or consolidation entered into after November 1, 1988.
B. 1. Except as otherwise provided for in this subsection, appraisal
rights shall be available for the shares of any class or series of stock of a
constituent corporation in a merger or consolidation, or of the acquired
corporation in a share acquisition, to be effected pursuant to the provisions
of Section 1081, other than a merger effected pursuant to subsection G of
Section 1081, and Sections 1082, 1086, 1087, 1090.1 or 1090.2 of this title.
2. a. No appraisal rights under this section shall be available for the
shares of any class or series of stock which stock, or depository receipts
in respect thereof, at the record date fixed to determine the shareholders
entitled to receive notice of and to vote at the meeting of shareholders to
act upon the agreement of merger or consolidation, were either:
(1) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc.; or
(2) held of record by more than two thousand holders.
No appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require for
its approval the vote of the shareholders of the surviving corporation as
provided in subsection G of Section 1081 of this title.
b. In addition, no appraisal rights shall be available for any shares of
stock, or depository receipts in respect thereof, of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the shareholders of the surviving corporation as
provided for in subsection F of Section 1081 of this title.
3. Notwithstanding the provisions of paragraph 2 of this subsection,
appraisal rights provided for in this section shall be available for the
shares of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to the provisions of Sections 1081, 1082, 1086, 1087,
1090.1 or 1090.2 of this title to accept for the stock anything except:
a shares of stock of the corporation surviving or resulting from
the merger or consolidation or depository receipts thereof, or
b. shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than two thousand
holders; or
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c. cash in lieu of fractional shares or fractional depository
receipts described in subparagraphs a and b of this paragraph, or
d. any combination of the shares of stock, depository receipts, and
cash in lieu of the fractional shares or depository receipts described
in subparagraphs a, b, and c of this paragraph.
4. In the event all of the stock of a subsidiary Oklahoma corporation
party to a merger effected pursuant to the provisions of Section 1083 of
this title is not owned by the parent corporation immediately prior to the
merger, appraisal rights shall be available for the shares of the subsidiary
Oklahoma corporation.
C. Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections D and E of this section, shall apply as nearly as is practicable.
D. Appraisal rights shall be perfected as follows:
1. If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
shareholders, the corporation, not less than twenty (20) days prior to the
meeting, shall notify each of its shareholders entitled to appraisal rights
that appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in the notice a copy of this
section. Each shareholder electing to demand the appraisal of the shares of
the shareholder shall deliver to the corporation, before the taking of the
vote on the merger or consolidation, a written demand for appraisal of the
shares of the shareholder. The demand will be sufficient if it reasonably
informs the corporation of the identity of the shareholder and that the
shareholder intends thereby to demand the appraisal of the shares of the
shareholder. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A shareholder electing to take such action must do
so by a separate written demand as herein provided. Within ten (10) days
after the effective date of the merger or consolidation, the surviving or
resulting corporation shall notify each shareholder of each constituent
corporation who has complied with the provisions of this subsection and has
not voted in favor of or consented to the merger or consolidation as of the
date that the merger or consolidation has become effective; or
2. If the merger or consolidation is approved pursuant to the provisions
of Section 1073 or 1083 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten (10)
days thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights are
available for any or all of the shares of the class or series of stock of
the constituent corporation, and shall include in such notice a copy of this
section; provided, if the notice is given on or after the effective date of
the merger or consolidation, the notice shall be given by the surviving or
resulting corporation to all the holders of any class or series of stock of
a constituent corporation that are entitled to appraisal rights. The notice
may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify the shareholders of the effective date of
the merger or consolidation. Any shareholder entitled to appraisal rights
may, within twenty (20) days after the date of mailing of the notice, demand
in writing from the surviving or resulting corporation the appraisal of the
holder's shares. The demand will be sufficient if it reasonably informs the
corporation of the identity of the shareholder and that the shareholder
intends to demand the appraisal of the holder's shares. If the notice does
not notify shareholders of the effective date of the merger or consolidation
either:
a. each constituent corporation shall send a second notice before
the effective date of the merger or consolidation notifying each of the
holders of any class or series of stock of the constituent corporation
that are entitled to appraisal rights of the effective date of the
merger or consolidation, or
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b. the surviving or resulting corporation shall send a second notice
to all holders on or within ten (10) days after the effective date of
the merger or consolidation; provided, however, that if the second
notice is sent more than twenty (20) days following the mailing of the
first notice, the second notice need only be sent to each shareholder
who is entitled to appraisal rights and who has demanded appraisal of
the holder's shares in accordance with this subsection. An affidavit of
the secretary or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that the notice has
been given shall, in the absence of fraud, be prima facie evidence of
the facts stated therein. For purposes of determining the shareholders
entitled to receive either notice, each constituent corporation may fix,
in advance, a record date that shall be not more than ten (10) days
prior to the date the notice is given; provided, if the notice is given
on or after the effective date of the merger or consolidation, the
record date shall be the effective date. If no record date is fixed and
the notice is given prior to the effective date, the record date shall
be the close of business on the day next preceding the day on which the
notice is given.
E. Within one hundred twenty (120) days after the effective date of the
merger or consolidation, the surviving or resulting corporation or any
shareholder who has complied with the provisions of subsections A and D of this
section and who is otherwise entitled to appraisal rights, may file a petition
in district court demanding a determination of the value of the stock of all
such shareholders; provided, however, at any time within sixty (60) days after
the effective date of the merger or consolidation, any shareholder shall have
the right to withdraw the demand of the shareholder for appraisal and to accept
the terms offered upon the merger or consolidation. Within one hundred twenty
(120) days after the effective date of the merger or consolidation, any
shareholder who has complied with the requirements of subsections A and D of
this section, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a
statement setting forth the aggregate number of shares not voted in favor of
the merger or consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of the shares. The
written statement shall be mailed to the shareholder within ten (10) days after
the shareholder's written request for a statement is received by the surviving
or resulting corporation or within ten (10) days after expiration of the period
for delivery of demands for appraisal pursuant to the provisions of subsection
D of this section, whichever is later.
F. Upon the filing of any such petition by a shareholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which within
twenty (20) days after such service, shall file, in the office of the court
clerk of the district court in which the petition was filed, a duly verified
list containing the names and addresses of all shareholders who have demanded
payment for their shares and with whom agreements regarding the value of their
shares have not been reached by the surviving or resulting corporation. If the
petition shall be filed by the surviving or resulting corporation, the petition
shall be accompanied by such a duly verified list. The court clerk, if so
ordered by the court, shall give notice of the time and place fixed for the
hearing on the petition by registered or certified mail to the surviving or
resulting corporation and to the shareholders shown on the list at the
addresses therein stated. Notice shall also be given by one or more
publications at least one (1) week before the day of the hearing, in a
newspaper of general circulation published in the City of Oklahoma City,
Oklahoma, or other publication as the court deems advisable. The forms of the
notices by mail and by publication shall be approved by the court, and the
costs thereof shall be borne by the surviving or resulting corporation.
G. At the hearing on the petition, the court shall determine the
shareholders who have complied with the provisions of this section and who have
become entitled to appraisal rights. The court may require the shareholders who
have demanded an appraisal of their shares and who hold stock represented by
certificates to submit their certificates of stock to the court clerk for
notation thereon of the pendency of the appraisal proceedings; and if any
shareholder fails to comply with this direction, the court may dismiss the
proceedings as to that shareholder.
H. After determining the shareholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of
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the merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining the
fair value, the court shall take into account all relevant factors. In
determining the fair rate of interest, the court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by
any shareholder entitled to participate in the appraisal proceeding, the court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
shareholder entitled to an appraisal. Any shareholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to the provisions
of subsection F of this section and who has submitted the certificates of stock
of the shareholder to the court clerk, if required, may participate fully in
all proceedings until it is finally determined that the shareholder is not
entitled to appraisal rights pursuant to the provisions of this section.
I. The court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the shareholders entitled thereto. Interest may be simple or compound, as the
court may direct. Payment shall be so made to each shareholder, in the case of
holders of uncertificated stock immediately, and in the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing the stock. The court's decree may be enforced as
other decrees in the district court may be enforced, whether the surviving or
resulting corporation be a corporation of this state or of any state.
J. The costs of the proceeding may be determined by the court and taxed
upon the parties as the court deems equitable in the circumstances. Upon
application of a shareholder, the court may order all or a portion of the
expenses incurred by any shareholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
K. From and after the effective date of the merger or consolidation, no
shareholder who has demanded appraisal rights as provided for in subsection D
of this section shall be entitled to vote the stock for any purpose or to
receive payment of dividends or other distributions on the stock, except
dividends or other distributions payable to shareholders of record at a date
which is prior to the effective date of the merger or consolidation; provided,
however, that if no petition for an appraisal shall be filed within the time
provided for in subsection E of this section, or if the shareholder shall
deliver to the surviving or resulting corporation a written withdrawal of the
shareholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within sixty (60) days after the effective date of the
merger or consolidation as provided in subsection E of this section or
thereafter with the written approval of the corporation, then the right of the
shareholder to an appraisal shall cease; provided further, no appraisal
proceeding in the district court shall be dismissed as to any shareholder
without the approval of the court, and approval may be conditioned upon terms
as the court deems just.
L. The shares of the surviving or resulting corporation into which the
shares of any objecting shareholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PROXY
CANAAN ENERGY CORPORATION
211 North Robinson, Suite 1000N
Oklahoma City, Oklahoma 73102
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
CANAAN ENERGY CORPORATION
The undersigned hereby appoints Sue Barnard and Michael S. Mewbourn, or
any one of them, each with the power to appoint his or her substitute, as
proxies (the "Proxies"), and hereby appoints and authorizes them to
represent and vote as designated below, all the shares of common stock held
of record by the undersigned on May 10, 2002, at the Special Meeting of
Shareholders of Canaan Energy Corporation (the "Company") to be held at The
Stanhope Hotel Park Hyatt located at 995 5th Avenue, New York, New York
10028, at 10:00 a.m. on June 28, 2002, and at any adjournment thereof.
(1) Proposal to adopt the merger agreement relating to the acquisition of
the Company by Chesapeake Energy Corporation, an Oklahoma corporation,
by means of a merger of CHK Acquisition, Inc., an Oklahoma corporation
and a subsidiary of Chesapeake Energy Corporation, with and into the
Company.
[_] FOR [_] AGAINST [_] ABSTAIN
(2) In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment
thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR THE PROPOSAL IN ITEM 1. IF ANY OTHER BUSINESS IS
PRESENTED AT THE ANNUAL MEETING, THIS PROXY SHALL BE VOTED IN ACCORDANCE
WITH THE RECOMMENDATION OF THE BOARD OF DIRECTORS.
(continued from reverse side)
Please sign exactly as the name appears below. When shares are held as
joint tenants, the signature of only one of the joint tenants is required.
When signing as attorney, executor, administrator, trustee, or guardian,
please give full title as such. If a corporation, please sign the full
corporate name by the President or other authorized officer. If a
partnership, please sign the partnership name by an authorized person. If a
limited liability company, please sign the name by an authorized person.
______________________
Signature(s)
Date________________
PLEASE MARK, SIGN,
DATE AND RETURN THIS
PROXY CARD PROMPTLY
USING THE ENCLOSED
ENVELOPE.