Item 1.01
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Entry into a Material Definitive Agreement.
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Purchase Agreement
On April 7, 2020,
Carbon Energy Corporation (the “Company” or “Carbon”), together with Nytis Exploration (USA) Inc., a direct
wholly owned subsidiary of the Company (“Nytis USA” and, together with Carbon, the “Sellers”), and certain
of Carbon’s other direct and indirect wholly owned subsidiaries, entered into a Membership Interest Purchase Agreement (the
“Purchase Agreement”) with Diversified Gas & Oil Corporation (the “Purchaser” or “DGO”)
pursuant to which Carbon agreed to sell to DGO all of the issued and outstanding membership interests of Carbon Appalachia Company,
LLC, a direct wholly owned subsidiary of the Company (“CAC”), and Nytis Exploration Company LLC, an indirect wholly
owned subsidiary of the Company (“Nytis LLC”) (the “Contemplated Transactions”). The Contemplated Transactions
constitute a sale of all of Carbon’s operations in the Appalachian and Illinois Basins. Contemporaneously with signing, certain
funds affiliated with Yorktown Partners LLC, which collectively own a majority of the Company’s common stock on an as-converted
basis, executed a written consent approving the Contemplated Transactions.
Pursuant to the Purchase
Agreement, subject to the terms and conditions set forth therein, the aggregate consideration to be paid to the Sellers by the
Purchaser in connection with the Contemplated Transactions will be (i) an aggregate base cash amount equal to $110.0 million, subject
to adjustment as described therein, and (ii) a contingent payment of up to $15.0 million.
The Purchaser will
have 45 days following the execution of the Purchase Agreement to conduct title diligence and notify the Sellers of any title defects.
In the event any title defects, subject to certain limitations set forth in the Purchase Agreement, are not waived by the Purchaser
or cured by the Sellers, the Purchaser will elect to either (i) reject the assets and reduce the base cash purchase price by the
allocated values thereof or (ii) permit the affected assets to remain with the applicable entity but provide an indemnity of the
Purchaser and the applicable entity against all liability resulting from such title defect.
The Purchase Agreement
includes customary representations and warranties and covenants, including, among others, a covenant that the Sellers will operate
and maintain the assets to be acquired by the Purchaser in the ordinary course of business and consistent with past practice during
the interim period between the execution of the Purchase Agreement and the consummation of the Contemplated Transactions. Subject
to certain exceptions set forth in the Purchase Agreement, the Company has agreed not to, directly or indirectly, solicit competing
acquisition proposals or to participate in discussions or negotiations concerning, or provide non-public information in connection
with, any unsolicited alternative business combinations.
The Purchase Agreement
also includes customary closing conditions, including, among others, (i) that certain adjustments to the base cash purchase price,
including adjustments based on uncured title and environmental defects, do not exceed 15% of the unadjusted base cash purchase
price, (ii) the absence of any law, injunction or other proceeding prohibiting the consummation of the Contemplated Transactions,
(iii) the mailing to the Company’s stockholders of an information statement to be filed by the Company on Schedule 14C at
least 20 days prior to closing and (iv) with respect to the Purchaser, the absence of a material adverse effect with respect to
Nytis LLC, CAC or their respective subsidiaries. The Purchase Agreement contains provisions granting each of the Purchaser and
the Sellers the right to terminate the Purchase Agreement for certain reasons, including, among others, (i) by either the Purchaser
or the Sellers if the Contemplated Transactions have not been completed by June 30, 2020, (ii) by the Purchaser if the board of
directors of the Company causes the requisite stockholder approval to be terminated, canceled, withdrawn or otherwise modified,
(iii) by the Purchaser if there has been a material breach of the Company’s obligation not to directly or indirectly solicit
competing acquisition proposals or to enter into discussions concerning, or provide confidential information in connection with,
any unsolicited alternative business combinations or (iv) by the Sellers, subject to the conditions set forth in the Purchase Agreement,
in order to enter into a definitive agreement with respect to a Superior Proposal (as defined in the Purchase Agreement), in which
case the Sellers will be required to pay a termination fee in an amount equal to $3,800,000 to the Purchaser.
Pursuant to the Purchase Agreement, upon closing, the Sellers
will assume and discharge all liabilities relating to, among other things, the following: (i) the ownership of the membership interests
of CAC and Nytis LLC or the ownership, operation and use of the assets to be acquired by the Purchaser attributable to periods
prior to the closing date, (ii) the ownership, operation and use of the excluded assets, (iii) the offsite disposal of any hazardous
materials from or generated by the assets to be acquired by the Purchaser prior to closing by CAC, Nytis LLC or their respective
subsidiaries, (iv) all taxes for which the Sellers are responsible pursuant to the terms of the Purchase Agreement and any liabilities
of the Sellers under Treasury Regulation Section 1.1502-6 as a transferee or as a result of a tax sharing or similar arrangement,
(v) all obligations of CAC, Nytis LLC or their respective subsidiaries for personal injury or death to the extent such personal
injury or death occurs prior to the closing date, (vi) all liabilities arising from or related to certain specified tax matters,
and (vii) all liabilities arising from or related to certain specified proceedings (collectively, the “Retained Liabilities”).
Following the closing,
the Sellers, jointly and severally, will, subject to the limitations and conditions set forth in the Purchase Agreement, indemnify
the Purchaser and its affiliates, including Nytis LLC and CAC, from and against any and all claims, proceedings and losses arising
out of, attributable to, or in connection with (i) any inaccuracy in or breach of the representations and warranties of the
Sellers in the Purchase Agreement or the other transaction documents, (ii) any breach by any Seller of any of its covenants or
agreements contained in the Purchase Agreement or the other transaction documents, (iii) any Retained Liability, and (iv) certain
other matters set forth in the Purchase Agreement.
Following the closing,
the Purchaser, Nytis LLC and CAC, jointly and severally, will, subject to the limitations and conditions set forth in the Purchase
Agreement, indemnify the Sellers and their respective affiliates from and against any and all claims, proceedings and losses arising
out of, attributable to, or in connection with (i) any inaccuracy in or breach of the representations and warranties of the
Purchaser in the Purchase Agreement or the other transaction documents, (ii) any breach by the Purchaser of any of its covenants
or agreements contained in the Purchase Agreement or the other transaction documents, and (iii) any Assumed Liability (as defined
in the Purchase Agreement).
Pursuant to the Purchase
Agreement, the Purchaser agreed to obtain a Purchaser-side representation and warranty insurance policy (the “R&W Insurance
Policy”) prior to the closing on terms and conditions reasonably acceptable to the Purchaser and the Sellers. The Purchaser
is required to satisfy any losses from a breach of the Sellers’ representations and warranties first by recovery under the
R&W Insurance Policy, second from a performance deposit that the Purchaser will place in escrow at closing in the amount of
approximately $1.1 million and third from the Sellers. The indemnification obligations of the Sellers resulting from any breach
by the Sellers of the Purchase Agreement, except with respect to breaches of certain fundamental representations and warranties
and certain representations and warranties related to tax and environmental matters, shall only apply with respect to claims that
exceed $50,000 and losses that in the aggregate exceed $2,750,000. Additionally, the aggregate liability of the Sellers under the
Purchase Agreement, except with respect to breaches of certain fundamental representations and warranties and certain representations
and warranties related to tax and environmental matters, is subject to a cap equal to $22,000,000.
The foregoing description
of the Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the
Purchase Agreement, which is attached hereto as Exhibit 2.1 and is incorporated herein by reference. Information concerning the
subject matter of the representations, warranties and covenants may change after the date of the Purchase Agreement, which subsequent
information may or may not be fully reflected in the Company’s public disclosures. Accordingly, the Purchase Agreement is
incorporated by reference herein only to provide investors with information regarding the terms of the Purchase Agreement, and
not to provide investors with any other factual information regarding the Company or its affiliates or businesses. The Purchase
Agreement should not be read alone, but should instead be read in conjunction with the other information regarding the Purchase
Agreement, the Company and its affiliates and business that will be contained in, or incorporated by reference into, the filings
that the Company makes with the Securities and Exchange Commission (the “SEC”).
If the Contemplated
Transactions are consummated, Carbon intends to use the proceeds to repay indebtedness and for general corporate purposes. The
amounts and timing of Carbon’s actual expenditures, however, will depend upon numerous factors, and Carbon may find it necessary
or advisable to use portions of the proceeds from the Contemplated Transactions for different or presently non-contemplated purposes.