Interactive 2009 Annual Report (PDF 7.56 MB) - Denbury Resources ...

Denbury Resources Inc. 2009 Annual Report 103The Encore Merger Agreement contains certain termination rights for both Denbury and Encore, including, amongothers, if the Merger is not completed by May 31, 2010. In the event of a termination of the Merger Agreement undercertain circumstances, Encore may be required to pay Denbury a termination fee of either $60 million or $120 million, orDenbury may be required to pay Encore a termination fee of either $60 million, $120 million or $300 million, in eachcase depending on the circumstances of the termination. In addition, Encore is obligated to reimburse Denbury for upto $10 million of its expenses related to the Merger if specified termination events occur. In addition, fee letters executedin conjunction with the financing commitment from JP Morgan require Denbury to pay up to approximately $48 millionin fees if the Merger is not consummated and the loans do not close.Denbury is subject to various possible contingencies that arise primarily from interpretation of federal and state lawsand regulations affecting the oil and natural gas industry. Such contingencies include differing interpretations as to theprices at which oil and natural gas sales may be made, the prices at which royalty owners may be paid for productionfrom their leases, environmental issues and other matters. Although management believes that it has complied with thevarious laws and regulations, administrative rulings and interpretations thereof, adjustments could be required as newinterpretations and regulations are issued. In addition, production rates, marketing and environmental matters aresubject to regulation by various federal and state agencies.LitigationIn connection with the Merger, three shareholder lawsuits styled as class actions have been filed against EncoreAcquisition Company (“Encore”) and its board of directors. The lawsuits are entitled Sanjay Israni, Individually and OnBehalf of All Others Similarly Situated vs. Encore Acquisition Company et al. (filed November 4, 2009 in the DistrictCourt of Tarrant County, Texas), Teamsters Allied Benefit Funds, Individually and On Behalf of All Others SimilarlySituated vs. Encore Acquisition Company et al. (filed November 5, 2009 in the Court of Chancery in the State ofDelaware) and Thomas W. Scott, Jr., individually and on behalf of all others similarly situated v. Encore AcquisitionCompany et al. (filed November 6, 2009 in the District Court of Tarrant County, Texas). The Teamsters and Scottlawsuits also name Denbury as a defendant. The complaints generally allege that (1) Encore’s directors breached theirfiduciary duties in negotiating and approving the Merger and by administering a sale process that failed to maximizeshareholder value and (2) Encore, and, in the case of the Teamsters and Scott complaints, Denbury aided and abettedEncore’s directors in breaching their fiduciary duties. The Teamsters complaint also alleges that Encore’s directors andexecutives stand to receive substantial financial benefits if the transaction is consummated on its current terms. Theplaintiffs in these lawsuits seek, among other things, to enjoin the Merger and to rescind the Merger Agreement. Encoreand Denbury have entered into a Memorandum of Understanding with the plaintiffs in these lawsuits agreeing inprinciple to the settlement of the lawsuits based upon inclusion in our joint proxy statement/prospectus dated February 5,2010, mailed to shareholders of Denbury and Encore in connection with their respective shareholder meetings toapprove the Merger, of additional disclosures requested by the plaintiffs, and agreeing that the parties to the lawsuitswill use best efforts to enter into a definitive settlement agreement, which has not yet occurred pending completion oflimited discovery, and to seek court approval for the settlement which would be binding on all Encore shareholderswho do not opt-out of the settlement. We currently believe the ultimate outcome of the settlement of these lawsuits willnot have a material adverse effect on our financial position, results of operations or cash flows.A shareholder suit regarding a compensation matter brought as a derivative action on behalf of Denbury againstDenbury’s board of directors, entitled Harbor Police Retirement System v. Gareth Roberts, et al, in the District Court ofDallas County, Texas, was amended during January 2010 to generally allege breach of the Denbury directors’ fiduciaryduties based upon the further allegation that the directors approved an unreasonably high purchase price in the Merger.On February 19, 2010, the plaintiff filed a motion for leave to amend its petition to add proxy disclosure claims related tothe joint proxy statement/prospectus dated February 5, 2010. The plaintiff seeks monetary damages and equitable relief,and if the motion to amend their petition is granted, to enjoin the Denbury shareholders meeting. A hearing is currentlyscheduled for March 1, 2010 on various pending motions, including a motion to dismiss the complaint. Denbury believesthat its directors have a valid defense to all claims against them, and that the other allegations in this suit are without merit.Denbury and its directors intend to defend this litigation vigorously. We currently believe the ultimate outcome of thislawsuit will not have a material adverse effect on our financial position, results of operations or cash flows.Notes to Consolidated Financial StatementsForm 10-K Part II