-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BnlimtVzqZP8tcuFTOzUby8dKxW0DPetkDRbFF285W59FxT4g13eXpE+zTguVNb5 gKIVXNXi4H9RUuDdXS4ANw== 0000950129-04-010135.txt : 20041228 0000950129-04-010135.hdr.sgml : 20041228 20041228152054 ACCESSION NUMBER: 0000950129-04-010135 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20041223 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Unregistered Sales of Equity Securities ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20041228 DATE AS OF CHANGE: 20041228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAR EAST ENERGY CORP CENTRAL INDEX KEY: 0001124024 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 880459590 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-32455 FILM NUMBER: 041228466 BUSINESS ADDRESS: STREET 1: 400 N. SAM HOUSTON PARKWAY E. STREET 2: SUITE 205 CITY: HOUSTON STATE: TX ZIP: 77060 BUSINESS PHONE: 7135861900 MAIL ADDRESS: STREET 1: 400 N. SAM HOUSTON PARKWAY E. STREET 2: SUITE 205 CITY: HOUSTON STATE: TX ZIP: 77060 FORMER COMPANY: FORMER CONFORMED NAME: EZFOODSTOP COM DATE OF NAME CHANGE: 20010306 8-K 1 h21197e8vk.txt FAR EAST ENERGY CORP.- DECEMBER 23, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): DECEMBER 23, 2004 FAR EAST ENERGY CORPORATION (Exact name of registrant as specified in its charter) NEVADA (State or other jurisdiction of incorporation) 0-32455 88-0459590 (Commission File Number) (IRS Employer Identification Number) 400 N. SAM HOUSTON EAST, SUITE 205, HOUSTON, TEXAS 77060 (Address of principal executive offices) (832) 598-0470 (Registrant's telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT. On December 23, 2004, Far East Energy Corporation (the "Registrant") entered into Amended and Restated Employment Agreements (the "Employment Agreements") with Michael R. McElwrath, Chief Executive Officer and Bruce N. Huff, Chief Financial Officer (each, an "Executive"). The Employment Agreements provide that the Executive will receive (i) an annual base salary of not less than $236,250 in the case of Mr. McElwrath and $168,000 in the case of Mr. Huff and (ii) performance bonuses of (A) not less than $20,000 payable on or before the 13th of April and October of each year in the case of Mr. McElwrath and (B) between 15% to 25% of his base salary in the case of Mr. Huff. The performance criteria for bonuses will be established by the Compensation Committee of the Registrant (or its Board of Directors if the Registrant does not have a Compensation Committee). Unless extended, the Employment Agreements for Messrs. McElwrath and Huff terminate on October 13, 2008 and May 1, 2009, respectively. The Employment Agreements provide that if an Executive is terminated by the Registrant for Cause (as defined in the Employment Agreements), the Registrant shall pay his base salary and all amounts actually earned, accrued or owing as of the date of termination and the Executive shall be entitled to exercise all options granted to him under his Employment Agreement or otherwise to the extent vested and exercisable on the date of termination. If an Executive's employment is terminated by the Registrant (other than as a result of death, Disability (as defined in his Employment Agreement) or Cause), or if the Executive terminates his employment for Good Reason (as defined in his Employment Agreement), the Executive shall be entitled to the following: - a lump sum payment of two times the sum of Executive's base salary and bonus paid during the immediately preceding twelve month period; - continued participation in all employee benefit plans, programs or arrangements available to the Registrant's executive officers in which Executive was participating on the date of termination for a specified period of time following termination; and - the exercise of all options and restricted stock awards granted to him to the extent vested and exercisable at the date of termination of Executive's employment, provided, that if the date of termination of Executive's employment is on or before April 13, 2006 in the case of Mr. McElwrath and May 1, 2006 in the case of Mr. Huff, then all options and restricted stock granted to him and exercisable within the first anniversary of the date of termination in the case of Mr. McElwrath and within 30 months of the date of termination in the case of Mr. Huff, shall be immediately and fully vested as of the date of termination. Notwithstanding the foregoing, if an Executive's termination of employment by the Registrant (other than for Cause, Disability or death) or by the Executive for Good Reason (as defined in the Employment Agreements) occurs within 24 months following a Change of Control (as defined in the Employment Agreements), then the Executive shall be entitled to a lump sum payment of three times the sum of Executive's base salary and bonus during the immediately preceding twelve-month period and all options and restricted stock granted to Executive will immediately vest and become exercisable as of the date of termination. The Employment Agreements also entitles each Executive to certain gross up payments for excise taxes in the event of a Change of Control. In connection with the Employment Agreements, the Registrant amended and restated its three stock option agreements with Messrs. McElwrath and Huff, in order to make the option agreements consistent with the terms of the Employment Agreements. The stock option agreements affected include: 2 - A non-qualified stock option award granted to Mr. McElwrath with respect to 1,200,000 options to purchase the Registrant's common stock at an exercise price of $0.65 per share; - A stock option agreement granted to Mr. McElwrath with respect to 100,000 shares of the Registrant's common stock at an exercise of $0.65 per share; and - A stock option agreement granted to Mr. Huff with respect to 500,000 shares of the Registrant's common stock at an exercise price of $2.00 per share. The amendments to those stock option agreements did not change the vesting and exercise price provisions of the original option agreements. The stock option agreements provide that the shares of common stock subject to such options vest 20% on the Award Date (as defined therein) and vest 20% on each succeeding anniversary of the Award Date. The Registrant also entered into four stock option agreements with executive officers on December 23, 2004, the terms of which are described in Item 3.02 below and incorporated by reference herein. The above discussion of the Employment Agreements and the amended and restated stock option agreements is a summary description of certain terms and conditions of those agreements and is qualified in its entirety by the terms and conditions of those agreements. For complete descriptions of the rights and obligations summarized in this report, reference must be made to the Employment Agreements, the amended and restated stock option agreements and stock option agreements attached hereto as Exhibits 10.1 through 10.9 and incorporated by reference herein. ITEM 3.02 UNREGISTERED SALES OF EQUITY SECURITIES. On December 23, 2004 (the "Award Date"), the Registrant granted options to purchase shares of the Registrant's common stock at an exercise price of $2.00 per share to four executive officers and one employee of the Company. The options vest 20% on the Award Date and 20% on each succeeding anniversary of the Award Date.
EXECUTIVE OFFICER/EMPLOYEE NUMBER OF NEW OPTIONS - -------------------------- --------------------- Michael R. McElwrath 200,000 Bruce N. Huff 400,000 Tun Aye Sai 200,000 Garry Ward 200,000 Other Employee 25,000
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS. (c) Exhibits
Exhibit Number Description - ------ ----------- 10.1 Amended and Restated Employment Agreement dated December 23, 2004, by and between Far East Energy Corporation and Michael R. McElwrath 10.2 Amended and Restated Employment Agreement dated December 23, 2004, by and between Far East Energy Corporation and Bruce N. Huff
3 10.3 Amended and Restated Non-Qualified Stock Option Agreement, dated December 23, 2004, by and between Far East Energy Corporation and Michael R. McElwrath 10.4 Amended and Restated Non-Qualified Stock Option Agreement, dated December 23, 2004, by and between Far East Energy Corporation and Michael R. McElwrath 10.5 Amended and Restated Non-Qualified Stock Option Agreement, dated December 23, 2004, by and between Far East Energy Corporation and Bruce N. Huff 10.6 Non Qualified Stock Non-Qualified Stock Option Agreement, dated December 23, 2004, by and between Far East Energy Corporation and Michael R. McElwrath 10.7 Non Qualified Stock Non-Qualified Stock Option Agreement, dated December 23, 2004, by and between Far East Energy Corporation and Bruce N. Huff 10.8 Non Qualified Stock Non-Qualified Stock Option Agreement, dated December 23, 2004, by and between Far East Energy Corporation and Tun Aye Sai 10.9 Non Qualified Stock Non-Qualified Stock Option Agreement, dated December 23, 2004, by and between Far East Energy Corporation and Garry Ward
4 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: December 28, 2004 FAR EAST ENERGY CORPORATION By: /s/ Bruce N. Huff ---------------------------- Bruce N. Huff Chief Financial Officer 5 INDEX TO EXHIBITS
Exhibit Number Description - ------ ----------- 10.1 Amended and Restated Employment Agreement dated December 23, 2004, by and between Far East Energy Corporation and Michael R. McElwrath 10.2 Amended and Restated Employment Agreement dated December 23, 2004, by and between Far East Energy Corporation and Bruce N. Huff 10.3 Amended and Restated Non-Qualified Stock Option Agreement, dated December 23, 2004, by and between Far East Energy Corporation and Michael R. McElwrath 10.4 Amended and Restated Non-Qualified Stock Option Agreement, dated December 23, 2004, by and between Far East Energy Corporation and Michael R. McElwrath 10.5 Amended and Restated Non-Qualified Stock Option Agreement, dated December 23, 2004, by and between Far East Energy Corporation and Bruce N. Huff 10.6 Non Qualified Stock Non-Qualified Stock Option Agreement, dated December 23, 2004, by and between Far East Energy Corporation and Michael R. McElwrath 10.7 Non Qualified Stock Non-Qualified Stock Option Agreement, dated December 23, 2004, by and between Far East Energy Corporation and Bruce N. Huff 10.8 Non Qualified Stock Non-Qualified Stock Option Agreement, dated December 23, 2004, by and between Far East Energy Corporation and Tun Aye Sai 10.9 Non Qualified Stock Non-Qualified Stock Option Agreement, dated December 23, 2004, by and between Far East Energy Corporation and Garry Ward
6 EX-10.1 2 h21197exv10w1.txt AMENDED EMPLOYMENT AGREEMENT - MICHAEL R. MCELWRATH EXHIBIT 10.1 EXECUTION COPY AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amended and Restated Employment Agreement (this "Agreement") is entered into this 23rd day of December, 2004 by and between Far East Energy Corporation, a Nevada corporation ("Company"), and Michael R. McElwrath ("Executive"). WHEREAS, Executive presently serves as a Director and the Chief Executive Officer of the Company; and WHEREAS, the Company and Executive previously entered into an Employment Agreement dated as of October 13, 2003 (the "Prior Agreement") setting forth the terms of Executive's employment, including the grant of options to purchase shares of Common Stock of the Company; and WHEREAS, the Company and Executive desire to amend and restate the Prior Agreement as hereinafter provided; and WHEREAS, the Company wishes to assure itself of the services of Executive for the period provided in this Agreement, and Executive is willing to perform services for the Company for such period, upon the terms and conditions hereinafter provided. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Term. The term of employment under this Agreement shall commence and this Agreement shall be effective as of December 23, 2004, and shall terminate on October 13, 2008, unless sooner terminated in accordance with the terms hereof (the "Term"). In addition, upon mutual agreement of the Company and Executive, this Agreement may be extended on the same terms and conditions for such period as the parties may agree. 2. Employment; Duties. During the Term, Executive shall be employed by Company, and the Executive shall serve, as the Company's Chief Executive Officer ("CEO") and shall have such duties, responsibilities and authority as shall be consistent with that position. Executive shall report directly and solely to the Company's Board of Directors (the "Board"). During the Term the Company agrees to nominate Executive for election to the Board at each annual meeting of the stockholders of the Company called for the purpose of electing directors of the Company. 3. Compensation; Benefits. During the Term, Executive shall receive an annual base salary of not less than $225,000 on or before December 31, 2004 and not less than $236,250 on or after January 1, 2005, payable in equal semi-monthly installments (the "Base Salary"). In addition to 1 the Base Salary, during the Term, Executive shall be eligible to receive performance bonuses in the amount of not less than $20,000 payable on or before the 13th day of October and April of each year (each such six month period herein referred to as the "Bonus Period"), with the performance criteria to be established by the Compensation Committee of Company (or the Board, if the Company does not have a Compensation Committee) in discussions with Executive (each a "Bonus"). The performance criteria for the Bonus shall be established and delivered in writing to Executive no later than the first business day of the applicable Bonus Period. At least annually, but no later than the 1st day of October of each year, the Compensation Committee (or the Board, if the Company does not have a Compensation Committee) shall review the Base Salary, Bonus, the minimum bonus and other compensation of Executive based upon performance and other factors deemed appropriate by the Compensation Committee (or the Board, if the Company does not have a Compensation Committee) and make such increases, supplemental bonus payments, or other incentive awards as it deems fit. Notwithstanding the foregoing, in no event will the Base Salary be less than an annual rate of $225,000 on or before December 31, 2004 and less than an annual rate of $236,250 on or after January 1, 2005, or shall the Bonus that Executive may earn under this Agreement be less than $20,000 for each Bonus Period. In addition to the Base Salary, the Bonus and other compensation described in this Section 3, Executive shall be entitled to receive any benefits and fringes (whether subsidized in part, or paid for in full by Company) including, but not limited to, medical, dental, life and disability insurance, and 401(k) Savings and Retirement Plan which Company now or in the future pays or subsidizes for any of its professional/technical or management employees, or employees in the same class as Executive. 4. Option Grant. Company and Executive acknowledge and agree that on October 13, 2003 Executive was granted options (the "Supplemental Options") to acquire 1,200,000 shares of the Common Stock of the Company at an exercise price of $0.65 per share. Upon execution of this Agreement, the Company and Executive shall amend and restate the Supplemental Options and related option agreement, which amendment and restatement shall be set forth in the Stock Option Agreement attached hereto as Exhibit A. 5. Termination. (a) Death. The Term and Executive's employment hereunder shall terminate upon Executive's death. (b) Disability. In the event Executive incurs a Disability for a continuous period exceeding thirty (30) days, the Company may, at its election, terminate the Term and Executive's employment by giving Executive a notice of termination as provided in Section 5(e). The term "Disability" as used in this Agreement shall mean the inability of Executive to substantially perform his duties under this Agreement, as a result of a physical or mental illness or personal injury he has incurred, as determined by an independent physician selected with the approval of the Company and Executive. (c) Cause. The Company may terminate this Agreement and the Term and discharge Executive for Cause by giving Executive a notice of termination as provided in Section 5(e). "Cause" shall mean: 2 (i) Executive's gross and willful misappropriation or theft of the Company's or any of its subsidiary's funds or property; (ii) Executive's conviction of, or plea of guilty or nolo contendere to, any felony or crime involving dishonesty or moral turpitude; or (iii) Executive's complete and total abandonment of his duties hereunder for a period of thirty consecutive days (other than for reason of Disability). (d) Good Reason. Executive may terminate his employment and the Term at any time for Good Reason by giving written notice as provided in Section 5(e), which shall set forth in reasonable detail the facts and circumstances constituting Good Reason. "Good Reason" shall mean the occurrence of any of the following during the Term: (i) without the consent of Executive, (A) the Company materially reduces Executive's title, duties or responsibilities under Section 2 without the same being corrected within thirty (30) days after being given written notice thereof, (B) Executive is not nominated and elected as a member of the Board at any meeting of the stockholders called for the purpose of electing directors of the Company or (C) Executive is removed as a member of the Board by the action of the Board or the stockholders of the Company (in each case, other than for Cause, death or Disability); (ii) the Company fails to pay any regular semi-monthly installment of Base Salary to Executive and such failure to pay continues for a period of more than 30 days; (iii) the Company reduces Executive's Base Salary or the minimum amount of any Bonus for which he is eligible pursuant to Section 3; (iv) without the consent of Executive, the Company changes the geographic location of the performance of Executive's duties to a location outside the Houston, Texas metropolitan area; (v) the Company breaches Section 11 without the same being corrected within thirty (30) days after being given written notice thereof; or (vi) the refusal to assume this Agreement by any successor or assign of the Company as provided in Section 12. (e) Notice of Termination. Any termination of this Agreement by the Company (other than for Cause under Section 5(c)) or by Executive shall be communicated in writing to the other party at least thirty (30) days before the date on which such termination is proposed to take effect. Any termination of this Agreement by the Company for Cause under Section 5(c) shall be communicated in writing to the Executive and such termination shall be effective immediately upon such notice. With respect to any termination of this Agreement by the 3 Company for Cause or by the Executive for Good Reason, such notice shall set forth in detail the facts and circumstances alleged to provide a basis for such termination. 6. Payments Upon Termination. (a) Death or Disability. If Executive's employment shall be terminated by reason of death or Disability: (i) the Company shall pay Executive's estate or Executive the portion of the Base Salary which would have been payable to Executive through the date his employment is terminated; plus, any other amounts earned, accrued or owing as of the date of death or Disability of Executive but not yet paid to Executive under Section 3; and (ii) all options granted to Executive under this Agreement or otherwise shall be immediately and fully vested and exercisable; and (iii) all restrictions on restricted stock awarded to Executive under this Agreement or otherwise shall be removed and the rights to such stock shall be immediately vested. Within three years following Executive's termination of employment, Executive or Executive's estate, heirs, executors, administrators, or personal or legal representatives, as the case may be, shall be entitled to exercise all options granted to him that are vested and exercisable pursuant to this Agreement or otherwise and all such options not exercised within such three year period shall be forfeited. In the event of death or Disability of Executive prior to April 1, 2005, Executive's estate, heirs, executors, administrators, or personal or legal representatives, as the case may be, may not offer or sell any securities covered hereby until April 1, 2005. In the event of the death or Disability of the Executive, then any payment due under this Section 6(a) shall be made to Executive's estate, heirs, executors, administrators, or personal or legal representatives, as the case may be. (b) Cause and Voluntary Termination. If Executive's employment shall be terminated for Cause or the Executive terminates his employment (other than for Good Reason, death or Disability), then without waiving any rights or remedies by reason thereof: (i) the Company shall pay Executive his Base Salary and all amounts actually earned, accrued or owing as of the date of termination but not yet paid to Executive under Section 3 through the date of termination; and (ii) Executive shall be entitled to exercise all options granted to him under this Agreement or otherwise to the extent vested and exercisable at the date of termination of Executive's employment; and (iii) except as otherwise provided in this subsection (b), the Company shall have no further obligations to Executive under this Agreement. 4 Within three months following Executive's termination of employment, Executive or Executive's estate, heirs, executors, administrators, or personal or legal representatives, as the case may be, shall be entitled to exercise all options granted to him that are vested and exercisable pursuant to this Agreement or otherwise and all such options not exercised within such three month period shall be forfeited. All options and restricted stock that are not vested and exercisable pursuant to this Agreement or otherwise as of the date of Executive's termination of employment shall be forfeited. (c) Other Than Cause. If Executive's employment is terminated by the Company (other than as a result of death, Disability or Cause as specified in Section 5(a), (b) or (c) above) or is terminated by Executive for Good Reason, Executive shall be entitled to the following: (i) a lump sum payment in an amount equal to product of (A) the Base Salary and Bonus paid to Executive under this Agreement during the immediately preceding twelve month period ending on the date of termination of employment, multiplied by (B) two; provided that if Executive's termination of employment by the Company or the Executive is within 24 months following the occurrence of a Change of Control (as defined in Section 7 below), such payment shall be equal to product of (A) the Base Salary and Bonus paid to Executive under this Agreement during the immediately preceding twelve month period ending on the date of termination of employment, multiplied by (B) three; (ii) all amounts earned, accrued or owing through the date his employment is terminated but not yet paid to Executive under Section 3; (iii) continued participation in all employee benefit plans, programs or arrangements available to the Company executives in which Executive was participating on the date of termination until the earliest of: (A) the second anniversary of the date of Executive's termination of employment, provided that if Executive's termination of employment by the Company or the Executive is within 24 months following the occurrence of a Change of Control, then Executive shall be entitled to continue to participate in such employee benefit plans, programs or arrangements until the third anniversary of the date of Executive's termination of employment; (B) the date this Agreement would have expired but for the occurrence of the date of termination; or (C) the date, or dates, the Executive receives coverage and benefits under the plans, programs and arrangements of a subsequent employer (such coverages and benefits to be determined on a coverage-by-coverage, or benefit-by-benefit, basis); ; provided that if Executive is precluded from continuing his participation in any employee benefit plan, program or arrangement as provided in this clause (iii), the 5 Company shall provide him with similar benefits provided under the plan, program or arrangement in which he is unable to participate for the period specified in this clause (iii). (iv) Executive shall be entitled to exercise all options granted to him to the extent vested and exercisable at the date of termination of Executive's employment; provided that if Executive's termination of employment by the Company or the Executive is on or before April 13, 2006, then all options granted to him and exercisable within the first anniversary the date of termination of Executive's employment shall be immediately and fully vested as of the date of termination; provided further that if Executive's termination of employment by the Company or the Executive is within 24 months following the occurrence of a Change of Control, then all options granted to Executive shall be immediately and fully vested and exercisable as of the date of termination; and (v) if Executive's termination of employment by the Company or the Executive is on or before April 13, 2006, then all restrictions on all restricted stock awarded to Executive and all rights to such stock that would be removed and vested within the first anniversary the date of termination of Executive's employment shall be immediately removed and fully vested as of the date of termination; provided that if Executive's termination of employment by the Company or the Executive is within 24 months following the occurrence of a Change of Control, then all restrictions on restricted stock awarded to Executive shall be removed and all rights to such stock vested as of the date of terminations. The payment of the lump sum amount under Section 6(c)(i) shall be made on the earlier of the date ending on the expiration of six months following the date of termination of Executive's employment or the death of the Executive. To the extent any payment under Section 6(c)(i) is deferred compensation within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder, then such payment shall be made on the earlier of the date ending on the expiration of six months following the date of termination of Executive's employment or the death of the Executive. Within three years following Executive's termination of employment, Executive or Executive's estate, heirs, executors, administrators, or personal or legal representatives, as the case may be, shall be entitled to exercise all options granted to him that are vested and exercisable pursuant to this Agreement or otherwise and all such options not exercised within such three year period shall be forfeited. All options and restricted stock that are not vested and exercisable pursuant to this Agreement or otherwise as of the date of, or as a result of, Executive's termination of employment shall be forfeited. In the event of the death or Disability of the Executive, then any payment due under this Section 6(c) shall be made to Executive's estate, heirs, executors, administrators, or personal or legal representatives, as the case may be. 7. Change of Control. For purposes of this Agreement, a "Change of Control" shall mean: (a) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than forty percent (40%) of the combined voting power of the then- 6 outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (A) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (B) any acquisition by Executive, by any group of persons consisting of relatives within the second degree of consanguinity or affinity of Executive or by any affiliate of Executive or (C) any acquisition by an entity pursuant to a reorganization, merger or consolidation, unless such reorganization, merger or consolidation constitutes a Change of Control under clause (b) of this Section 7; (b) the consummation of a reorganization, merger or consolidation, unless following such reorganization, merger or consolidation sixty percent (60%) or more of the combined voting power of the then-outstanding voting securities of the entity resulting from such reorganization, merger or consolidation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation; (c) the (i) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company or (ii) sale or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company, unless the successor entity existing immediately after such sale or disposition is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Voting Securities immediately prior to such sale or disposition; (d) if individuals who, as of December 23, 2004, constitute the Board of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then constituting the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest subject to Rule 14a-11 of Regulation 14A promulgated under the Exchange Act or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (e) the Board adopts a resolution to the effect that, for purposes hereof, a Change of Control has occurred. 8. Registration. The Company shall cause the shares of Common Stock of the Company subject to Supplemental Options and all other options to purchase Common Stock of the Company granted for compensatory reasons to Executive (the "Option Shares") to be covered by an effective registration statement on Form S-8 (or any successor form) within 60 days following written request of the Executive; provided, however, that Executive shall not make such written request until the Company's Registration Statement on Form S-2 (File No. 333-117635) filed 7 with the Securities and Exchange Commission ("SEC") on July 23, 2004 is declared effective by the SEC or withdrawn by the Company; provided further, the Company may register the Option Shares at any earlier date in the Company's discretion. The Company shall use reasonable efforts to cause all such Option Shares to be listed or included on each national securities exchange, if any, or on the NASDAQ Stock Market, on which the other outstanding shares of Common Stock of the Company are then listed. The Company will pay all of the filing fees, listing fees and other registration expenses associated with the registration of the Option Shares. 9. Gross-ups. (a) Notwithstanding any other provision in this Agreement to the contrary, and except as set forth below, in the event it shall be determined under the provisions of this Section 9 hereof that any payment or distribution by the Company, or by any successor or affiliate of the Company (the "Payor"), to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, including without limitation any other Agreement, arrangement or agreement with such Payor, and including a determination (i) with regard to the value of any accelerated vesting of options or stock awards or other forms of compensation, if such vesting occurs as a result of a Change of Control; but (ii) without regard to any additional payments required or calculated under this Section 9) (a "Payment"), would be subject to the excise tax imposed by Internal Revenue Code Section 4999 (or any successor provision of the Internal Revenue Code), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax and any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") (which is itself payable subject to applicable tax withholdings). This Gross-Up Payment shall be equal to an amount such that the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments after paying all applicable federal, state and local income taxes, FICA and social security taxes owed with respect to such payment. The Company's obligation to make Gross-Up Payments under this Section 9 shall not be conditioned upon the Executive's termination of employment after any Change of Control. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made, and state and local income taxes at the highest marginal rate of taxation in either the state and locality of the Executive's place of employment at the time of the Change of Control or in the state and locality of residence at the time or times of payment, as applicable, net of the maximum reduction in federal income taxes that could be obtained from the deduction of the state and local taxes. (b) Notwithstanding the foregoing provisions of this Section 9, if it shall be determined that the Executive is entitled to a Gross-up Payment, but that the Payments are less than $10,000 more than the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payment would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive, and the Payment, in the aggregate, shall be reduced to the Reduced Amount, minus $100. The reduction of the amounts payable hereunder, if applicable, shall be made by reducing the payments under Section 6(c) hereof, but in any event shall be made in such a manner as to maximize the value of all Payments actually made to the 8 Executive. For purposes of reducing the Payments to the Reduced Amount, only amounts payable under the Agreement (and no other Payments) shall be reduced. If the reduction of amounts payable under this Agreement would not result in the payment of the Reduced Amount, no amounts payable under this Agreement shall be reduced. (c) The Company shall provide written notice to the Executive with respect to each Payment promptly after it occurs, setting forth the nature of such Payment. Subject to the provisions of this Section 9, all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a law firm or public accounting firm selected among those regularly consulted by the Company during the twelve-month period immediately prior to the Change of Control regarding federal income tax matters (the "Firm"). Within 15 days after the Firm has been notified by the Executive or the Company that a parachute payment has occurred, such Firm shall provide a reasonably detailed supporting calculations with respect to such Payment both to the Company and the Executive. All fees and expenses of the Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within thirty days of the receipt of the Firm's determination. Any determination by the Firm shall be binding upon the Company and the Executive. 10. Indemnification. (a) The Company shall indemnify and hold Executive harmless to the maximum extent permitted by law against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys fees incurred by Executive, in connection with the defense of, or as a result of, any action or proceeding (or any appeal from any action or proceeding) in which Executive is made or is threatened to be made a party by reason of the fact that Executive is or was an officer or Director of the Company, regardless of whether such action or proceeding is one brought by or in the right of the Company, to procure a judgment in its favor (or other than by or in the right of the Company). (b) Notwithstanding anything in the Company's Articles of Incorporation, the by-laws or this Agreement to the contrary, if so requested by Executive, the Company shall advance any and all Expenses (as defined below) to Executive ("Expense Advance"), within fifteen days following the date of such request and the receipt of a written undertaking by or on behalf of Executive to repay such Expense Advance if a judgment or other final adjudication adverse to Executive (as to which all rights of appeal therefrom have been exhausted or lapsed) establishes that Executive, with respect to such Claim, is not eligible for indemnification. "Expenses" shall include attorneys' fees and all other costs, charges and expenses paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in any Claim relating to any indemnifiable event. A "Claim" shall include any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative or other, including without limitation, an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, whether predicated on foreign, federal, state or local law and whether formal or informal. 9 11. Insurance. The Company represents and warrants that (a) Executive shall be and continue to be covered and insured up to the maximum limits provided by all insurance which the Company maintains to indemnify its directors and officers (and to indemnify the corporation for any obligations which it incurs as a result of its undertaking to indemnify its officers and directors) and (b) the Company will use its best efforts to maintain such insurance, in not less than $1,000,000, in effect throughout the Term. 12. Binding Agreement; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of Executive and the Company and their respective heirs, legal representatives and permitted successors and assigns. If the Company shall at any time be merged or consolidated into or with any other entity, the provisions of this Agreement shall survive any such transaction and shall be binding on and inure to the benefit and responsibility of the entity resulting from such merger or consolidation (and this provision shall apply in the event of any subsequent merger or consolidation), and the Company, upon the occasion of the above-described transaction, shall include in the appropriate agreements the obligation that the payments herein agreed to be paid to or for the benefit of Executive, his beneficiaries or estate, shall be paid. 13. Dispute Resolution. Any controversy or claim arising with regard to this Agreement shall be settled by expedited arbitration in accordance with the provisions of the Texas Arbitration Act. The controversy or claim shall be submitted to an arbitrator appointed by the presiding judge of the Harris County, Texas Judicial District Court. The decision of the arbitrator shall be final and binding upon the parties hereto and shall be delivered in writing signed by the arbitrator to each of the parties hereto. Any appeal arising out of the ruling of any arbitrator shall be determined in a court of competent jurisdiction in Houston, Texas, or the federal court for Houston, Texas, and each party waives any claim to have the matter heard in any other local, state, or federal jurisdiction. The prevailing party in the arbitration proceeding or in any appeal shall be entitled to recover attorney's fees, court costs and all related costs from the non-prevailing party. If the controversy or claim arises with regard to any severance or separation payment required under Section 6 of this Agreement and the arbitrator rules in favor of Executive with respect thereto, then: (a) any award or sums due and owing to Executive under the terms of this Agreement shall be increased by an amount equal to the product of one month of Executive's Base Salary in effect immediately prior to the termination of this Agreement, multiplied by (i) if such award or sums is payable under Section 6(c), then the number of thirty (30) day periods or part thereof that has elapsed after the date ending six months after the date of Executive's termination or separation or (ii) otherwise, the number of thirty (30) day periods or part thereof that has elapsed after the date of Executive's termination; (b) if the Company fails to comply with any such ruling of the arbitrator, or if the Company unsuccessfully appeals any such ruling of the arbitrator, then any award or sums due and owing to Executive under the terms of this Agreement shall be increased by an amount equal to the product of one month of Executive's Base Salary in effect immediately prior to the termination of this Agreement, multiplied by the number of thirty (30) day periods or part thereof 10 that has elapsed after the date of the arbitrator's initial decision or determination; and (c) If the arbitrator in such initial arbitration proceeding, or any court in any appeal thereof determine that Company acted in bad faith, or frivolously, in claiming "Cause" as its reason for termination of this Agreement, or in failing to offer to the Executive the severance or separation payment pursuant to Section 6 of this Agreement, then the Executive shall be entitled to receive and Company shall be ordered to pay to Executive as a penalty an amount equal to $100,000.00 in addition to the payments required under Section 6 of this Agreement and any other amounts due under this Agreement. 14. Survivorship. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations and to the extent that any performance is required following termination of this Agreement. Without limiting the foregoing, Sections 6, 9 and 10 and Sections 12 through 23 shall expressly survive the termination of this Agreement. 15. Nonassignability. Neither this Agreement nor any right or interest hereunder shall be assignable by Executive, his beneficiaries, dependents or legal representatives without the Company's prior written consent; provided, however, that nothing in this Section 15 shall preclude (a) Executive from designating a beneficiary to receive any benefit payable hereunder upon his death, or (b) the executors, administrators or other legal representatives of Executive or his estate from assigning any rights hereunder to the person or persons entitled thereto. 16. Amendments to this Agreement. Except for increases in the Base Salary, Bonus and other compensation made as provided in Section 3, this Agreement may not be modified or amended except by an instrument in writing signed by the Executive and the Company. No increase in the Base Salary, Bonus or other compensation made as provided in Section 3 will operate as a cancellation or termination of this Agreement. 17. Waiver. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 18. Severability. If, for any reason, any provision of this Agreement is held invalid, illegal or unenforceable such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement not held so invalid, illegal or unenforceable, and each such other provision shall, to the full extent consistent with law, continue in full force and effect. In addition, if any provision of this Agreement shall be held invalid, illegal or unenforceable in part, such invalidity, illegality or unenforceability shall in no way affect the rest of such provision not held so invalid, illegal or unenforceable and the rest of such provision, together with all other provisions of this Agreement, shall, to the full extent consistent with law, continue in full force and effect. If any provision or part thereof shall be held invalid, illegal or unenforceable, to the 11 fullest extent permitted by law, a provision or part thereof shall be substituted therefor that is valid, legal and enforceable. 19. Notices. Any notice, request, or other communication required or permitted pursuant to this Agreement shall be in writing and shall be deemed duly given when received by the party to whom it shall be given or three days after being mailed by certified, registered, or express mail, postage prepaid, addressed as follows: If to Company: Far East Energy Corporation 400 North Sam Houston Parkway East Suite 205 Houston, Texas 77060 Attention: Chairman of Compensation Committee If to Executive: Michael R. McElwrath 7 Stargazer Place The Woodlands, Texas 77381 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 20. Headings. The headings of Sections are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 21. Governing Law. This Agreement has been executed and delivered in the State of Texas, and its validity, interpretation, performance and enforcement shall be governed by the laws of Texas, without giving effect to any principles of conflicts of law. 22. Withholding. All amounts paid pursuant to this Agreement shall be subject to withholding for taxes (federal, state, local or otherwise) to the extent required by applicable law. 23. Counterparts. This Agreement may be executed in counterparts, each of which, when taken together, shall constitute one original Agreement. 24. Amendment and Restatement. This Agreement constitutes an amendment, modification and restatement of the Prior Agreement. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Company or any predecessor of the Company and Executive, including the Prior Agreement, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided and not expressly provided for in this Agreement. 12 IN WITNESS WHEREOF, Company has caused its duly authorized officer and directors to execute and attest to this Agreement, and Executive has placed his signature hereon, effective as of the first date above. COMPANY: FAR EAST ENERGY CORPORATION By: /s/ John Mihm -------------------------------- John Mihm, Director EXECUTIVE: By: /s/ Michael R. McElwrath -------------------------------- Michael R. McElwrath 13 EX-10.2 3 h21197exv10w2.txt AMENDED EMPLOYMENT AGREEMENT - BRUCE N. HUFF EXHIBIT 10.2 EXECUTION COPY AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amended and Restated Employment Agreement (this "Agreement") is entered into this 23rd day of December, 2004 by and between Far East Energy Corporation, a Nevada corporation ("Company"), and Bruce N. Huff ("Executive"). WHEREAS, Executive presently serves as the Chief Financial Officer of the Company; and WHEREAS, the Company and Executive previously entered into an Employment Agreement dated as of May 1, 2004 (the "Prior Agreement") setting forth the terms of Executive's employment, including the grant of options to purchase shares of Common Stock of the Company; and WHEREAS, the Company and Executive desire to amend and restate the Prior Agreement as hereinafter provided; and WHEREAS, the Company wishes to assure itself of the services of Executive for the period provided in this Agreement, and Executive is willing to perform services for the Company for such period, upon the terms and conditions hereinafter provided. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Term. The term of employment under this Agreement shall commence and this Agreement shall be effective as of December 23, 2004, and shall terminate on May 1, 2009, unless sooner terminated in accordance with the terms hereof (the "Term"). In addition, upon mutual agreement of the Company and Executive, this Agreement may be extended on the same terms and conditions for such period as the parties may agree. 2. Employment; Duties. During the Term, Executive shall be employed by Company, and the Executive shall serve, as the Company's Chief Financial Officer ("CEO") and shall have such duties, responsibilities and authority as shall be consistent with that position. Executive shall report directly and solely to the Company's Chief Executive Officer and the Board of Directors (the "Board"). 3. Compensation; Benefits. During the Term, Executive shall receive an annual base salary of not less than $160,000 on or before December 31, 2004 and not less than $168,000 on or after January 1, 2005, payable in equal semi-monthly installments (the "Base Salary"). In addition to the Base Salary, during the Term, Executive shall be eligible to receive performance bonuses in the amount of between fifteen percent and twenty-five percent of his Base Salary, with the 1 performance criteria to be established by the Compensation Committee of Company (or the Board, if the Company does not have a Compensation Committee) in discussions with Executive (each a "Bonus"). The performance criteria for the Bonus shall be established and delivered in writing to Executive no later than the first business day following the 1st day of May of each year. At least annually, but no later than the 1st day of May of each year, the Compensation Committee (or the Board, if the Company does not have a Compensation Committee) shall review the Base Salary, Bonus, the minimum bonus and other compensation of Executive based upon performance and other factors deemed appropriate by the Compensation Committee (or the Board, if the Company does not have a Compensation Committee) and make such increases, supplemental bonus payments, or other incentive awards as it deems fit. Notwithstanding the foregoing, in no event will the Base Salary be less than an annual rate of $160,000 on or before December 31, 2004 and less than an annual rate of $168,000 on or after January 1, 2005. In addition to the Base Salary, the Bonus and other compensation described in this Section 3, Executive shall be entitled to receive any benefits and fringes (whether subsidized in part, or paid for in full by Company) including, but not limited to, medical, dental, life and disability insurance, and 401(k) Savings and Retirement Plan which Company now or in the future pays or subsidizes for any of its professional/technical or management employees, or employees in the same class as Executive. 4. Option Grant. Company and Executive acknowledge and agree that on May 1, 2004 Executive was granted options (the "Supplemental Options") to acquire 500,000 shares of the Common Stock of the Company at an exercise price of $2.00 per share. Upon execution of this Agreement, the Company and Executive shall amend and restate the Supplemental Options and related option agreement, which amendment and restatement shall be set forth in the Stock Option Agreement attached hereto as Exhibit A. 5. Termination. (a) Death. The Term and Executive's employment hereunder shall terminate upon Executive's death. (b) Disability. In the event Executive incurs a Disability for a continuous period exceeding thirty (30) days, the Company may, at its election, terminate the Term and Executive's employment by giving Executive a notice of termination as provided in Section 5(e). The term "Disability" as used in this Agreement shall mean the inability of Executive to substantially perform his duties under this Agreement, as a result of a physical or mental illness or personal injury he has incurred, as determined by an independent physician selected with the approval of the Company and Executive. (c) Cause. The Company may terminate this Agreement and the Term and discharge Executive for Cause by giving Executive a notice of termination as provided in Section 5(e). "Cause" shall mean: (i) Executive's gross and willful misappropriation or theft of the Company's or any of its subsidiary's funds or property; 2 (ii) Executive's conviction of, or plea of guilty or nolo contendere to, any felony or crime involving dishonesty or moral turpitude; or (iii) Executive's complete and total abandonment of his duties hereunder for a period of thirty consecutive days (other than for reason of Disability). (d) Good Reason. Executive may terminate his employment and the Term at any time for Good Reason by giving written notice as provided in Section 5(e), which shall set forth in reasonable detail the facts and circumstances constituting Good Reason. "Good Reason" shall mean the occurrence of any of the following during the Term: (i) without the consent of Executive, the Company materially reduces Executive's title, duties or responsibilities under Section 2 without the same being corrected within thirty (30) days after being given written notice thereof; (ii) the Company fails to pay any regular semi-monthly installment of Base Salary to Executive and such failure to pay continues for a period of more than 30 days; (iii) the Company reduces Executive's Base Salary or the minimum amount of any Bonus for which he is eligible pursuant to Section 3; (iv) without the consent of Executive, the Company changes the geographic location of the performance of Executive's duties to a location outside the Houston, Texas metropolitan area; (v) the Company breaches Section 11 without the same being corrected within thirty (30) days after being given written notice thereof; or (vi) the refusal to assume this Agreement by any successor or assign of the Company as provided in Section 12. (e) Notice of Termination. Any termination of this Agreement by the Company (other than for Cause under Section 5(c)) or by Executive shall be communicated in writing to the other party at least thirty (30) days before the date on which such termination is proposed to take effect. Any termination of this Agreement by the Company for Cause under Section 5(c) shall be communicated in writing to the Executive and such termination shall be effective immediately upon such notice. With respect to any termination of this Agreement by the Company for Cause or by the Executive for Good Reason, such notice shall set forth in detail the facts and circumstances alleged to provide a basis for such termination. 6. Payments Upon Termination. (a) Death or Disability. If Executive's employment shall be terminated by reason of death or Disability: 3 (i) the Company shall pay Executive's estate or Executive the portion of the Base Salary which would have been payable to Executive through the date his employment is terminated; plus, any other amounts earned, accrued or owing as of the date of death or Disability of Executive but not yet paid to Executive under Section 3; and (ii) all options granted to Executive under this Agreement or otherwise shall be immediately and fully vested and exercisable; and (iii) all restrictions on restricted stock awarded to Executive under this Agreement or otherwise shall be removed and the rights to such stock shall be immediately vested. Within three years following Executive's termination of employment, Executive or Executive's estate, heirs, executors, administrators, or personal or legal representatives, as the case may be, shall be entitled to exercise all options granted to him that are vested and exercisable pursuant to this Agreement or otherwise and all such options not exercised within such three year period shall be forfeited. In the event of death or Disability of Executive prior to April 1, 2005, Executive's estate, heirs, executors, administrators, or personal or legal representatives, as the case may be, may not offer or sell any securities covered hereby until April 1, 2005. In the event of the death or Disability of the Executive, then any payment due under this Section 6(a) shall be made to Executive's estate, heirs, executors, administrators, or personal or legal representatives, as the case may be. (b) Cause and Voluntary Termination. If Executive's employment shall be terminated for Cause or the Executive terminates his employment (other than for Good Reason, death or Disability), then without waiving any rights or remedies by reason thereof: (i) the Company shall pay Executive his Base Salary and all amounts actually earned, accrued or owing as of the date of termination but not yet paid to Executive under Section 3 through the date of termination; and (ii) Executive shall be entitled to exercise all options granted to him under this Agreement or otherwise to the extent vested and exercisable at the date of termination of Executive's employment; and (iii) except as otherwise provided in this subsection (b), the Company shall have no further obligations to Executive under this Agreement. Within three months following Executive's termination of employment, Executive or Executive's estate, heirs, executors, administrators, or personal or legal representatives, as the case may be, shall be entitled to exercise all options granted to him that are vested and exercisable pursuant to this Agreement or otherwise and all such options not exercised within such three month period shall be forfeited. All options and restricted stock that are not vested and exercisable pursuant to this Agreement or otherwise as of the date of Executive's termination of employment shall be forfeited. 4 (c) Other Than Cause. If Executive's employment is terminated by the Company (other than as a result of death, Disability or Cause as specified in Section 5(a), (b) or (c) above) or is terminated by Executive for Good Reason, Executive shall be entitled to the following: (i) a lump sum payment in an amount equal to product of (A) the Base Salary and Bonus paid to Executive under this Agreement during the immediately preceding twelve month period ending on the date of termination of employment, multiplied by (B) two; provided that if Executive's termination of employment by the Company or the Executive is within 24 months following the occurrence of a Change of Control (as defined in Section 7 below), such payment shall be equal to product of (A) the Base Salary and Bonus paid to Executive under this Agreement during the immediately preceding twelve month period ending on the date of termination of employment, multiplied by (B) three; (ii) all amounts earned, accrued or owing through the date his employment is terminated but not yet paid to Executive under Section 3; (iii) continued participation in all employee benefit plans, programs or arrangements available to the Company executives in which Executive was participating on the date of termination until the earliest of: (A) the second anniversary of the date of Executive's termination of employment, provided that if Executive's termination of employment by the Company or the Executive is within 24 months following the occurrence of a Change of Control, then Executive shall be entitled to continue to participate in such employee benefit plans, programs or arrangements until the third anniversary of the date of Executive's termination of employment; (B) the date this Agreement would have expired but for the occurrence of the date of termination; or (C) the date, or dates, the Executive receives coverage and benefits under the plans, programs and arrangements of a subsequent employer (such coverages and benefits to be determined on a coverage-by-coverage, or benefit-by-benefit, basis); ; provided that if Executive is precluded from continuing his participation in any employee benefit plan, program or arrangement as provided in this clause (iii), the Company shall provide him with similar benefits provided under the plan, program or arrangement in which he is unable to participate for the period specified in this clause (iii). (iv) Executive shall be entitled to exercise all options granted to him to the extent vested and exercisable at the date of termination of Executive's employment; provided that if Executive's termination of employment by the Company or the Executive is on or before May 1, 2006, then all options granted to him and exercisable within 30 5 months of the date of termination of Executive's employment shall be immediately and fully vested as of the date of termination; provided further that if Executive's termination of employment by the Company or the Executive is within 24 months following the occurrence of a Change of Control, then all options granted to Executive shall be immediately and fully vested and exercisable as of the date of termination; and (v) if Executive's termination of employment by the Company or the Executive is on or before May 1, 2006, then all restrictions on all restricted stock awarded to Executive and all rights to such stock that would be removed and vested within 30 months of the date of termination of Executive's employment shall be immediately removed and fully vested as of the date of termination; provided that if Executive's termination of employment by the Company or the Executive is within 24 months following the occurrence of a Change of Control, then all restrictions on restricted stock awarded to Executive shall be removed and all rights to such stock vested as of the date of terminations. The payment of the lump sum amount under Section 6(c)(i) shall be made on the earlier of the date ending on the expiration of six months following the date of termination of Executive's employment or the death of the Executive. To the extent any payment under Section 6(c)(i) is deferred compensation within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder, then such payment shall be made on the earlier of the date ending on the expiration of six months following the date of termination of Executive's employment or the death of the Executive. Within three years following Executive's termination of employment, Executive or Executive's estate, heirs, executors, administrators, or personal or legal representatives, as the case may be, shall be entitled to exercise all options granted to him that are vested and exercisable pursuant to this Agreement or otherwise and all such options not exercised within such three year period shall be forfeited. All options and restricted stock that are not vested and exercisable pursuant to this Agreement or otherwise as of the date of, or as a result of, Executive's termination of employment shall be forfeited. In the event of the death or Disability of the Executive, then any payment due under this Section 6(c) shall be made to Executive's estate, heirs, executors, administrators, or personal or legal representatives, as the case may be. 7. Change of Control. For purposes of this Agreement, a "Change of Control" shall mean: (a) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than forty percent (40%) of the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (A) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (B) any acquisition by Executive, by any group of persons consisting of relatives within the second degree of consanguinity or affinity of Executive or by any affiliate of Executive or (C) any acquisition by an entity pursuant to a reorganization, merger or consolidation, unless such reorganization, merger or consolidation constitutes a Change of 6 Control under clause (b) of this Section 7; (b) the consummation of a reorganization, merger or consolidation, unless following such reorganization, merger or consolidation sixty percent (60%) or more of the combined voting power of the then-outstanding voting securities of the entity resulting from such reorganization, merger or consolidation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation; (c) the (i) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company or (ii) sale or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company, unless the successor entity existing immediately after such sale or disposition is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Voting Securities immediately prior to such sale or disposition; (d) if individuals who, as of December 23, 2004, constitute the Board of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then constituting the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest subject to Rule 14a-11 of Regulation 14A promulgated under the Exchange Act or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (e) the Board adopts a resolution to the effect that, for purposes hereof, a Change of Control has occurred. 8. Registration. The Company shall cause the shares of Common Stock of the Company subject to Supplemental Options and all other options to purchase Common Stock of the Company granted for compensatory reasons to Executive (the "Option Shares") to be covered by an effective registration statement on Form S-8 (or any successor form) within 60 days following written request of the Executive; provided, however, that Executive shall not make such written request until the Company's Registration Statement on Form S-2 (File No. 333-117635) filed with the Securities and Exchange Commission ("SEC") on July 23, 2004 is declared effective by the SEC or withdrawn by the Company; provided further, the Company may register the Option Shares at any earlier date in the Company's discretion. The Company shall use reasonable efforts to cause all such Option Shares to be listed or included on each national securities exchange, if any, or on the NASDAQ Stock Market, on which the other outstanding shares of Common Stock of the Company are then listed. The Company will pay all of the filing fees, listing fees and other registration expenses associated with the registration of the Option Shares. 7 9. Gross-ups. (a) Notwithstanding any other provision in this Agreement to the contrary, and except as set forth below, in the event it shall be determined under the provisions of this Section 9 hereof that any payment or distribution by the Company, or by any successor or affiliate of the Company (the "Payor"), to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, including without limitation any other Agreement, arrangement or agreement with such Payor, and including a determination (i) with regard to the value of any accelerated vesting of options or stock awards or other forms of compensation, if such vesting occurs as a result of a Change of Control; but (ii) without regard to any additional payments required or calculated under this Section 9) (a "Payment"), would be subject to the excise tax imposed by Internal Revenue Code Section 4999 (or any successor provision of the Internal Revenue Code), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax and any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") (which is itself payable subject to applicable tax withholdings). This Gross-Up Payment shall be equal to an amount such that the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments after paying all applicable federal, state and local income taxes, FICA and social security taxes owed with respect to such payment. The Company's obligation to make Gross-Up Payments under this Section 9 shall not be conditioned upon the Executive's termination of employment after any Change of Control. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made, and state and local income taxes at the highest marginal rate of taxation in either the state and locality of the Executive's place of employment at the time of the Change of Control or in the state and locality of residence at the time or times of payment, as applicable, net of the maximum reduction in federal income taxes that could be obtained from the deduction of the state and local taxes. (b) Notwithstanding the foregoing provisions of this Section 9, if it shall be determined that the Executive is entitled to a Gross-up Payment, but that the Payments are less than $10,000 more than the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payment would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive, and the Payment, in the aggregate, shall be reduced to the Reduced Amount, minus $100. The reduction of the amounts payable hereunder, if applicable, shall be made by reducing the payments under Section 6(c) hereof, but in any event shall be made in such a manner as to maximize the value of all Payments actually made to the Executive. For purposes of reducing the Payments to the Reduced Amount, only amounts payable under the Agreement (and no other Payments) shall be reduced. If the reduction of amounts payable under this Agreement would not result in the payment of the Reduced Amount, no amounts payable under this Agreement shall be reduced. (c) The Company shall provide written notice to the Executive with respect to each Payment promptly after it occurs, setting forth the nature of such Payment. Subject to the provisions of this Section 9, all determinations required to be made under this Section 9, 8 including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a law firm or public accounting firm selected among those regularly consulted by the Company during the twelve-month period immediately prior to the Change of Control regarding federal income tax matters (the "Firm"). Within 15 days after the Firm has been notified by the Executive or the Company that a parachute payment has occurred, such Firm shall provide a reasonably detailed supporting calculations with respect to such Payment both to the Company and the Executive. All fees and expenses of the Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within thirty days of the receipt of the Firm's determination. Any determination by the Firm shall be binding upon the Company and the Executive. 10. Indemnification. (a) The Company shall indemnify and hold Executive harmless to the maximum extent permitted by law against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys fees incurred by Executive, in connection with the defense of, or as a result of, any action or proceeding (or any appeal from any action or proceeding) in which Executive is made or is threatened to be made a party by reason of the fact that Executive is or was an officer or Director of the Company, regardless of whether such action or proceeding is one brought by or in the right of the Company, to procure a judgment in its favor (or other than by or in the right of the Company). (b) Notwithstanding anything in the Company's Articles of Incorporation, the by-laws or this Agreement to the contrary, if so requested by Executive, the Company shall advance any and all Expenses (as defined below) to Executive ("Expense Advance"), within fifteen days following the date of such request and the receipt of a written undertaking by or on behalf of Executive to repay such Expense Advance if a judgment or other final adjudication adverse to Executive (as to which all rights of appeal therefrom have been exhausted or lapsed) establishes that Executive, with respect to such Claim, is not eligible for indemnification. "Expenses" shall include attorneys' fees and all other costs, charges and expenses paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in any Claim relating to any indemnifiable event. A "Claim" shall include any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative or other, including without limitation, an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, whether predicated on foreign, federal, state or local law and whether formal or informal. 11. Insurance. The Company represents and warrants that (a) Executive shall be and continue to be covered and insured up to the maximum limits provided by all insurance which the Company maintains to indemnify its directors and officers (and to indemnify the corporation for any obligations which it incurs as a result of its undertaking to indemnify its officers and directors) and (b) the Company will use its best efforts to maintain such insurance, in not less than $1,000,000, in effect throughout the Term. 9 12. Binding Agreement; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of Executive and the Company and their respective heirs, legal representatives and permitted successors and assigns. If the Company shall at any time be merged or consolidated into or with any other entity, the provisions of this Agreement shall survive any such transaction and shall be binding on and inure to the benefit and responsibility of the entity resulting from such merger or consolidation (and this provision shall apply in the event of any subsequent merger or consolidation), and the Company, upon the occasion of the above-described transaction, shall include in the appropriate agreements the obligation that the payments herein agreed to be paid to or for the benefit of Executive, his beneficiaries or estate, shall be paid. 13. Dispute Resolution. Any controversy or claim arising with regard to this Agreement shall be settled by expedited arbitration in accordance with the provisions of the Texas Arbitration Act. The controversy or claim shall be submitted to an arbitrator appointed by the presiding judge of the Harris County, Texas Judicial District Court. The decision of the arbitrator shall be final and binding upon the parties hereto and shall be delivered in writing signed by the arbitrator to each of the parties hereto. Any appeal arising out of the ruling of any arbitrator shall be determined in a court of competent jurisdiction in Houston, Texas, or the federal court for Houston, Texas, and each party waives any claim to have the matter heard in any other local, state, or federal jurisdiction. The prevailing party in the arbitration proceeding or in any appeal shall be entitled to recover attorney's fees, court costs and all related costs from the non-prevailing party. If the controversy or claim arises with regard to any severance or separation payment required under Section 6 of this Agreement and the arbitrator rules in favor of Executive with respect thereto, then: (a) any award or sums due and owing to Executive under the terms of this Agreement shall be increased by an amount equal to the product of one month of Executive's Base Salary in effect immediately prior to the termination of this Agreement, multiplied by (i) if such award or sums is payable under Section 6(c), then the number of thirty (30) day periods or part thereof that has elapsed after the date ending six months after the date of Executive's termination or separation or (ii) otherwise, the number of thirty (30) day periods or part thereof that has elapsed after the date of Executive's termination; (b) if the Company fails to comply with any such ruling of the arbitrator, or if the Company unsuccessfully appeals any such ruling of the arbitrator, then any award or sums due and owing to Executive under the terms of this Agreement shall be increased by an amount equal to the product of one month of Executive's Base Salary in effect immediately prior to the termination of this Agreement, multiplied by the number of thirty (30) day periods or part thereof that has elapsed after the date of the arbitrator's initial decision or determination; and (c) If the arbitrator in such initial arbitration proceeding, or any court in any appeal thereof determine that Company acted in bad faith, or frivolously, in claiming "Cause" as its reason for termination of this Agreement, or in failing to offer to the Executive the severance or separation payment pursuant to Section 6 of this Agreement, then the Executive shall be entitled to receive and Company shall be ordered to pay to Executive as a penalty an amount equal to $100,000.00 in addition to the payments required under Section 6 of this Agreement and any 10 other amounts due under this Agreement. 14. Survivorship. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations and to the extent that any performance is required following termination of this Agreement. Without limiting the foregoing, Sections 6, 9 and 10 and Sections 12 through 23 shall expressly survive the termination of this Agreement. 15. Nonassignability. Neither this Agreement nor any right or interest hereunder shall be assignable by Executive, his beneficiaries, dependents or legal representatives without the Company's prior written consent; provided, however, that nothing in this Section 15 shall preclude (a) Executive from designating a beneficiary to receive any benefit payable hereunder upon his death, or (b) the executors, administrators or other legal representatives of Executive or his estate from assigning any rights hereunder to the person or persons entitled thereto. 16. Amendments to this Agreement. Except for increases in the Base Salary, Bonus and other compensation made as provided in Section 3, this Agreement may not be modified or amended except by an instrument in writing signed by the Executive and the Company. No increase in the Base Salary, Bonus or other compensation made as provided in Section 3 will operate as a cancellation or termination of this Agreement. 17. Waiver. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 18. Severability. If, for any reason, any provision of this Agreement is held invalid, illegal or unenforceable such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement not held so invalid, illegal or unenforceable, and each such other provision shall, to the full extent consistent with law, continue in full force and effect. In addition, if any provision of this Agreement shall be held invalid, illegal or unenforceable in part, such invalidity, illegality or unenforceability shall in no way affect the rest of such provision not held so invalid, illegal or unenforceable and the rest of such provision, together with all other provisions of this Agreement, shall, to the full extent consistent with law, continue in full force and effect. If any provision or part thereof shall be held invalid, illegal or unenforceable, to the fullest extent permitted by law, a provision or part thereof shall be substituted therefor that is valid, legal and enforceable. 11 19. Notices. Any notice, request, or other communication required or permitted pursuant to this Agreement shall be in writing and shall be deemed duly given when received by the party to whom it shall be given or three days after being mailed by certified, registered, or express mail, postage prepaid, addressed as follows: If to Company: Far East Energy Corporation 400 North Sam Houston Parkway East Suite 205 Houston, Texas 77060 Attention: Chairman of Compensation Committee If to Executive: Bruce N. Huff 23614 River Place Dr. Katy, Texas 77494 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 20. Headings. The headings of Sections are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 21. Governing Law. This Agreement has been executed and delivered in the State of Texas, and its validity, interpretation, performance and enforcement shall be governed by the laws of Texas, without giving effect to any principles of conflicts of law. 22. Withholding. All amounts paid pursuant to this Agreement shall be subject to withholding for taxes (federal, state, local or otherwise) to the extent required by applicable law. 23. Counterparts. This Agreement may be executed in counterparts, each of which, when taken together, shall constitute one original Agreement. 24. Amendment and Restatement. This Agreement constitutes an amendment, modification and restatement of the Prior Agreement. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Company or any predecessor of the Company and Executive, including the Prior Agreement, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided and not expressly provided for in this Agreement. 12 IN WITNESS WHEREOF, Company has caused its duly authorized officer and directors to execute and attest to this Agreement, and Executive has placed his signature hereon, effective as of the first date above. COMPANY: FAR EAST ENERGY CORPORATION By: /s/ John Mihm ----------------------------------- John Mihm, Director EXECUTIVE: By: /s/ Bruce N. Huff ----------------------------------- Bruce N. Huff 13 EX-10.3 4 h21197exv10w3.txt AMENDED NON-QUALIFIED STOCK OPTION AGMT - MICHAEL R. MCELWRATH EXHIBIT 10.3 FAR EAST ENERGY CORPORATION AMENDED AND RESTATED NONQUALIFIED STOCK OPTION AGREEMENT GENERAL INFORMATION Name: Michael R. McElwrath Award Date: October 13, 2003 Number of Shares Subject to Option: 1,200,000 Exercise Price: $0.65 Vesting: One fifth upon the Award Date and one fifth each succeeding anniversary of the Award Date until fully vested Expiration Date: October 13, 2013 FAR EAST ENERGY CORPORATION AMENDED AND RESTATED NONQUALIFIED STOCK OPTION AGREEMENT THIS AMENDED AND RESTATED NONQUALIFIED STOCK OPTION AGREEMENT (this "AGREEMENT") is made as of this 23rd day of December, 2004, by and between Far East Energy Corporation, a Nevada corporation (the "CORPORATION"), and Michael R. McElwrath ("PARTICIPANT"). WHEREAS, the Corporation and the Participant previously entered into a Stock Option Agreement (the "ORIGINAL OPTION AGREEMENT") dated as of October 13, 2003 (the "AWARD DATE") setting forth the grant of options to purchase 1,200,000 shares of common stock, par value $0.001 per share, of the Corporation (the "COMMON STOCK") at an exercise price per share of $0.65; and WHEREAS, the Participant has entered into an Amended and Restated Employment Agreement (as hereinafter amended, restated and modified from time to time, the "EMPLOYMENT AGREEMENT") dated the date hereof with the Corporation and, in connection therewith, the Corporation and the Participant have agreed to amend and restate the Original Option Agreement; NOW, THEREFORE, in consideration of the foregoing, of the mutual promises hereinafter set forth and of such other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. GRANT OF OPTION; DEFINED TERMS. A. Capitalized terms used herein without definition shall have the meaning ascribed to such terms in the Employment Agreement. B. Subject to the terms and conditions hereinafter set forth, the Corporation, with the approval and at the direction of the Compensation Committee of the Board of Directors (the "COMMITTEE"), and the Participant hereby acknowledge and agree that the Corporation granted to Participant, as of the Award Date, an option to purchase up to 1,200,000 shares of Common Stock at a price of U.S.$0.65 per share (as may be adjusted in accordance with Article 5, the "EXERCISE PRICE") in accordance with the terms of the Original Option Agreement. Such option is hereinafter referred to as the "OPTION," and the shares of Common Stock purchasable upon exercise of the Option are hereinafter referred to as the "SHARES." The Option is intended by the parties hereto to be, and shall be treated as, a nonqualified stock option (as such term is defined under Section 422 of the Internal Revenue Code of 1986, as amended). 1 C. The right to exercise 20% of the Option (or a portion thereof) shall vest and first become exercisable on the Award Date, and an additional 20% shall vest on each succeeding anniversary of the Award Date until all of the Option is vested (the "VESTING DATE(S)"), so that all of the Shares subject to the Option shall be fully vested on October 13, 2007; provided, however, that Participant has been continuously employed or otherwise retained by the Corporation during the period from the Award Date until the applicable Vesting Date. D. The Option shall be immediately vested and exercisable in accordance with the terms and conditions of, and to the extent provided in, the Employment Agreement. 2. TERMINATION OF OPTION. The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after October 13, 2013 (the "OPTION TERM"). 3. EXERCISE OF OPTION. A. Participant may exercise the Option with respect to all or any part of the number of Shares then exercisable hereunder by giving the Secretary of the Corporation written notice of intent to exercise. The notice of exercise shall specify the number of Shares as to which Participant is exercising and the date of exercise thereof, which date shall be not less than five (5) days after the giving of such notice (unless an earlier time shall have been mutually agreed upon in writing). All or any portion of the vested portion of the Option may be exercised by Participant at any time on or before October 13, 2013. B. Notwithstanding anything contained in this Article 3 to the contrary, the Option may be exercised only in compliance with all applicable securities laws and only by (i) Participant's completion, execution and delivery to the Corporation of a notice of exercise and, if required by the Corporation, an "investment letter" as supplied by the Corporation and (ii) the payment to the Corporation, as provided in Article 3D hereof, of an amount equal to the amount obtained by multiplying the Exercise Price by the number of Shares being purchased pursuant to such exercise as shall be specified by Participant in such notice of exercise. Except as otherwise provided in the Employment Agreement, Participant shall not sell, transfer, assign, pledge for a loan, margin, hypothecate or exchange the Option or the option shares until April 1, 2005, except pursuant to the laws of descent and except that Participant's estate, executors or administrators, or personal or legal representatives may exercise the Option in accordance with the terms of Article 3C hereof in the event of the death or Disability of Participant. C. In the event of the death or Disability of Participant at such time that Participant shall possess an Option pursuant to the terms of this Agreement, Participant, Participant's estate, executors or administrators, or personal or legal representatives (as applicable) shall be entitled to exercise the Option within three years following Participant's termination of employment (but not beyond the Option Term). Any person, other than Participant, so desiring to exercise Participant's Option shall be required, as a condition to the exercise of the Option, to furnish to the Corporation such documentation as the Corporation shall deem satisfactory to evidence the 2 authority of such person to exercise the Option on behalf of Participant. In the event of the exercise of such Option by Participant's estate, executors or administrators, or personal or legal representatives, all references herein to Participant shall, to the extent applicable, be deemed to refer to and include such estate, executors or administrators, or personal or legal representatives, as the case may be. D. The Exercise Price shall be paid in full by Participant for the Shares purchased on or before the exercise date specified in the notice of exercise, at Participant's option, in one or a combination of the following methods: (i) in cash or by electronic funds transfer; (ii) by check payable to the order of the Corporation; (iii) if authorized by the Board of Directors of the Corporation (the "BOARD"), or the Committee, by a promissory note of the Participant; (iv) by notice and third party payment in such manner as may be authorized by the Board or the Committee; (v) by the delivery of shares of Common Stock of the Corporation already owned by the Participant; or (vi) pursuant to a "cashless exercise" procedure (the "CASHLESS EXERCISE RIGHT") pursuant to which the Participant shall surrender to the Corporation this Option and a notice of exercise, duly completed and executed by the Participant to evidence the exercise of the Cashless Exercise Right by authorizing the Corporation to withhold from issuance a number of Shares issuable upon such exercise of the Option which, when multiplied by the Fair Market Value (as defined below) of such Shares, is equal to the aggregate Exercise Price (and such withheld Shares shall no longer be issuable under this Option). Shares of Common Stock used to satisfy the Exercise Price of an Option shall be valued at their Fair Market Value on the date of exercise. E. The "FAIR MARKET VALUE" shall be determined as follows: (a) if the security at issue is listed on a national securities exchange or admitted to unlisted trading privileges on such an exchange or quoted on either the National Market System or the Small Cap Market of the automated quotation service operated by The Nasdaq Stock Market, Inc., the Fair Market Value shall be the last reported sale price of that security on such exchange or system on the day for which the Fair Market Value is to be determined or, if no such sale is made on such day, the average of the highest closing bid and lowest asked price for such day on such exchange or system; or (b) if the security at issue is not so listed or quoted or admitted to unlisted trading privileges, the Fair Market Value shall be the average of the last reported highest bid and lowest asked prices quoted on the Electronic Bulletin Board operated by The Nasdaq Stock Market, Inc., or, if not so quoted, then by the National Quotation Bureau, Inc. on the last business day prior to the day for which the Fair Market Value is to be determined; or (c) if the security at issue is not so listed or quoted or admitted to unlisted trading privileges and bid and asked prices are not reported, the Fair Market Value shall be determined in such reasonable manner as may be prescribed from time to time by the Board. 3 F. Upon the exercise of all or any portion of the Option by Participant, or as soon thereafter as is practicable, the Corporation shall issue and deliver to Participant (or to any broker or, if acceptable to the Corporation, to any other person designated by Participant) a certificate or certificates evidencing such number of Shares as Participant has elected to purchase. Such certificate or certificates shall be registered in the name of Participant (or the designated broker or other person) and, if applicable, shall bear an appropriate investment warranty legend, any legend required by an applicable securities law, rule or regulation and, if applicable, a legend referring to the restrictions provided hereunder and under the Employment Agreement and any legend required by applicable law. Upon the exercise of the Option and the issuance and delivery of such certificate or certificates, Participant (or the person to whom such stock certificates are registered) shall have all the rights of a stockholder with respect to such Shares and to receive all dividends or other distributions paid or made with respect thereto. In the event that the capital stock of the Corporation is converted in whole or in part into securities of any other entity, a determination as to whether the securities of the other entity so received (if any) shall be subject to the restrictions set forth in this Agreement shall be made solely by the other entity. 4. RIGHTS PRIOR TO EXERCISE. Participant shall have no equity interest in the Corporation or any voting, dividend, liquidation or dissolution rights with respect to any capital stock of the Corporation solely by reason of having an Option or having executed this Agreement. Prior to the exercise of all or a portion of the Option, as set forth in Article 3A hereof, and the issuance and delivery of a certificate or certificates evidencing the Shares purchased pursuant to the exercise of all or a portion of such Option, Participant shall have no interest in, or any voting, dividend, liquidation or dissolution rights with respect to, the Shares, except to the extent that Participant has exercised all or a portion of such Option and has been issued and received delivery of a certificate or certificates evidencing the Shares purchased pursuant to such exercise. 5. ADJUSTMENT OF PURCHASE AND NUMBER OF SHARES. A. ADJUSTMENT. The number and kind of securities purchasable upon the exercise of this Option and the Exercise Price shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) Reclassification, Consolidation or Merger. At any time while this Option remains outstanding and unexpired, in case of (i) any reclassification or change of outstanding securities issuable upon exercise of this Option (other than a change in par value, or from par value to no par value per share, or from no par value per share to par value or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of the Option), (ii) any consolidation or merger of the Corporation with or into another corporation (other than a merger with another corporation in which the Corporation is a continuing corporation and which does not result in any reclassification or change, other than a change in par value, or from par value to no par value per share, or from no par value per share to par value, or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of this Option), or (iii) any sale or 4 transfer to another corporation of the property of the Corporation as an entirety or substantially as an entirety, the Corporation, or such successor or purchasing corporation, as the case may be, shall without payment of any additional consideration therefore, execute a new Option providing that the holder of this Option shall have the right to exercise such new Option (upon terms not less favorable to the holder than those then applicable to this Option) and to receive upon such exercise, in lieu of each share of Common Stock theretofore issuable upon exercise of this Option, the kind and amount of shares of stock, other securities, money or property receivable upon such reclassification, change , consolidation, merger, sale or transfer. Such new Options shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 5A. The provisions of this Section 5A(a) shall similarly apply to successive reclassifications, changes, consolidations, mergers, sales and transfers. (b) Subdivision or Combination of Shares. If the Corporation at any time while this Option remains outstanding and unexpired, shall subdivide or combine its capital stock, the Exercise Price shall be proportionately reduced, in case of subdivision of such shares as of the effective date of such subdivision, or, if the Corporation shall take a record of holders of its capital stock for the purpose of so subdividing, as of such record date, whichever is earlier, or shall be proportionately increased, in the case of combination of such shares, as of the effective date of such combination, or, if the Corporation shall take a record of holders of its capital stock for the purpose of so combining, as of such record date, whichever is earlier. (c) Stock Dividends. If the Corporation at any time which this Option is outstanding and unexpired shall pay a dividend in shares of, or make other distribution of shares of, its capital stock, then the Exercise Price shall be adjusted, as of the date the Corporation shall take a record of the holders of its capital stock for the purpose of receiving such dividend or other distribution (or if no such record is taken, as at the date of such payment or other distribution), to that price determined by multiplying the Exercise Price in effect immediately prior to such payment or other distribution by a fraction (i) the numerator of which shall be the total number of shares of capital stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of capital stock outstanding immediately after such dividend or distribution. The provisions of this Section 5A(c) shall not apply under any of the circumstances for which an adjustment is provided in Section 5A(a) or 5A(b). (d) Liquidating Dividends, Etc. If the Corporation at any time while this Option is outstanding and unexpired makes a distribution of its assets to the holders of its capital stock as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Corporation's assets (other than under the circumstances provided 5 for in the Sections 5A(a) through (c)), the holder of this Option shall be entitled to receive upon the exercise hereof, in addition to the shares of Common Stock receivable upon such exercise, and without payment of any consideration other than the Exercise Price, an amount in cash equal to the value of such distribution per share of Common Stock multiplied by the number of shares of Common Stock which, on the record date for such distribution, are issuable upon exercise of this Option (with no further adjustment being made following any event which causes a subsequent adjustment in the number of shares of Common Stock issuable upon the exercise hereof ), and an appropriate provision therefor should be made a part of any such distribution. The value of a distribution which is paid in other than cash shall be determined in good faith by the Board. B. NOTICE OF ADJUSTMENTS. Whenever any of the Exercise Price or the number of shares of Common Stock purchasable under the terms of this Option at that Exercise Price shall be adjusted pursuant to Section 5A hereof, the Corporation shall promptly make a certificate signed by its Chief Executive Officer, President or a Vice President and by its Treasurer or Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis upon which the Board made any determination hereunder), and the Exercise Price and number of shares of Common Stock purchasable at that Exercise Price after giving effect to such adjustment, and shall promptly cause copies of such certificate to be mailed (by First Class and Postage Prepaid) to the registered holder of this Option. 6. HEADINGS. The headings and other captions contained in this Agreement are for convenience of reference only, and shall not be used in interpreting, construing or enforcing any of the provisions of this Agreement. 7. ENTIRE AGREEMENT. This Agreement, together with the Employment Agreement, sets forth all of the promises, agreements, conditions, understandings, warranties and representations between the parties hereto with respect to the Shares, and there are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, between them with respect to the Shares other than as set forth herein and in the Employment Agreement. Any and all prior agreements between the parties hereto with respect to any stock acquisition rights regarding the Shares are hereby revoked. This Agreement, together with the Employment Agreement, is, and is intended by the parties to be, an integration of any and all prior agreements or understandings, oral or written, with respect to the Option and the Shares. 8. NOTICES. Any and all notices provided for herein shall be sufficient if in writing, and sent by hand delivery, by an overnight delivery service that produces a signed receipt evidencing delivery or by certified or registered mail (return receipt requested and first class postage prepaid), in the case of the Corporation, to its principal office, and in the case of Participant, to Participant's address as shown on the Corporation's records. 9. INVALID OR UNENFORCEABLE PROVISIONS. The provisions of this Agreement shall be 6 deemed severable, and the invalidity or unenforceability of any one or more of the provisions hereof shall not affect the validity and enforceability of the other provisions hereof. Participant agrees that the breach or alleged breach by the Corporation of (a) any covenant contained in another agreement (if any) between the Corporation and Participant or (b) any obligation owed to Participant by the Corporation, shall not affect the validity or enforceability of the covenants and agreements of Participant set forth herein. 10. MODIFICATIONS. No change or modification of this Agreement shall be valid unless the same is in writing and signed by the parties hereto; provided, however, that Participant hereby covenants and agrees to execute any amendment to this Agreement which shall be required or desirable (in the opinion of the Corporation or its counsel) in order to comply with any rule or regulation promulgated or proposed under the Internal Revenue Code of 1986, as amended, by the Internal Revenue Service. 11. INCORPORATION OF EMPLOYMENT AGREEMENT BY REFERENCE. The Option is granted pursuant to the terms of the Employment Agreement, the terms of which are incorporated herein by reference, and the Option shall in all respects be interpreted in accordance with the Employment Agreement. To the extent that any conflict may exist between any term or provision of this Agreement and any term or provision of the Employment Agreement (other than with respect to matters that, pursuant to the Employment Agreement, may be altered in this Agreement), such term or provision of the Employment Agreement shall control. 12. GOVERNING LAW. The validity, construction, interpretation and effect of this Agreement shall exclusively be governed by and determined in accordance with the laws of Texas (other than the conflicts-of-law or choice-of-law rules thereof), except to the extent preempted by federal law, which solely to the extent of such preemption shall govern. Venue shall lie only in the State and Federal Courts in and for the County of Harris, Texas, as to all disputes arising under this Agreement, and such venue is hereby consented to by the Corporation and Participant. 13. COUNTERPARTS. This Agreement may be executed in counterparts, each of which, when taken together, shall constitute one original agreement. 14. AMENDMENT AND RESTATEMENT. This Agreement constitutes an amendment, modification and restatement of the Original Option Agreement. This Agreement contains the entire understanding between the parties hereto and supersedes the Original Option Agreement. [SIGNATURE PAGE FOLLOWS.] 7 IN WITNESS WHEREOF, the Corporation has caused its duly authorized officer to execute and attest to this Agreement, and to apply the corporate seal hereto, and Participant has placed his or her signature hereon, effective as of this 23rd day of December, 2004. CORPORATION: FAR EAST ENERGY CORPORATION By: /s/ John Mihm -------------------------------------- John Mihm, Director PARTICIPANT: By: /s/ Michael R. McElwrath -------------------------------------- Michael R. McElwrath 8 EX-10.4 5 h21197exv10w4.txt AMENDED NON-QUALIFIED STOCK OPTION AGMT - MICHAEL R. MCELWRATH EXHIBIT 10.4 FAR EAST ENERGY CORPORATION AMENDED AND RESTATED NONQUALIFIED STOCK OPTION AGREEMENT GENERAL INFORMATION Name: Michael R. McElwrath Award Date: January 29, 2002 Number of Shares Subject to Option: 100,000 Exercise Price: $0.65 Vesting: One fifth on July 29, 2002 and one fifth each succeeding anniversary of the Award Date until fully vested Expiration Date: January 29, 2009 FAR EAST ENERGY CORPORATION AMENDED AND RESTATED NONQUALIFIED STOCK OPTION AGREEMENT THIS AMENDED AND RESTATED NONQUALIFIED STOCK OPTION AGREEMENT (this "AGREEMENT") is made as of this 23rd day of December, 2004, by and between Far East Energy Corporation, a Nevada corporation (the "CORPORATION"), and Michael R. McElwrath ("PARTICIPANT"). WHEREAS, the Corporation and the Participant previously entered into a Stock Option Agreement (the "ORIGINAL OPTION AGREEMENT") dated as of January 29, 2002 (the "AWARD DATE") setting forth the grant of options to purchase 100,000 shares of common stock, par value $0.001 per share, of the Corporation (the "COMMON STOCK") at an exercise price per share of $0.65; and WHEREAS, the Participant has entered into an Amended and Restated Employment Agreement (as hereinafter amended, restated and modified from time to time, the "EMPLOYMENT AGREEMENT") dated the date hereof with the Corporation and, in connection therewith, the Corporation and the Participant have agreed to amend and restate the Original Option Agreement; NOW, THEREFORE, in consideration of the foregoing, of the mutual promises hereinafter set forth and of such other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. GRANT OF OPTION; DEFINED TERMS. A. Capitalized terms used herein without definition shall have the meaning ascribed to such terms in the Employment Agreement. B. Subject to the terms and conditions hereinafter set forth, the Corporation, with the approval and at the direction of the Compensation Committee of the Board of Directors (the "COMMITTEE"), and the Participant hereby acknowledge and agree that the Corporation granted to Participant, as of the Award Date, an option to purchase up to 100,000 shares of Common Stock at a price of U.S.$0.65 per share (as may be adjusted in accordance with Article 5, the "EXERCISE PRICE") in accordance with the terms of the Original Option Agreement. Such option is hereinafter referred to as the "OPTION," and the shares of Common Stock purchasable upon exercise of the Option are hereinafter referred to as the "SHARES." The Option is intended by the parties hereto to be, and shall be treated as, a nonqualified stock option (as such term is defined under Section 422 of the Internal Revenue Code of 1986, as amended). 1 C. The right to exercise 20% of the Option (or a portion thereof) shall vest and first become exercisable on July 29, 2002, and an additional 20% shall vest on each succeeding anniversary of the Award Date until all of the Option is vested (the "VESTING DATE(S)"), so that all of the Shares subject to the Option shall be fully vested on January 29, 2006; provided, however, that Participant has been continuously employed or otherwise retained by the Corporation during the period from the Award Date until the applicable Vesting Date. D. The Option shall be immediately vested and exercisable in accordance with the terms and conditions of, and to the extent provided in, the Employment Agreement. 2. TERMINATION OF OPTION. The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after January 29, 2009 (the "OPTION TERM"). 3. EXERCISE OF OPTION. A. Participant may exercise the Option with respect to all or any part of the number of Shares then exercisable hereunder by giving the Secretary of the Corporation written notice of intent to exercise. The notice of exercise shall specify the number of Shares as to which Participant is exercising and the date of exercise thereof, which date shall be not less than five (5) days after the giving of such notice (unless an earlier time shall have been mutually agreed upon in writing). All or any portion of the vested portion of the Option may be exercised by Participant at any time on or before January 29, 2009. B. Notwithstanding anything contained in this Article 3 to the contrary, the Option may be exercised only in compliance with all applicable securities laws and only by (i) Participant's completion, execution and delivery to the Corporation of a notice of exercise and, if required by the Corporation, an "investment letter" as supplied by the Corporation and (ii) the payment to the Corporation, as provided in Article 3D hereof, of an amount equal to the amount obtained by multiplying the Exercise Price by the number of Shares being purchased pursuant to such exercise as shall be specified by Participant in such notice of exercise. Except as otherwise provided in the Employment Agreement, Participant shall not sell, transfer, assign, pledge for a loan, margin, hypothecate or exchange the Option or the option shares until April 1, 2005, except pursuant to the laws of descent and except that Participant's estate, executors or administrators, or personal or legal representatives may exercise the Option in accordance with the terms of Article 3C hereof in the event of the death or Disability of Participant. C. In the event of the death or Disability of Participant at such time that Participant shall possess an Option pursuant to the terms of this Agreement, Participant, Participant's estate, executors or administrators, or personal or legal representatives (as applicable) shall be entitled to exercise the Option within three years following Participant's termination of employment (but not beyond the Option Term). Any person, other than Participant, so desiring to exercise Participant's Option shall be required, as a condition to the exercise of the Option, to furnish to the Corporation such documentation as the Corporation shall deem satisfactory to evidence the 2 authority of such person to exercise the Option on behalf of Participant. In the event of the exercise of such Option by Participant's estate, executors or administrators, or personal or legal representatives, all references herein to Participant shall, to the extent applicable, be deemed to refer to and include such estate, executors or administrators, or personal or legal representatives, as the case may be. D. The Exercise Price shall be paid in full by Participant for the Shares purchased on or before the exercise date specified in the notice of exercise, at Participant's option, in one or a combination of the following methods: (i) in cash or by electronic funds transfer; (ii) by check payable to the order of the Corporation; (iii) if authorized by the Board of Directors of the Corporation (the "BOARD"), or the Committee, by a promissory note of the Participant; (iv) by notice and third party payment in such manner as may be authorized by the Board or the Committee; (v) by the delivery of shares of Common Stock of the Corporation already owned by the Participant; or (vi) pursuant to a "cashless exercise" procedure (the "CASHLESS EXERCISE RIGHT") pursuant to which the Participant shall surrender to the Corporation this Option and a notice of exercise, duly completed and executed by the Participant to evidence the exercise of the Cashless Exercise Right by authorizing the Corporation to withhold from issuance a number of Shares issuable upon such exercise of the Option which, when multiplied by the Fair Market Value (as defined below) of such Shares, is equal to the aggregate Exercise Price (and such withheld Shares shall no longer be issuable under this Option). Shares of Common Stock used to satisfy the Exercise Price of an Option shall be valued at their Fair Market Value on the date of exercise. E. The "FAIR MARKET VALUE" shall be determined as follows: (a) if the security at issue is listed on a national securities exchange or admitted to unlisted trading privileges on such an exchange or quoted on either the National Market System or the Small Cap Market of the automated quotation service operated by The Nasdaq Stock Market, Inc., the Fair Market Value shall be the last reported sale price of that security on such exchange or system on the day for which the Fair Market Value is to be determined or, if no such sale is made on such day, the average of the highest closing bid and lowest asked price for such day on such exchange or system; or (b) if the security at issue is not so listed or quoted or admitted to unlisted trading privileges, the Fair Market Value shall be the average of the last reported highest bid and lowest asked prices quoted on the Electronic Bulletin Board operated by The Nasdaq Stock Market, Inc., or, if not so quoted, then by the National Quotation Bureau, Inc. on the last business day prior to the day for which the Fair Market Value is to be determined; or (c) if the security at issue is not so listed or quoted or admitted to unlisted trading privileges and bid and asked prices are not reported, the Fair Market Value shall be determined in such reasonable manner as may be prescribed from time to time by the Board. 3 F. Upon the exercise of all or any portion of the Option by Participant, or as soon thereafter as is practicable, the Corporation shall issue and deliver to Participant (or to any broker or, if acceptable to the Corporation, to any other person designated by Participant) a certificate or certificates evidencing such number of Shares as Participant has elected to purchase. Such certificate or certificates shall be registered in the name of Participant (or the designated broker or other person) and, if applicable, shall bear an appropriate investment warranty legend, any legend required by an applicable securities law, rule or regulation and, if applicable, a legend referring to the restrictions provided hereunder and under the Employment Agreement and any legend required by applicable law. Upon the exercise of the Option and the issuance and delivery of such certificate or certificates, Participant (or the person to whom such stock certificates are registered) shall have all the rights of a stockholder with respect to such Shares and to receive all dividends or other distributions paid or made with respect thereto. In the event that the capital stock of the Corporation is converted in whole or in part into securities of any other entity, a determination as to whether the securities of the other entity so received (if any) shall be subject to the restrictions set forth in this Agreement shall be made solely by the other entity. 4. RIGHTS PRIOR TO EXERCISE. Participant shall have no equity interest in the Corporation or any voting, dividend, liquidation or dissolution rights with respect to any capital stock of the Corporation solely by reason of having an Option or having executed this Agreement. Prior to the exercise of all or a portion of the Option, as set forth in Article 3A hereof, and the issuance and delivery of a certificate or certificates evidencing the Shares purchased pursuant to the exercise of all or a portion of such Option, Participant shall have no interest in, or any voting, dividend, liquidation or dissolution rights with respect to, the Shares, except to the extent that Participant has exercised all or a portion of such Option and has been issued and received delivery of a certificate or certificates evidencing the Shares purchased pursuant to such exercise. 5. ADJUSTMENT OF PURCHASE AND NUMBER OF SHARES. A. ADJUSTMENT. The number and kind of securities purchasable upon the exercise of this Option and the Exercise Price shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) Reclassification, Consolidation or Merger. At any time while this Option remains outstanding and unexpired, in case of (i) any reclassification or change of outstanding securities issuable upon exercise of this Option (other than a change in par value, or from par value to no par value per share, or from no par value per share to par value or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of the Option), (ii) any consolidation or merger of the Corporation with or into another corporation (other than a merger with another corporation in which the Corporation is a continuing corporation and which does not result in any reclassification or change, other than a change in par value, or from par value to no par value per share, or from no par value per share to par value, or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of this Option), or (iii) any sale or 4 transfer to another corporation of the property of the Corporation as an entirety or substantially as an entirety, the Corporation, or such successor or purchasing corporation, as the case may be, shall without payment of any additional consideration therefore, execute a new Option providing that the holder of this Option shall have the right to exercise such new Option (upon terms not less favorable to the holder than those then applicable to this Option) and to receive upon such exercise, in lieu of each share of Common Stock theretofore issuable upon exercise of this Option, the kind and amount of shares of stock, other securities, money or property receivable upon such reclassification, change , consolidation, merger, sale or transfer. Such new Options shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 5A. The provisions of this Section 5A(a) shall similarly apply to successive reclassifications, changes, consolidations, mergers, sales and transfers. (b) Subdivision or Combination of Shares. If the Corporation at any time while this Option remains outstanding and unexpired, shall subdivide or combine its capital stock, the Exercise Price shall be proportionately reduced, in case of subdivision of such shares as of the effective date of such subdivision, or, if the Corporation shall take a record of holders of its capital stock for the purpose of so subdividing, as of such record date, whichever is earlier, or shall be proportionately increased, in the case of combination of such shares, as of the effective date of such combination, or, if the Corporation shall take a record of holders of its capital stock for the purpose of so combining, as of such record date, whichever is earlier. (c) Stock Dividends. If the Corporation at any time which this Option is outstanding and unexpired shall pay a dividend in shares of, or make other distribution of shares of, its capital stock, then the Exercise Price shall be adjusted, as of the date the Corporation shall take a record of the holders of its capital stock for the purpose of receiving such dividend or other distribution (or if no such record is taken, as at the date of such payment or other distribution), to that price determined by multiplying the Exercise Price in effect immediately prior to such payment or other distribution by a fraction (i) the numerator of which shall be the total number of shares of capital stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of capital stock outstanding immediately after such dividend or distribution. The provisions of this Section 5A(c) shall not apply under any of the circumstances for which an adjustment is provided in Section 5A(a) or 5A(b). (d) Liquidating Dividends, Etc. If the Corporation at any time while this Option is outstanding and unexpired makes a distribution of its assets to the holders of its capital stock as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Corporation's assets (other than under the circumstances provided 5 for in the Sections 5A(a) through (c)), the holder of this Option shall be entitled to receive upon the exercise hereof, in addition to the shares of Common Stock receivable upon such exercise, and without payment of any consideration other than the Exercise Price, an amount in cash equal to the value of such distribution per share of Common Stock multiplied by the number of shares of Common Stock which, on the record date for such distribution, are issuable upon exercise of this Option (with no further adjustment being made following any event which causes a subsequent adjustment in the number of shares of Common Stock issuable upon the exercise hereof ), and an appropriate provision therefor should be made a part of any such distribution. The value of a distribution which is paid in other than cash shall be determined in good faith by the Board. B. NOTICE OF ADJUSTMENTS. Whenever any of the Exercise Price or the number of shares of Common Stock purchasable under the terms of this Option at that Exercise Price shall be adjusted pursuant to Section 5A hereof, the Corporation shall promptly make a certificate signed by its Chief Executive Officer, President or a Vice President and by its Treasurer or Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis upon which the Board made any determination hereunder), and the Exercise Price and number of shares of Common Stock purchasable at that Exercise Price after giving effect to such adjustment, and shall promptly cause copies of such certificate to be mailed (by First Class and Postage Prepaid) to the registered holder of this Option. 6. HEADINGS. The headings and other captions contained in this Agreement are for convenience of reference only, and shall not be used in interpreting, construing or enforcing any of the provisions of this Agreement. 7. ENTIRE AGREEMENT. This Agreement, together with the Employment Agreement, sets forth all of the promises, agreements, conditions, understandings, warranties and representations between the parties hereto with respect to the Shares, and there are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, between them with respect to the Shares other than as set forth herein and in the Employment Agreement. Any and all prior agreements between the parties hereto with respect to any stock acquisition rights regarding the Shares are hereby revoked. This Agreement, together with the Employment Agreement, is, and is intended by the parties to be, an integration of any and all prior agreements or understandings, oral or written, with respect to the Option and the Shares. 8. NOTICES. Any and all notices provided for herein shall be sufficient if in writing, and sent by hand delivery, by an overnight delivery service that produces a signed receipt evidencing delivery or by certified or registered mail (return receipt requested and first class postage prepaid), in the case of the Corporation, to its principal office, and in the case of Participant, to Participant's address as shown on the Corporation's records. 9. INVALID OR UNENFORCEABLE PROVISIONS. The provisions of this Agreement shall be 6 deemed severable, and the invalidity or unenforceability of any one or more of the provisions hereof shall not affect the validity and enforceability of the other provisions hereof. Participant agrees that the breach or alleged breach by the Corporation of (a) any covenant contained in another agreement (if any) between the Corporation and Participant or (b) any obligation owed to Participant by the Corporation, shall not affect the validity or enforceability of the covenants and agreements of Participant set forth herein. 10. MODIFICATIONS. No change or modification of this Agreement shall be valid unless the same is in writing and signed by the parties hereto; provided, however, that Participant hereby covenants and agrees to execute any amendment to this Agreement which shall be required or desirable (in the opinion of the Corporation or its counsel) in order to comply with any rule or regulation promulgated or proposed under the Internal Revenue Code of 1986, as amended, by the Internal Revenue Service. 11. INCORPORATION OF EMPLOYMENT AGREEMENT BY REFERENCE. The Option is granted pursuant to the terms of the Employment Agreement, the terms of which are incorporated herein by reference, and the Option shall in all respects be interpreted in accordance with the Employment Agreement. To the extent that any conflict may exist between any term or provision of this Agreement and any term or provision of the Employment Agreement (other than with respect to matters that, pursuant to the Employment Agreement, may be altered in this Agreement), such term or provision of the Employment Agreement shall control. 12. GOVERNING LAW. The validity, construction, interpretation and effect of this Agreement shall exclusively be governed by and determined in accordance with the laws of Texas (other than the conflicts-of-law or choice-of-law rules thereof), except to the extent preempted by federal law, which solely to the extent of such preemption shall govern. Venue shall lie only in the State and Federal Courts in and for the County of Harris, Texas, as to all disputes arising under this Agreement, and such venue is hereby consented to by the Corporation and Participant. 13. COUNTERPARTS. This Agreement may be executed in counterparts, each of which, when taken together, shall constitute one original agreement. 14. AMENDMENT AND RESTATEMENT. This Agreement constitutes an amendment, modification and restatement of the Original Option Agreement. This Agreement contains the entire understanding between the parties hereto and supersedes the Original Option Agreement. [SIGNATURE PAGE FOLLOWS.] 7 IN WITNESS WHEREOF, the Corporation has caused its duly authorized officer to execute and attest to this Agreement, and to apply the corporate seal hereto, and Participant has placed his or her signature hereon, effective as of this 23rd day of December, 2004. CORPORATION: FAR EAST ENERGY CORPORATION By: /s/ John Mihm ---------------------------------------- John Mihm, Director PARTICIPANT: By: /s/ Michael R. McElwrath ---------------------------------------- Michael R. McElwrath 8 EX-10.5 6 h21197exv10w5.txt AMENDED NON-QUALIFIED STOCK OPTION AGMT - BRUCE N. HUFF EXHIBIT 10.5 FAR EAST ENERGY CORPORATION AMENDED AND RESTATED NONQUALIFIED STOCK OPTION AGREEMENT GENERAL INFORMATION Name: Bruce N. Huff Award Date: May 1, 2004 Number of Shares Subject to Option: 500,000 Exercise Price: $2.00 Vesting: One fifth upon the Award Date and one fifth each succeeding anniversary of the Award Date until fully vested Expiration Date: May 1, 2009 FAR EAST ENERGY CORPORATION AMENDED AND RESTATED NONQUALIFIED STOCK OPTION AGREEMENT THIS AMENDED AND RESTATED NONQUALIFIED STOCK OPTION AGREEMENT (this "AGREEMENT") is made as of this 23rd day of December, 2004, by and between Far East Energy Corporation, a Nevada corporation (the "CORPORATION"), and Bruce N. Huff ("PARTICIPANT"). WHEREAS, the Corporation and the Participant previously entered into a Stock Option Agreement (the "ORIGINAL OPTION AGREEMENT") dated as of May 1, 2004 (the "AWARD DATE") setting forth the grant of options to purchase 500,000 shares of common stock, par value $0.001 per share, of the Corporation (the "COMMON STOCK") at an exercise price per share of $2.00; and WHEREAS, the Participant has entered into an Amended and Restated Employment Agreement (as hereinafter amended, restated and modified from time to time, the "EMPLOYMENT AGREEMENT") dated the date hereof with the Corporation and, in connection therewith, the Corporation and the Participant have agreed to amend and restate the Original Option Agreement; NOW, THEREFORE, in consideration of the foregoing, of the mutual promises hereinafter set forth and of such other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. GRANT OF OPTION; DEFINED TERMS. A. Capitalized terms used herein without definition shall have the meaning ascribed to such terms in the Employment Agreement. B. Subject to the terms and conditions hereinafter set forth, the Corporation, with the approval and at the direction of the Compensation Committee of the Board of Directors (the "COMMITTEE"), and the Participant hereby acknowledge and agree that the Corporation granted to Participant, as of the Award Date, an option to purchase up to 500,000 shares of Common Stock at a price of U.S.$2.00 per share (as may be adjusted in accordance with Article 5, the "EXERCISE PRICE") in accordance with the terms of the Original Option Agreement. Such option is hereinafter referred to as the "OPTION," and the shares of Common Stock purchasable upon exercise of the Option are hereinafter referred to as the "SHARES." The Option is intended by the parties hereto to be, and shall be treated as, a nonqualified stock option (as such term is defined under Section 422 of the Internal Revenue Code of 1986, as amended). 1 C. The right to exercise 20% of the Option (or a portion thereof) shall vest and first become exercisable on the Award Date, and an additional 20% shall vest on each succeeding anniversary of the Award Date until all of the Option is vested (the "VESTING DATE(S)"), so that all of the Shares subject to the Option shall be fully vested on May 1, 2008; provided, however, that Participant has been continuously employed or otherwise retained by the Corporation during the period from the Award Date until the applicable Vesting Date. D. The Option shall be immediately vested and exercisable in accordance with the terms and conditions of, and to the extent provided in, the Employment Agreement. 2. TERMINATION OF OPTION. The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after May 1, 2009 (the "OPTION TERM"). 3. EXERCISE OF OPTION. A. Participant may exercise the Option with respect to all or any part of the number of Shares then exercisable hereunder by giving the Secretary of the Corporation written notice of intent to exercise. The notice of exercise shall specify the number of Shares as to which Participant is exercising and the date of exercise thereof, which date shall be not less than five (5) days after the giving of such notice (unless an earlier time shall have been mutually agreed upon in writing). All or any portion of the vested portion of the Option may be exercised by Participant at any time on or before May 1, 2009. B. Notwithstanding anything contained in this Article 3 to the contrary, the Option may be exercised only in compliance with all applicable securities laws and only by (i) Participant's completion, execution and delivery to the Corporation of a notice of exercise and, if required by the Corporation, an "investment letter" as supplied by the Corporation and (ii) the payment to the Corporation, as provided in Article 3D hereof, of an amount equal to the amount obtained by multiplying the Exercise Price by the number of Shares being purchased pursuant to such exercise as shall be specified by Participant in such notice of exercise. Except as otherwise provided in the Employment Agreement, Participant shall not sell, transfer, assign, pledge for a loan, margin, hypothecate or exchange the Option or the option shares, except pursuant to the laws of descent and except that Participant's estate, executors or administrators, or personal or legal representatives may exercise the Option in accordance with the terms of Article 3C hereof in the event of the death or Disability of Participant. C. In the event of the death or Disability of Participant at such time that Participant shall possess an Option pursuant to the terms of this Agreement, Participant, Participant's estate, executors or administrators, or personal or legal representatives (as applicable) shall be entitled to exercise the Option within three years following Participant's termination of employment (but not beyond the Option Term). Any person, other than Participant, so desiring to exercise Participant's Option shall be required, as a condition to the exercise of the Option, to furnish to the Corporation such documentation as the Corporation shall deem satisfactory to evidence the 2 authority of such person to exercise the Option on behalf of Participant. In the event of the exercise of such Option by Participant's estate, executors or administrators, or personal or legal representatives, all references herein to Participant shall, to the extent applicable, be deemed to refer to and include such estate, executors or administrators, or personal or legal representatives, as the case may be. D. The Exercise Price shall be paid in full by Participant for the Shares purchased on or before the exercise date specified in the notice of exercise, at Participant's option, in one or a combination of the following methods: (i) in cash or by electronic funds transfer; (ii) by check payable to the order of the Corporation; (iii) if authorized by the Board of Directors of the Corporation (the "BOARD"), or the Committee, by a promissory note of the Participant; (iv) by notice and third party payment in such manner as may be authorized by the Board or the Committee; (v) by the delivery of shares of Common Stock of the Corporation already owned by the Participant; or (vi) pursuant to a "cashless exercise" procedure (the "CASHLESS EXERCISE RIGHT") pursuant to which the Participant shall surrender to the Corporation this Option and a notice of exercise, duly completed and executed by the Participant to evidence the exercise of the Cashless Exercise Right by authorizing the Corporation to withhold from issuance a number of Shares issuable upon such exercise of the Option which, when multiplied by the Fair Market Value (as defined below) of such Shares, is equal to the aggregate Exercise Price (and such withheld Shares shall no longer be issuable under this Option). Shares of Common Stock used to satisfy the Exercise Price of an Option shall be valued at their Fair Market Value on the date of exercise. E. The "FAIR MARKET VALUE" shall be determined as follows: (a) if the security at issue is listed on a national securities exchange or admitted to unlisted trading privileges on such an exchange or quoted on either the National Market System or the Small Cap Market of the automated quotation service operated by The Nasdaq Stock Market, Inc., the Fair Market Value shall be the last reported sale price of that security on such exchange or system on the day for which the Fair Market Value is to be determined or, if no such sale is made on such day, the average of the highest closing bid and lowest asked price for such day on such exchange or system; or (b) if the security at issue is not so listed or quoted or admitted to unlisted trading privileges, the Fair Market Value shall be the average of the last reported highest bid and lowest asked prices quoted on the Electronic Bulletin Board operated by The Nasdaq Stock Market, Inc., or, if not so quoted, then by the National Quotation Bureau, Inc. on the last business day prior to the day for which the Fair Market Value is to be determined; or (c) if the security at issue is not so listed or quoted or admitted to unlisted trading privileges and bid and asked prices are not reported, the Fair Market Value shall be determined in such reasonable manner as may be prescribed from time to time by the Board. 3 F. Upon the exercise of all or any portion of the Option by Participant, or as soon thereafter as is practicable, the Corporation shall issue and deliver to Participant (or to any broker or, if acceptable to the Corporation, to any other person designated by Participant) a certificate or certificates evidencing such number of Shares as Participant has elected to purchase. Such certificate or certificates shall be registered in the name of Participant (or the designated broker or other person) and, if applicable, shall bear an appropriate investment warranty legend, any legend required by an applicable securities law, rule or regulation and, if applicable, a legend referring to the restrictions provided hereunder and under the Employment Agreement and any legend required by applicable law. Upon the exercise of the Option and the issuance and delivery of such certificate or certificates, Participant (or the person to whom such stock certificates are registered) shall have all the rights of a stockholder with respect to such Shares and to receive all dividends or other distributions paid or made with respect thereto. In the event that the capital stock of the Corporation is converted in whole or in part into securities of any other entity, a determination as to whether the securities of the other entity so received (if any) shall be subject to the restrictions set forth in this Agreement shall be made solely by the other entity. 4. RIGHTS PRIOR TO EXERCISE. Participant shall have no equity interest in the Corporation or any voting, dividend, liquidation or dissolution rights with respect to any capital stock of the Corporation solely by reason of having an Option or having executed this Agreement. Prior to the exercise of all or a portion of the Option, as set forth in Article 3A hereof, and the issuance and delivery of a certificate or certificates evidencing the Shares purchased pursuant to the exercise of all or a portion of such Option, Participant shall have no interest in, or any voting, dividend, liquidation or dissolution rights with respect to, the Shares, except to the extent that Participant has exercised all or a portion of such Option and has been issued and received delivery of a certificate or certificates evidencing the Shares purchased pursuant to such exercise. 5. ADJUSTMENT OF PURCHASE AND NUMBER OF SHARES. A. ADJUSTMENT. The number and kind of securities purchasable upon the exercise of this Option and the Exercise Price shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) Reclassification, Consolidation or Merger. At any time while this Option remains outstanding and unexpired, in case of (i) any reclassification or change of outstanding securities issuable upon exercise of this Option (other than a change in par value, or from par value to no par value per share, or from no par value per share to par value or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of the Option), (ii) any consolidation or merger of the Corporation with or into another corporation (other than a merger with another corporation in which the Corporation is a continuing corporation and which does not result in any reclassification or change, other than a change in par value, or from par value to no par value per share, or from no par value per share to par value, or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of this Option), or (iii) any sale or 4 transfer to another corporation of the property of the Corporation as an entirety or substantially as an entirety, the Corporation, or such successor or purchasing corporation, as the case may be, shall without payment of any additional consideration therefore, execute a new Option providing that the holder of this Option shall have the right to exercise such new Option (upon terms not less favorable to the holder than those then applicable to this Option) and to receive upon such exercise, in lieu of each share of Common Stock theretofore issuable upon exercise of this Option, the kind and amount of shares of stock, other securities, money or property receivable upon such reclassification, change , consolidation, merger, sale or transfer. Such new Options shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 5A. The provisions of this Section 5A(a) shall similarly apply to successive reclassifications, changes, consolidations, mergers, sales and transfers. (b) Subdivision or Combination of Shares. If the Corporation at any time while this Option remains outstanding and unexpired, shall subdivide or combine its capital stock, the Exercise Price shall be proportionately reduced, in case of subdivision of such shares as of the effective date of such subdivision, or, if the Corporation shall take a record of holders of its capital stock for the purpose of so subdividing, as of such record date, whichever is earlier, or shall be proportionately increased, in the case of combination of such shares, as of the effective date of such combination, or, if the Corporation shall take a record of holders of its capital stock for the purpose of so combining, as of such record date, whichever is earlier. (c) Stock Dividends. If the Corporation at any time which this Option is outstanding and unexpired shall pay a dividend in shares of, or make other distribution of shares of, its capital stock, then the Exercise Price shall be adjusted, as of the date the Corporation shall take a record of the holders of its capital stock for the purpose of receiving such dividend or other distribution (or if no such record is taken, as at the date of such payment or other distribution), to that price determined by multiplying the Exercise Price in effect immediately prior to such payment or other distribution by a fraction (i) the numerator of which shall be the total number of shares of capital stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of capital stock outstanding immediately after such dividend or distribution. The provisions of this Section 5A(c) shall not apply under any of the circumstances for which an adjustment is provided in Section 5A(a) or 5A(b). (d) Liquidating Dividends, Etc. If the Corporation at any time while this Option is outstanding and unexpired makes a distribution of its assets to the holders of its capital stock as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Corporation's assets (other than under the circumstances provided 5 for in the Sections 5A(a) through (c)), the holder of this Option shall be entitled to receive upon the exercise hereof, in addition to the shares of Common Stock receivable upon such exercise, and without payment of any consideration other than the Exercise Price, an amount in cash equal to the value of such distribution per share of Common Stock multiplied by the number of shares of Common Stock which, on the record date for such distribution, are issuable upon exercise of this Option (with no further adjustment being made following any event which causes a subsequent adjustment in the number of shares of Common Stock issuable upon the exercise hereof ), and an appropriate provision therefor should be made a part of any such distribution. The value of a distribution which is paid in other than cash shall be determined in good faith by the Board. B. NOTICE OF ADJUSTMENTS. Whenever any of the Exercise Price or the number of shares of Common Stock purchasable under the terms of this Option at that Exercise Price shall be adjusted pursuant to Section 5A hereof, the Corporation shall promptly make a certificate signed by its Chief Executive Officer, President or a Vice President and by its Treasurer or Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis upon which the Board made any determination hereunder), and the Exercise Price and number of shares of Common Stock purchasable at that Exercise Price after giving effect to such adjustment, and shall promptly cause copies of such certificate to be mailed (by First Class and Postage Prepaid) to the registered holder of this Option. 6. HEADINGS. The headings and other captions contained in this Agreement are for convenience of reference only, and shall not be used in interpreting, construing or enforcing any of the provisions of this Agreement. 7. ENTIRE AGREEMENT. This Agreement, together with the Employment Agreement, sets forth all of the promises, agreements, conditions, understandings, warranties and representations between the parties hereto with respect to the Shares, and there are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, between them with respect to the Shares other than as set forth herein and in the Employment Agreement. Any and all prior agreements between the parties hereto with respect to any stock acquisition rights regarding the Shares are hereby revoked. This Agreement, together with the Employment Agreement, is, and is intended by the parties to be, an integration of any and all prior agreements or understandings, oral or written, with respect to the Option and the Shares. 8. NOTICES. Any and all notices provided for herein shall be sufficient if in writing, and sent by hand delivery, by an overnight delivery service that produces a signed receipt evidencing delivery or by certified or registered mail (return receipt requested and first class postage prepaid), in the case of the Corporation, to its principal office, and in the case of Participant, to Participant's address as shown on the Corporation's records. 9. INVALID OR UNENFORCEABLE PROVISIONS. The provisions of this Agreement shall be 6 deemed severable, and the invalidity or unenforceability of any one or more of the provisions hereof shall not affect the validity and enforceability of the other provisions hereof. Participant agrees that the breach or alleged breach by the Corporation of (a) any covenant contained in another agreement (if any) between the Corporation and Participant or (b) any obligation owed to Participant by the Corporation, shall not affect the validity or enforceability of the covenants and agreements of Participant set forth herein. 10. MODIFICATIONS. No change or modification of this Agreement shall be valid unless the same is in writing and signed by the parties hereto; provided, however, that Participant hereby covenants and agrees to execute any amendment to this Agreement which shall be required or desirable (in the opinion of the Corporation or its counsel) in order to comply with any rule or regulation promulgated or proposed under the Internal Revenue Code of 1986, as amended, by the Internal Revenue Service. 11. INCORPORATION OF EMPLOYMENT AGREEMENT BY REFERENCE. The Option is granted pursuant to the terms of the Employment Agreement, the terms of which are incorporated herein by reference, and the Option shall in all respects be interpreted in accordance with the Employment Agreement. To the extent that any conflict may exist between any term or provision of this Agreement and any term or provision of the Employment Agreement (other than with respect to matters that, pursuant to the Employment Agreement, may be altered in this Agreement), such term or provision of the Employment Agreement shall control. 12. GOVERNING LAW. The validity, construction, interpretation and effect of this Agreement shall exclusively be governed by and determined in accordance with the laws of Texas (other than the conflicts-of-law or choice-of-law rules thereof), except to the extent preempted by federal law, which solely to the extent of such preemption shall govern. Venue shall lie only in the State and Federal Courts in and for the County of Harris, Texas, as to all disputes arising under this Agreement, and such venue is hereby consented to by the Corporation and Participant. 13. COUNTERPARTS. This Agreement may be executed in counterparts, each of which, when taken together, shall constitute one original agreement. 14. AMENDMENT AND RESTATEMENT. This Agreement constitutes an amendment, modification and restatement of the Original Option Agreement. This Agreement contains the entire understanding between the parties hereto and supersedes the Original Option Agreement. [SIGNATURE PAGE FOLLOWS.] 7 IN WITNESS WHEREOF, the Corporation has caused its duly authorized officer to execute and attest to this Agreement, and to apply the corporate seal hereto, and Participant has placed his or her signature hereon, effective as of this 23rd day of December, 2004. CORPORATION: CORPORATION: FAR EAST ENERGY CORPORATION By: /s/ John Mihm ------------------------------- John Mihm, Director PARTICIPANT: By: /s/ Bruce N. Huff ------------------------------- Bruce N. Huff 8 EX-10.6 7 h21197exv10w6.txt NON QUALIFIED STOCK NON-QUALIFIED STOCK OPTION AGMT - M. MCELWRATH EXHIBIT 10.6 FAR EAST ENERGY CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT GENERAL INFORMATION Name: Michael R. McElwrath Award Date: December 23, 2004 Number of Shares Subject to Option: 200,000 Exercise Price: $2.00 Vesting: One fifth upon the Award Date and one fifth each succeeding anniversary of the Award Date until fully vested Expiration Date: December 23, 2014 FAR EAST ENERGY CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT THIS NONQUALIFIED STOCK OPTION AGREEMENT (this "AGREEMENT") is made as of this 23rd day of December, 2004, by and between Far East Energy Corporation, a Nevada corporation (the "CORPORATION"), and Michael R. McElwrath ("PARTICIPANT"). WHEREAS, the Participant has entered into an Amended and Restated Employment Agreement dated the date hereof (as hereinafter amended, restated and modified from time to time, the "EMPLOYMENT AGREEMENT") with the Corporation; NOW, THEREFORE, in consideration of the foregoing, of the mutual promises hereinafter set forth and of such other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. GRANT OF OPTION; DEFINED TERMS. A. Capitalized terms used herein without definition shall have the meaning ascribed to such terms in the Employment Agreement. B. Subject to the terms and conditions hereinafter set forth, the Corporation, with the approval and at the direction of the Compensation Committee of the Board of Directors (the "COMMITTEE"), and the Participant hereby acknowledge and agree that the Corporation granted to Participant, as of the Award Date, an option to purchase up to 200,000 shares of common stock of the Corporation (the "COMMON STOCK") at a price of U.S. $2.00 per share (as may be adjusted in accordance with Article 5, the "EXERCISE PRICE"). Such option is hereinafter referred to as the "OPTION," and the shares of Common Stock purchasable upon exercise of the Option are hereinafter referred to as the "SHARES." The Option is intended by the parties hereto to be, and shall be treated as, a nonqualified stock option (as such term is defined under Section 422 of the Internal Revenue Code of 1986, as amended). C. The right to exercise 20% of the Option (or a portion thereof) shall vest and first become exercisable on the Award Date, and an additional 20% shall vest on each succeeding anniversary of the Award Date until all of the Option is vested (the "VESTING DATE(S)"), so that all of the Shares subject to the Option shall be fully vested on December 23, 2008; provided, however, that Participant has been continuously employed or otherwise retained by the Corporation during the period from the Award Date until the applicable Vesting Date. D. The Option shall be immediately vested and exercisable in accordance with the terms and conditions of, and to the extent provided in, the Employment Agreement. 1 2. TERMINATION OF OPTION. The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after December 23, 2014 (the "OPTION TERM"). 3. EXERCISE OF OPTION. A. Participant may exercise the Option with respect to all or any part of the number of Shares then exercisable hereunder by giving the Secretary of the Corporation written notice of intent to exercise. The notice of exercise shall specify the number of Shares as to which Participant is exercising and the date of exercise thereof, which date shall be not less than five (5) days after the giving of such notice (unless an earlier time shall have been mutually agreed upon in writing). All or any portion of the vested portion of the Option may be exercised by Participant at any time on or before December 23, 2014. B. Notwithstanding anything contained in this Article 3 to the contrary, the Option may be exercised only in compliance with all applicable securities laws and only by (i) Participant's completion, execution and delivery to the Corporation of a notice of exercise and, if required by the Corporation, an "investment letter" as supplied by the Corporation and (ii) the payment to the Corporation, as provided in Article 3D hereof, of an amount equal to the amount obtained by multiplying the Exercise Price by the number of Shares being purchased pursuant to such exercise as shall be specified by Participant in such notice of exercise. Except as otherwise provided in the Employment Agreement, Participant shall not sell, transfer, assign, pledge for a loan, margin, hypothecate or exchange the Option or the option shares until April 1, 2005, except pursuant to the laws of descent and except that Participant's estate, executors or administrators, or personal or legal representatives may exercise the Option in accordance with the terms of Article 3C hereof in the event of the death or Disability of Participant. C. In the event of the death or Disability of Participant at such time that Participant shall possess an Option pursuant to the terms of this Agreement, Participant, Participant's estate, executors or administrators, or personal or legal representatives (as applicable) shall be entitled to exercise the Option within three years following Participant's termination of employment (but not beyond the Option Term). Any person, other than Participant, so desiring to exercise Participant's Option shall be required, as a condition to the exercise of the Option, to furnish to the Corporation such documentation as the Corporation shall deem satisfactory to evidence the authority of such person to exercise the Option on behalf of Participant. In the event of the exercise of such Option by Participant's estate, executors or administrators, or personal or legal representatives, all references herein to Participant shall, to the extent applicable, be deemed to refer to and include such estate, executors or administrators, or personal or legal representatives, as the case may be. D. The Exercise Price shall be paid in full by Participant for the Shares purchased on or before the exercise date specified in the notice of exercise, at Participant's option, in one or a combination of the following methods: (i) in cash or by electronic funds transfer; (ii) by check payable to the order of the Corporation; (iii) if authorized by the Board of Directors of the Corporation (the "BOARD"), or the Committee, by a promissory note of the Participant; (iv) by 2 notice and third party payment in such manner as may be authorized by the Board or the Committee; (v) by the delivery of shares of Common Stock of the Corporation already owned by the Participant; or (vi) pursuant to a "cashless exercise" procedure (the "CASHLESS EXERCISE RIGHT") pursuant to which the Participant shall surrender to the Corporation this Option and a notice of exercise, duly completed and executed by the Participant to evidence the exercise of the Cashless Exercise Right by authorizing the Corporation to withhold from issuance a number of Shares issuable upon such exercise of the Option which, when multiplied by the Fair Market Value (as defined below) of such Shares, is equal to the aggregate Exercise Price (and such withheld Shares shall no longer be issuable under this Option). Shares of Common Stock used to satisfy the Exercise Price of an Option shall be valued at their Fair Market Value on the date of exercise. E. The "FAIR MARKET VALUE" shall be determined as follows: (a) if the security at issue is listed on a national securities exchange or admitted to unlisted trading privileges on such an exchange or quoted on either the National Market System or the Small Cap Market of the automated quotation service operated by The Nasdaq Stock Market, Inc., the Fair Market Value shall be the last reported sale price of that security on such exchange or system on the day for which the Fair Market Value is to be determined or, if no such sale is made on such day, the average of the highest closing bid and lowest asked price for such day on such exchange or system; or (b) if the security at issue is not so listed or quoted or admitted to unlisted trading privileges, the Fair Market Value shall be the average of the last reported highest bid and lowest asked prices quoted on the Electronic Bulletin Board operated by The Nasdaq Stock Market, Inc., or, if not so quoted, then by the National Quotation Bureau, Inc. on the last business day prior to the day for which the Fair Market Value is to be determined; or (c) if the security at issue is not so listed or quoted or admitted to unlisted trading privileges and bid and asked prices are not reported, the Fair Market Value shall be determined in such reasonable manner as may be prescribed from time to time by the Board. F. Upon the exercise of all or any portion of the Option by Participant, or as soon thereafter as is practicable, the Corporation shall issue and deliver to Participant (or to any broker or, if acceptable to the Corporation, to any other person designated by Participant) a certificate or certificates evidencing such number of Shares as Participant has elected to purchase. Such certificate or certificates shall be registered in the name of Participant (or the designated broker or other person) and, if applicable, shall bear an appropriate investment warranty legend, any legend required by an applicable securities law, rule or regulation and, if applicable, a legend referring to the restrictions provided hereunder and under the Employment Agreement and any legend required by applicable law. Upon the exercise of the Option and the issuance and delivery of such certificate or certificates, Participant (or the person to whom such stock certificates are 3 registered) shall have all the rights of a stockholder with respect to such Shares and to receive all dividends or other distributions paid or made with respect thereto. In the event that the capital stock of the Corporation is converted in whole or in part into securities of any other entity, a determination as to whether the securities of the other entity so received (if any) shall be subject to the restrictions set forth in this Agreement shall be made solely by the other entity. 4. RIGHTS PRIOR TO EXERCISE. Participant shall have no equity interest in the Corporation or any voting, dividend, liquidation or dissolution rights with respect to any capital stock of the Corporation solely by reason of having an Option or having executed this Agreement. Prior to the exercise of all or a portion of the Option, as set forth in Article 3A hereof, and the issuance and delivery of a certificate or certificates evidencing the Shares purchased pursuant to the exercise of all or a portion of such Option, Participant shall have no interest in, or any voting, dividend, liquidation or dissolution rights with respect to, the Shares, except to the extent that Participant has exercised all or a portion of such Option and has been issued and received delivery of a certificate or certificates evidencing the Shares purchased pursuant to such exercise. 5. ADJUSTMENT OF PURCHASE AND NUMBER OF SHARES. A. ADJUSTMENT. The number and kind of securities purchasable upon the exercise of this Option and the Exercise Price shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) Reclassification, Consolidation or Merger. At any time while this Option remains outstanding and unexpired, in case of (i) any reclassification or change of outstanding securities issuable upon exercise of this Option (other than a change in par value, or from par value to no par value per share, or from no par value per share to par value or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of the Option), (ii) any consolidation or merger of the Corporation with or into another corporation (other than a merger with another corporation in which the Corporation is a continuing corporation and which does not result in any reclassification or change, other than a change in par value, or from par value to no par value per share, or from no par value per share to par value, or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of this Option), or (iii) any sale or transfer to another corporation of the property of the Corporation as an entirety or substantially as an entirety, the Corporation, or such successor or purchasing corporation, as the case may be, shall without payment of any additional consideration therefore, execute a new Option providing that the holder of this Option shall have the right to exercise such new Option (upon terms not less favorable to the holder than those then applicable to this Option) and to receive upon such exercise, in lieu of each share of Common Stock theretofore issuable upon exercise of this Option, the kind and amount of shares of stock, other securities, money or property receivable upon such reclassification, change, consolidation, merger, sale or transfer. Such new Options shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 5A. The provisions of this Section 5A(a) shall similarly 4 apply to successive reclassifications, changes, consolidations, mergers, sales and transfers. (b) Subdivision or Combination of Shares. If the Corporation at any time while this Option remains outstanding and unexpired, shall subdivide or combine its capital stock, the Exercise Price shall be proportionately reduced, in case of subdivision of such shares as of the effective date of such subdivision, or, if the Corporation shall take a record of holders of its capital stock for the purpose of so subdividing, as of such record date, whichever is earlier, or shall be proportionately increased, in the case of combination of such shares, as of the effective date of such combination, or, if the Corporation shall take a record of holders of its capital stock for the purpose of so combining, as of such record date, whichever is earlier. (c) Stock Dividends. If the Corporation at any time which this Option is outstanding and unexpired shall pay a dividend in shares of, or make other distribution of shares of, its capital stock, then the Exercise Price shall be adjusted, as of the date the Corporation shall take a record of the holders of its capital stock for the purpose of receiving such dividend or other distribution (or if no such record is taken, as at the date of such payment or other distribution), to that price determined by multiplying the Exercise Price in effect immediately prior to such payment or other distribution by a fraction (i) the numerator of which shall be the total number of shares of capital stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of its capital stock outstanding immediately after such dividend or distribution. The provisions of this Section 5A(c) shall not apply under any of the circumstances for which an adjustment is provided in Section 5A(a) or 5A(b). (d) Liquidating Dividends, Etc. If the Corporation at any time while this Option is outstanding and unexpired makes a distribution of its assets to the holders of its capital stock as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Corporation's assets (other than under the circumstances provided for in the Sections 5A(a) through (c)), the holder of this Option shall be entitled to receive upon the exercise hereof, in addition to the shares of Common Stock receivable upon such exercise, and without payment of any consideration other than the Exercise Price, an amount in cash equal to the value of such distribution per share of Common Stock multiplied by the number of shares of Common Stock which, on the record date for such distribution, are issuable upon exercise of this Option (with no further adjustment being made following any event which causes a subsequent adjustment in the number of shares of Common Stock issuable upon the exercise hereof), and an appropriate provision therefor should be made a part of any such distribution. The value of a distribution which is paid in other than cash shall be determined in good faith by the Board. 5 B. NOTICE OF ADJUSTMENTS. Whenever any of the Exercise Price or the number of shares of Common Stock purchasable under the terms of this Option at that Exercise Price shall be adjusted pursuant to Section 5A hereof, the Corporation shall promptly make a certificate signed by its Chief Executive Officer, President or a Vice President and by its Treasurer or Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis upon which the Board made any determination hereunder), and the Exercise Price and number of shares of Common Stock purchasable at that Exercise Price after giving effect to such adjustment, and shall promptly cause copies of such certificate to be mailed (by First Class and Postage Prepaid) to the registered holder of this Option. 6. HEADINGS. The headings and other captions contained in this Agreement are for convenience of reference only, and shall not be used in interpreting, construing or enforcing any of the provisions of this Agreement. 7. ENTIRE AGREEMENT. This Agreement, together with the Employment Agreement, sets forth all of the promises, agreements, conditions, understandings, warranties and representations between the parties hereto with respect to the Shares, and there are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, between them with respect to the Shares other than as set forth herein and in the Employment Agreement. Any and all prior agreements between the parties hereto with respect to any stock acquisition rights regarding the Shares are hereby revoked. This Agreement, together with the Employment Agreement, is, and is intended by the parties to be, an integration of any and all prior agreements or understandings, oral or written, with respect to the Option and the Shares. 8. NOTICES. Any and all notices provided for herein shall be sufficient if in writing, and sent by hand delivery, by an overnight delivery service that produces a signed receipt evidencing delivery or by certified or registered mail (return receipt requested and first class postage prepaid), in the case of the Corporation, to its principal office, and in the case of Participant, to Participant's address as shown on the Corporation's records. 9. INVALID OR UNENFORCEABLE PROVISIONS. The provisions of this Agreement shall be deemed severable, and the invalidity or unenforceability of any one or more of the provisions hereof shall not affect the validity and enforceability of the other provisions hereof. Participant agrees that the breach or alleged breach by the Corporation of (a) any covenant contained in another agreement (if any) between the Corporation and Participant or (b) any obligation owed to Participant by the Corporation, shall not affect the validity or enforceability of the covenants and agreements of Participant set forth herein. 10. MODIFICATIONS. No change or modification of this Agreement shall be valid unless the same is in writing and signed by the parties hereto; provided, however, that Participant hereby covenants and agrees to execute any amendment to this Agreement which shall be required or desirable (in the opinion of the Corporation or its counsel) in order to comply with any rule or 6 regulation promulgated or proposed under the Internal Revenue Code of 1986, as amended, by the Internal Revenue Service. 11. INCORPORATION OF EMPLOYMENT AGREEMENT BY REFERENCE. The Option is granted pursuant to the terms of the Employment Agreement, the terms of which are incorporated herein by reference, and the Option shall in all respects be interpreted in accordance with the Employment Agreement. To the extent that any conflict may exist between any term or provision of this Agreement and any term or provision of the Employment Agreement (other than with respect to matters that, pursuant to the Employment Agreement, may be altered in this Agreement), such term or provision of the Employment Agreement shall control. 12. GOVERNING LAW. The validity, construction, interpretation and effect of this Agreement shall exclusively be governed by and determined in accordance with the laws of Texas (other than the conflicts-of-law or choice-of-law rules thereof), except to the extent preempted by federal law, which solely to the extent of such preemption shall govern. Venue shall lie only in the State and Federal Courts in and for the County of Harris, Texas, as to all disputes arising under this Agreement, and such venue is hereby consented to by the Corporation and Participant. 13. COUNTERPARTS. This Agreement may be executed in counterparts, each of which, when taken together, shall constitute one original agreement. 7 IN WITNESS WHEREOF, the Corporation has caused its duly authorized officer to execute and attest to this Agreement, and to apply the corporate seal hereto, and Participant has placed his or her signature hereon, effective as of this 23rd day of December, 2004. CORPORATION: FAR EAST ENERGY CORPORATION By: /s/ John Mihm ---------------------------------------- John Mihm, Director PARTICIPANT: By: /s/ Michael R. McElwrath ---------------------------------------- Michael R. McElwrath 8 EX-10.7 8 h21197exv10w7.txt NON QUALIFIED STOCK NON-QUALIFIED STOCK OPTION AGMT - BRUCE N. HUFF EXHIBIT 10.7 FAR EAST ENERGY CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT GENERAL INFORMATION Name: Bruce N. Huff Award Date: December 23, 2004 Number of Shares Subject to Option: 400,000 Exercise Price: $2.00 Vesting: One fifth upon the Award Date and one fifth each succeeding anniversary of the Award Date until fully vested Expiration Date: December 23, 2014 FAR EAST ENERGY CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT THIS NONQUALIFIED STOCK OPTION AGREEMENT (this "AGREEMENT") is made as of this 23rd day of December, 2004, by and between Far East Energy Corporation, a Nevada corporation (the "CORPORATION"), and Bruce N. Huff ("PARTICIPANT"). WHEREAS, the Participant has entered into an Amended and Restated Employment Agreement dated the date hereof (as hereinafter amended, restated and modified from time to time, the "EMPLOYMENT AGREEMENT") with the Corporation; NOW, THEREFORE, in consideration of the foregoing, of the mutual promises hereinafter set forth and of such other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. GRANT OF OPTION; DEFINED TERMS. A. Capitalized terms used herein without definition shall have the meaning ascribed to such terms in the Employment Agreement. B. Subject to the terms and conditions hereinafter set forth, the Corporation, with the approval and at the direction of the Compensation Committee of the Board of Directors (the "COMMITTEE"), and the Participant hereby acknowledge and agree that the Corporation granted to Participant, as of the Award Date, an option to purchase up to 400,000 shares of common stock of the Corporation (the "COMMON STOCK") at a price of U.S. $2.00 per share (as may be adjusted in accordance with Article 5, the "EXERCISE PRICE"). Such option is hereinafter referred to as the "OPTION," and the shares of Common Stock purchasable upon exercise of the Option are hereinafter referred to as the "SHARES." The Option is intended by the parties hereto to be, and shall be treated as, a nonqualified stock option (as such term is defined under Section 422 of the Internal Revenue Code of 1986, as amended). C. The right to exercise 20% of the Option (or a portion thereof) shall vest and first become exercisable on the Award Date, and an additional 20% shall vest on each succeeding anniversary of the Award Date until all of the Option is vested (the "VESTING DATE(S)"), so that all of the Shares subject to the Option shall be fully vested on December 23, 2008; provided, however, that Participant has been continuously employed or otherwise retained by the Corporation during the period from the Award Date until the applicable Vesting Date. D. The Option shall be immediately vested and exercisable in accordance with the terms and conditions of, and to the extent provided in, the Employment Agreement. 1 2. TERMINATION OF OPTION. The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after December 23, 2014 (the "OPTION TERM"). 3. EXERCISE OF OPTION. A. Participant may exercise the Option with respect to all or any part of the number of Shares then exercisable hereunder by giving the Secretary of the Corporation written notice of intent to exercise. The notice of exercise shall specify the number of Shares as to which Participant is exercising and the date of exercise thereof, which date shall be not less than five (5) days after the giving of such notice (unless an earlier time shall have been mutually agreed upon in writing). All or any portion of the vested portion of the Option may be exercised by Participant at any time on or before December 23, 2014. B. Notwithstanding anything contained in this Article 3 to the contrary, the Option may be exercised only in compliance with all applicable securities laws and only by (i) Participant's completion, execution and delivery to the Corporation of a notice of exercise and, if required by the Corporation, an "investment letter" as supplied by the Corporation and (ii) the payment to the Corporation, as provided in Article 3D hereof, of an amount equal to the amount obtained by multiplying the Exercise Price by the number of Shares being purchased pursuant to such exercise as shall be specified by Participant in such notice of exercise. Except as otherwise provided in the Employment Agreement, Participant shall not sell, transfer, assign, pledge for a loan, margin, hypothecate or exchange the Option or the option shares, except pursuant to the laws of descent and except that Participant's estate, executors or administrators, or personal or legal representatives may exercise the Option in accordance with the terms of Article 3C hereof in the event of the death or Disability of Participant. C. In the event of the death or Disability of Participant at such time that Participant shall possess an Option pursuant to the terms of this Agreement, Participant, Participant's estate, executors or administrators, or personal or legal representatives (as applicable) shall be entitled to exercise the Option within three years following Participant's termination of employment (but not beyond the Option Term). Any person, other than Participant, so desiring to exercise Participant's Option shall be required, as a condition to the exercise of the Option, to furnish to the Corporation such documentation as the Corporation shall deem satisfactory to evidence the authority of such person to exercise the Option on behalf of Participant. In the event of the exercise of such Option by Participant's estate, executors or administrators, or personal or legal representatives, all references herein to Participant shall, to the extent applicable, be deemed to refer to and include such estate, executors or administrators, or personal or legal representatives, as the case may be. D. The Exercise Price shall be paid in full by Participant for the Shares purchased on or before the exercise date specified in the notice of exercise, at Participant's option, in one or a combination of the following methods: (i) in cash or by electronic funds transfer; (ii) by check payable to the order of the Corporation; (iii) if authorized by the Board of Directors of the Corporation (the "BOARD"), or the Committee, by a promissory note of the Participant; (iv) by 2 notice and third party payment in such manner as may be authorized by the Board or the Committee; (v) by the delivery of shares of Common Stock of the Corporation already owned by the Participant; or (vi) pursuant to a "cashless exercise" procedure (the "CASHLESS EXERCISE RIGHT") pursuant to which the Participant shall surrender to the Corporation this Option and a notice of exercise, duly completed and executed by the Participant to evidence the exercise of the Cashless Exercise Right by authorizing the Corporation to withhold from issuance a number of Shares issuable upon such exercise of the Option which, when multiplied by the Fair Market Value (as defined below) of such Shares, is equal to the aggregate Exercise Price (and such withheld Shares shall no longer be issuable under this Option). Shares of Common Stock used to satisfy the Exercise Price of an Option shall be valued at their Fair Market Value on the date of exercise. E. The "FAIR MARKET VALUE" shall be determined as follows: (a) if the security at issue is listed on a national securities exchange or admitted to unlisted trading privileges on such an exchange or quoted on either the National Market System or the Small Cap Market of the automated quotation service operated by The Nasdaq Stock Market, Inc., the Fair Market Value shall be the last reported sale price of that security on such exchange or system on the day for which the Fair Market Value is to be determined or, if no such sale is made on such day, the average of the highest closing bid and lowest asked price for such day on such exchange or system; or (b) if the security at issue is not so listed or quoted or admitted to unlisted trading privileges, the Fair Market Value shall be the average of the last reported highest bid and lowest asked prices quoted on the Electronic Bulletin Board operated by The Nasdaq Stock Market, Inc., or, if not so quoted, then by the National Quotation Bureau, Inc. on the last business day prior to the day for which the Fair Market Value is to be determined; or (c) if the security at issue is not so listed or quoted or admitted to unlisted trading privileges and bid and asked prices are not reported, the Fair Market Value shall be determined in such reasonable manner as may be prescribed from time to time by the Board. F. Upon the exercise of all or any portion of the Option by Participant, or as soon thereafter as is practicable, the Corporation shall issue and deliver to Participant (or to any broker or, if acceptable to the Corporation, to any other person designated by Participant) a certificate or certificates evidencing such number of Shares as Participant has elected to purchase. Such certificate or certificates shall be registered in the name of Participant (or the designated broker or other person) and, if applicable, shall bear an appropriate investment warranty legend, any legend required by an applicable securities law, rule or regulation and, if applicable, a legend referring to the restrictions provided hereunder and under the Employment Agreement and any legend required by applicable law. Upon the exercise of the Option and the issuance and delivery of such certificate or certificates, Participant (or the person to whom such stock certificates are 3 registered) shall have all the rights of a stockholder with respect to such Shares and to receive all dividends or other distributions paid or made with respect thereto. In the event that the capital stock of the Corporation is converted in whole or in part into securities of any other entity, a determination as to whether the securities of the other entity so received (if any) shall be subject to the restrictions set forth in this Agreement shall be made solely by the other entity. 4. RIGHTS PRIOR TO EXERCISE. Participant shall have no equity interest in the Corporation or any voting, dividend, liquidation or dissolution rights with respect to any capital stock of the Corporation solely by reason of having an Option or having executed this Agreement. Prior to the exercise of all or a portion of the Option, as set forth in Article 3A hereof, and the issuance and delivery of a certificate or certificates evidencing the Shares purchased pursuant to the exercise of all or a portion of such Option, Participant shall have no interest in, or any voting, dividend, liquidation or dissolution rights with respect to, the Shares, except to the extent that Participant has exercised all or a portion of such Option and has been issued and received delivery of a certificate or certificates evidencing the Shares purchased pursuant to such exercise. 5. ADJUSTMENT OF PURCHASE AND NUMBER OF SHARES. A. ADJUSTMENT. The number and kind of securities purchasable upon the exercise of this Option and the Exercise Price shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) Reclassification, Consolidation or Merger. At any time while this Option remains outstanding and unexpired, in case of (i) any reclassification or change of outstanding securities issuable upon exercise of this Option (other than a change in par value, or from par value to no par value per share, or from no par value per share to par value or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of the Option), (ii) any consolidation or merger of the Corporation with or into another corporation (other than a merger with another corporation in which the Corporation is a continuing corporation and which does not result in any reclassification or change, other than a change in par value, or from par value to no par value per share, or from no par value per share to par value, or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of this Option), or (iii) any sale or transfer to another corporation of the property of the Corporation as an entirety or substantially as an entirety, the Corporation, or such successor or purchasing corporation, as the case may be, shall without payment of any additional consideration therefore, execute a new Option providing that the holder of this Option shall have the right to exercise such new Option (upon terms not less favorable to the holder than those then applicable to this Option) and to receive upon such exercise, in lieu of each share of Common Stock theretofore issuable upon exercise of this Option, the kind and amount of shares of stock, other securities, money or property receivable upon such reclassification, change, consolidation, merger, sale or transfer. Such new Options shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 5A. The provisions of this Section 5A(a) shall similarly 4 apply to successive reclassifications, changes, consolidations, mergers, sales and transfers. (b) Subdivision or Combination of Shares. If the Corporation at any time while this Option remains outstanding and unexpired, shall subdivide or combine its capital stock, the Exercise Price shall be proportionately reduced, in case of subdivision of such shares as of the effective date of such subdivision, or, if the Corporation shall take a record of holders of its capital stock for the purpose of so subdividing, as of such record date, whichever is earlier, or shall be proportionately increased, in the case of combination of such shares, as of the effective date of such combination, or, if the Corporation shall take a record of holders of its capital stock for the purpose of so combining, as of such record date, whichever is earlier. (c) Stock Dividends. If the Corporation at any time which this Option is outstanding and unexpired shall pay a dividend in shares of, or make other distribution of shares of, its capital stock, then the Exercise Price shall be adjusted, as of the date the Corporation shall take a record of the holders of its capital stock for the purpose of receiving such dividend or other distribution (or if no such record is taken, as at the date of such payment or other distribution), to that price determined by multiplying the Exercise Price in effect immediately prior to such payment or other distribution by a fraction (i) the numerator of which shall be the total number of shares of capital stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of its capital stock outstanding immediately after such dividend or distribution. The provisions of this Section 5A(c) shall not apply under any of the circumstances for which an adjustment is provided in Section 5A(a) or 5A(b). (d) Liquidating Dividends, Etc. If the Corporation at any time while this Option is outstanding and unexpired makes a distribution of its assets to the holders of its capital stock as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Corporation's assets (other than under the circumstances provided for in the Sections 5A(a) through (c)), the holder of this Option shall be entitled to receive upon the exercise hereof, in addition to the shares of Common Stock receivable upon such exercise, and without payment of any consideration other than the Exercise Price, an amount in cash equal to the value of such distribution per share of Common Stock multiplied by the number of shares of Common Stock which, on the record date for such distribution, are issuable upon exercise of this Option (with no further adjustment being made following any event which causes a subsequent adjustment in the number of shares of Common Stock issuable upon the exercise hereof), and an appropriate provision therefor should be made a part of any such distribution. The value of a distribution which is paid in other than cash shall be determined in good faith by the Board. 5 B. NOTICE OF ADJUSTMENTS. Whenever any of the Exercise Price or the number of shares of Common Stock purchasable under the terms of this Option at that Exercise Price shall be adjusted pursuant to Section 5A hereof, the Corporation shall promptly make a certificate signed by its Chief Executive Officer, President or a Vice President and by its Treasurer or Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis upon which the Board made any determination hereunder), and the Exercise Price and number of shares of Common Stock purchasable at that Exercise Price after giving effect to such adjustment, and shall promptly cause copies of such certificate to be mailed (by First Class and Postage Prepaid) to the registered holder of this Option. 6. HEADINGS. The headings and other captions contained in this Agreement are for convenience of reference only, and shall not be used in interpreting, construing or enforcing any of the provisions of this Agreement. 7. ENTIRE AGREEMENT. This Agreement, together with the Employment Agreement, sets forth all of the promises, agreements, conditions, understandings, warranties and representations between the parties hereto with respect to the Shares, and there are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, between them with respect to the Shares other than as set forth herein and in the Employment Agreement. Any and all prior agreements between the parties hereto with respect to any stock acquisition rights regarding the Shares are hereby revoked. This Agreement, together with the Employment Agreement, is, and is intended by the parties to be, an integration of any and all prior agreements or understandings, oral or written, with respect to the Option and the Shares. 8. NOTICES. Any and all notices provided for herein shall be sufficient if in writing, and sent by hand delivery, by an overnight delivery service that produces a signed receipt evidencing delivery or by certified or registered mail (return receipt requested and first class postage prepaid), in the case of the Corporation, to its principal office, and in the case of Participant, to Participant's address as shown on the Corporation's records. 9. INVALID OR UNENFORCEABLE PROVISIONS. The provisions of this Agreement shall be deemed severable, and the invalidity or unenforceability of any one or more of the provisions hereof shall not affect the validity and enforceability of the other provisions hereof. Participant agrees that the breach or alleged breach by the Corporation of (a) any covenant contained in another agreement (if any) between the Corporation and Participant or (b) any obligation owed to Participant by the Corporation, shall not affect the validity or enforceability of the covenants and agreements of Participant set forth herein. 10. MODIFICATIONS. No change or modification of this Agreement shall be valid unless the same is in writing and signed by the parties hereto; provided, however, that Participant hereby covenants and agrees to execute any amendment to this Agreement which shall be required or desirable (in the opinion of the Corporation or its counsel) in order to comply with any rule or 6 regulation promulgated or proposed under the Internal Revenue Code of 1986, as amended, by the Internal Revenue Service. 11. INCORPORATION OF EMPLOYMENT AGREEMENT BY REFERENCE. The Option is granted pursuant to the terms of the Employment Agreement, the terms of which are incorporated herein by reference, and the Option shall in all respects be interpreted in accordance with the Employment Agreement. To the extent that any conflict may exist between any term or provision of this Agreement and any term or provision of the Employment Agreement (other than with respect to matters that, pursuant to the Employment Agreement, may be altered in this Agreement), such term or provision of the Employment Agreement shall control. 12. GOVERNING LAW. The validity, construction, interpretation and effect of this Agreement shall exclusively be governed by and determined in accordance with the laws of Texas (other than the conflicts-of-law or choice-of-law rules thereof), except to the extent preempted by federal law, which solely to the extent of such preemption shall govern. Venue shall lie only in the State and Federal Courts in and for the County of Harris, Texas, as to all disputes arising under this Agreement, and such venue is hereby consented to by the Corporation and Participant. 13. COUNTERPARTS. This Agreement may be executed in counterparts, each of which, when taken together, shall constitute one original agreement. 7 IN WITNESS WHEREOF, the Corporation has caused its duly authorized officer to execute and attest to this Agreement, and to apply the corporate seal hereto, and Participant has placed his or her signature hereon, effective as of this 23rd day of December, 2004. CORPORATION: FAR EAST ENERGY CORPORATION By: /s/ John Mihm ---------------------------------------- John Mihm, Director PARTICIPANT: By: /s/ Bruce N. Huff ---------------------------------------- Bruce N. Huff 8 EX-10.8 9 h21197exv10w8.txt NON QUALIFIED STOCK NON-QUALIFIED STOCK OPTION AGMT - TUN AYE SAI EXHIBIT 10.8 FAR EAST ENERGY CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT GENERAL INFORMATION Name: Tun Aye Sai Award Date: December 23, 2004 Number of Shares Subject to Option: 200,000 Exercise Price: $2.00 Vesting: One fifth upon the Award Date and one fifth each succeeding anniversary of the Award Date until fully vested Expiration Date: December 23, 2014 FAR EAST ENERGY CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT THIS NONQUALIFIED STOCK OPTION AGREEMENT (this "AGREEMENT") is made as of this 23rd day of December, 2004, by and between Far East Energy Corporation, a Nevada corporation (the "CORPORATION"), and Tun Aye Sai ("PARTICIPANT"). NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth and of such other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. GRANT OF OPTION. A. Subject to the terms and conditions hereinafter set forth, the Corporation, with the approval and at the direction of the Compensation Committee of the Board of Directors (the "COMMITTEE"), and the Participant hereby acknowledge and agree that the Corporation granted to Participant, as of the Award Date, an option to purchase up to 200,000 shares of the common stock of the Corporation ("COMMON STOCK") at a price of U.S. $2.00 per share (as may be adjusted in accordance with Article 5, the "EXERCISE PRICE"). Such option is hereinafter referred to as the "OPTION," and the shares of Common Stock purchasable upon exercise of the Option are hereinafter referred to as the "SHARES." The Option is intended by the parties hereto to be, and shall be treated as, a nonqualified stock option (as such term is defined under Section 422 of the Internal Revenue Code of 1986, as amended). B. The right to exercise 20% of the Option (or a portion thereof) shall vest and first become exercisable on the Award Date, and an additional 20% shall vest on each succeeding anniversary of the Award Date until all of the Option is vested (the "VESTING DATE(S)"), so that all of the Shares subject to the Option shall be fully vested on December 23, 2008; provided, however, that Participant has been continuously employed or otherwise retained by the Corporation during the period from the Award Date until the applicable Vesting Date. 2. TERMINATION OF OPTION. The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after December 23, 2014 (the "OPTION TERM"). 3. EXERCISE OF OPTION. A. Participant may exercise the Option with respect to all or any part of the number of Shares then exercisable hereunder by giving the Secretary of the Corporation written notice of intent to exercise. The notice of exercise shall specify the number of Shares as to which Participant is exercising and the date of exercise thereof, which date shall be not less than five (5) days after the giving of such notice (unless an earlier time shall have been mutually agreed upon 1 in writing). All or any portion of the vested portion of the Option may be exercised by Participant at any time on or before December 23, 2014. B. Notwithstanding anything contained in this Article 3 to the contrary, the Option may be exercised only in compliance with all applicable securities laws and only by (i) Participant's completion, execution and delivery to the Corporation of a notice of exercise and, if required by the Corporation, an "investment letter" as supplied by the Corporation and (ii) the payment to the Corporation, as provided in Article 3D hereof, of an amount equal to the amount obtained by multiplying the Exercise Price by the number of Shares being purchased pursuant to such exercise as shall be specified by Participant in such notice of exercise. Participant shall not sell, transfer, assign, pledge for a loan, margin, hypothecate or exchange the Option or the option shares, except pursuant to the laws of descent and except that Participant's estate, executors or administrators, or personal or legal representatives may exercise the Option in accordance with the terms of Article 3C hereof in the event of the death or Disability of Participant. "DISABILITY" as used in this Agreement shall mean the inability of Participant to substantially perform his duties under this Agreement, as a result of a physical or mental illness or personal injury he has incurred, as determined by an independent physician selected with the approval of the Corporation and Participant. C. In the event the Participant ceases to be an employee of the Corporation for any reason, except due to the Participant's death or Disability, the Option to the extent exercisable, may be exercised for three months following termination of employment (but not beyond the Option Term). To the extent the Option is not exercisable at the time of termination of employment, the Option shall be immediately forfeited. D. In the event of the death or Disability of Participant at such time that Participant shall possess an Option pursuant to the terms of this Agreement, Participant, Participant's estate, executors or administrators, or personal or legal representatives (as applicable) shall be entitled to exercise the Option within three months following the Participant's death or Disability (but not beyond the Option Term). Any person, other than Participant, so desiring to exercise Participant's Option shall be required, as a condition to the exercise of the Option, to furnish to the Corporation such documentation as the Corporation shall deem satisfactory to evidence the authority of such person to exercise the Option on behalf of Participant. In the event of the exercise of such Option by Participant's estate, executors or administrators, or personal or legal representatives, all references herein to Participant shall, to the extent applicable, be deemed to refer to and include such estate, executors or administrators, or personal or legal representatives, as the case may be. E. Notwithstanding anything contained in this Article 3 to the contrary, the Committee or the Board of Directors of the Corporation (the "BOARD"), may, in its sole discretion, permit the Option to vest and be exercisable in whole or in part immediately prior to the time of a Change in Control notwithstanding that the Option is not fully vested, and the Participant shall have the right to exercise this Option from and after the date of the Change in Control. A "CHANGE IN CONTROL" shall mean to have occurred at such time as either (i) any "person", as such term is used in Section 14(d) of the Securities Exchange Act of 1934, as 2 amended (other than the Company, or any employee benefit plan (or related trust) maintained or sponsored by the Company, or an entity controlled by the Company) (a "PERSON"), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, or any successor rule), directly or indirectly, of fifty percent (50%) or more of the combined voting power of the Company's outstanding voting securities then entitled to vote generally in the election of directors (the "OUTSTANDING VOTING SECURITIES"); provided that the following shall not be deemed to result in a Change in Control: (A) any acquisition directly from the Company; or (B) any acquisition by merger, consolidation, share exchange or similar transaction that is not described in clause (ii) of this Section 3E as long as no Person resulting from such transaction obtains beneficial ownership of fifty percent (50%) or more of the then Outstanding Voting Securities or (ii) a consolidation, share exchange or similar transaction involving the Company in which the stockholders of the Company immediately prior to such transaction do not own, directly or indirectly, at least fifty percent (50%) of the Outstanding Voting Securities or voting power of the issued and outstanding capital stock of the Company's successor immediately after such transaction. F. The Exercise Price shall be paid in full by Participant for the Shares purchased on or before the exercise date specified in the notice of exercise, at Participant's option, in one or a combination of the following methods: (i) in cash or by electronic funds transfer; (ii) by check payable to the order of the Corporation; (iii) if authorized by and the Board or the Committee, by a promissory note of the Participant; (iv) by notice and third party payment in such manner as may be authorized by the Board or the Committee; (v) by the delivery of shares of Common Stock of the Corporation already owned by the Participant; or (vi) pursuant to a "cashless exercise" procedure (the "CASHLESS EXERCISE RIGHT") pursuant to which the Participant shall surrender to the Corporation this Option and a notice of exercise, duly completed and executed by the Participant to evidence the exercise of the Cashless Exercise Right by authorizing the Corporation to withhold from issuance a number of Shares issuable upon such exercise of the Option which, when multiplied by the Fair Market Value (as defined below) of such Shares, is equal to the aggregate Exercise Price (and such withheld Shares shall no longer be issuable under this Option). Shares of Common Stock used to satisfy the Exercise Price of an Option shall be valued at their Fair Market Value on the date of exercise. G. The "FAIR MARKET VALUE" shall be determined as follows: (a) if the security at issue is listed on a national securities exchange or admitted to unlisted trading privileges on such an exchange or quoted on either the National Market System or the Small Cap Market of the automated quotation service operated by The Nasdaq Stock Market, Inc., the Fair Market Value shall be the last reported sale price of that security on such exchange or system on the day for which the Fair Market Value is to be determined or, if no such sale is made on such day, the average of the highest closing bid and lowest asked price for such day on such exchange or system; or (b) if the security at issue is not so listed or quoted or admitted to unlisted trading privileges, the Fair Market Value shall be the average of the last reported highest 3 bid and lowest asked prices quoted on the Electronic Bulletin Board operated by The Nasdaq Stock Market, Inc., or, if not so quoted, then by the National Quotation Bureau, Inc. on the last business day prior to the day for which the Fair Market Value is to be determined; or (c) if the security at issue is not so listed or quoted or admitted to unlisted trading privileges and bid and asked prices are not reported, the Fair Market Value shall be determined in such reasonable manner as may be prescribed from time to time by the Board. H. Upon the exercise of all or any portion of the Option by Participant, or as soon thereafter as is practicable, the Corporation shall issue and deliver to Participant (or to any broker or, if acceptable to the Corporation, to any other person designated by Participant) a certificate or certificates evidencing such number of Shares as Participant has elected to purchase. Such certificate or certificates shall be registered in the name of Participant (or the designated broker or other person) and, if applicable, shall bear an appropriate investment warranty legend, any legend required by an applicable securities law, rule or regulation and, if applicable, a legend referring to the restrictions provided hereunder and any legend required by applicable law. Upon the exercise of the Option and the issuance and delivery of such certificate or certificates, Participant (or the person to whom such stock certificates are registered) shall have all the rights of a stockholder with respect to such Shares and to receive all dividends or other distributions paid or made with respect thereto. In the event that the capital stock of the Corporation is converted in whole or in part into securities of any other entity, a determination as to whether the securities of the other entity so received (if any) shall be subject to the restrictions set forth in this Agreement shall be made solely by the other entity. 4. RIGHTS PRIOR TO EXERCISE. Participant shall have no equity interest in the Corporation or any voting, dividend, liquidation or dissolution rights with respect to any capital stock of the Corporation solely by reason of having an Option or having executed this Agreement. Prior to the exercise of all or a portion of the Option, as set forth in Article 3A hereof, and the issuance and delivery of a certificate or certificates evidencing the Shares purchased pursuant to the exercise of all or a portion of such Option, Participant shall have no interest in, or any voting, dividend, liquidation or dissolution rights with respect to, the Shares, except to the extent that Participant has exercised all or a portion of such Option and has been issued and received delivery of a certificate or certificates evidencing the Shares purchased pursuant to such exercise. 5. ADJUSTMENT OF PURCHASE AND NUMBER OF SHARES. A. ADJUSTMENT. The number and kind of securities purchasable upon the exercise of this Option and the Exercise Price shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) Reclassification, Consolidation or Merger. At any time while this Option remains outstanding and unexpired, in case of (i) any reclassification or change of outstanding securities issuable upon exercise of this Option (other than a change in par 4 value, or from par value to no par value per share, or from no par value per share to par value or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of the Option), (ii) any consolidation or merger of the Corporation with or into another corporation (other than a merger with another corporation in which the Corporation is a continuing corporation and which does not result in any reclassification or change, other than a change in par value, or from par value to no par value per share, or from no par value per share to par value, or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of this Option), or (iii) any sale or transfer to another corporation of the property of the Corporation as an entirety or substantially as an entirety, the Corporation, or such successor or purchasing corporation, as the case may be, shall without payment of any additional consideration therefore, execute a new Option providing that the holder of this Option shall have the right to exercise such new Option (upon terms not less favorable to the holder than those then applicable to this Option) and to receive upon such exercise, in lieu of each share of Common Stock theretofore issuable upon exercise of this Option, the kind and amount of shares of stock, other securities, money or property receivable upon such reclassification, change, consolidation, merger, sale or transfer. Such new Options shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 5A. The provisions of this Section 5A(a) shall similarly apply to successive reclassifications, changes, consolidations, mergers, sales and transfers. (b) Subdivision or Combination of Shares. If the Corporation at any time while this Option remains outstanding and unexpired, shall subdivide or combine its capital stock, the Exercise Price shall be proportionately reduced, in case of subdivision of such shares as of the effective date of such subdivision, or, if the Corporation shall take a record of holders of its capital stock for the purpose of so subdividing, as of such record date, whichever is earlier, or shall be proportionately increased, in the case of combination of such shares, as of the effective date of such combination, or, if the Corporation shall take a record of holders of its capital stock for the purpose of so combining, as of such record date, whichever is earlier. (c) Stock Dividends. If the Corporation at any time which this Option is outstanding and unexpired shall pay a dividend in shares of, or make other distribution of shares of, its capital stock, then the Exercise Price shall be adjusted, as of the date the Corporation shall take a record of the holders of its capital stock for the purpose of receiving such dividend or other distribution (or if no such record is taken, as at the date of such payment or other distribution), to that price determined by multiplying the Exercise Price in effect immediately prior to such payment or other distribution by a fraction (i) the numerator of which shall be the total number of shares of capital stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of its capital stock outstanding immediately after such dividend or distribution. The provisions of this Section 5A(c) shall not apply under any of the circumstances for which an adjustment is provided in Section 5A(a) or 5A(b). 5 (d) Liquidating Dividends, Etc. If the Corporation at any time while this Option is outstanding and unexpired makes a distribution of its assets to the holders of its capital stock as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Corporation's assets (other than under the circumstances provided for in the Sections 5A(a) through (c)), the holder of this Option shall be entitled to receive upon the exercise hereof, in addition to the shares of Common Stock receivable upon such exercise, and without payment of any consideration other than the Exercise Price, an amount in cash equal to the value of such distribution per share of Common Stock multiplied by the number of shares of Common Stock which, on the record date for such distribution, are issuable upon exercise of this Option (with no further adjustment being made following any event which causes a subsequent adjustment in the number of shares of Common Stock issuable upon the exercise hereof), and an appropriate provision therefor should be made a part of any such distribution. The value of a distribution which is paid in other than cash shall be determined in good faith by the Board. B. NOTICE OF ADJUSTMENTS. Whenever any of the Exercise Price or the number of shares of Common Stock purchasable under the terms of this Option at that Exercise Price shall be adjusted pursuant to Section 5A hereof, the Corporation shall promptly make a certificate signed by its Chief Executive Officer, President or a Vice President and by its Treasurer or Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis upon which the Board made any determination hereunder), and the Exercise Price and number of shares of Common Stock purchasable at that Exercise Price after giving effect to such adjustment, and shall promptly cause copies of such certificate to be mailed (by First Class and Postage Prepaid) to the registered holder of this Option. 6. HEADINGS. The headings and other captions contained in this Agreement are for convenience of reference only, and shall not be used in interpreting, construing or enforcing any of the provisions of this Agreement. 7. ENTIRE AGREEMENT. This Agreement sets forth all of the promises, agreements, conditions, understandings, warranties and representations between the parties hereto with respect to the Shares, and there are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, between them with respect to the Shares other than as set forth herein. Any and all prior agreements between the parties hereto with respect to any stock acquisition rights regarding the Shares are hereby revoked. This Agreement is, and is intended by the parties to be, an integration of any and all prior agreements or understandings, oral or written, with respect to the Option and the Shares. 8. NOTICES. Any and all notices provided for herein shall be sufficient if in writing, and sent by hand delivery, by an overnight delivery service that produces a signed receipt evidencing 6 delivery or by certified or registered mail (return receipt requested and first class postage prepaid), in the case of the Corporation, to its principal office, and in the case of Participant, to Participant's address as shown on the Corporation's records. 9. INVALID OR UNENFORCEABLE PROVISIONS. The provisions of this Agreement shall be deemed severable, and the invalidity or unenforceability of any one or more of the provisions hereof shall not affect the validity and enforceability of the other provisions hereof. Participant agrees that the breach or alleged breach by the Corporation of (a) any covenant contained in another agreement (if any) between the Corporation and Participant or (b) any obligation owed to Participant by the Corporation, shall not affect the validity or enforceability of the covenants and agreements of Participant set forth herein. 10. MODIFICATIONS. No change or modification of this Agreement shall be valid unless the same is in writing and signed by the parties hereto; provided, however, that Participant hereby covenants and agrees to execute any amendment to this Agreement which shall be required or desirable (in the opinion of the Corporation or its counsel) in order to comply with any rule or regulation promulgated or proposed under the Internal Revenue Code of 1986, as amended, by the Internal Revenue Service. 11. GOVERNING LAW. The validity, construction, interpretation and effect of this Agreement shall exclusively be governed by and determined in accordance with the laws of Texas (other than the conflicts-of-law or choice-of-law rules thereof), except to the extent preempted by federal law, which solely to the extent of such preemption shall govern. Venue shall lie only in the State and Federal Courts in and for the County of Harris, Texas, as to all disputes arising under this Agreement, and such venue is hereby consented to by the Corporation and Participant. 12. COUNTERPARTS. This Agreement may be executed in counterparts, each of which, when taken together, shall constitute one original agreement. [SIGNATURE PAGE FOLLOWS.] 7 IN WITNESS WHEREOF, the Corporation has caused its duly authorized officer to execute and attest to this Agreement, and to apply the corporate seal hereto, and Participant has placed his or her signature hereon, effective as of this 23rd day of December, 2004. CORPORATION: FAR EAST ENERGY CORPORATION By: /s/ Michael R. McElwrath ------------------------------------------------- Michael R. McElwrath, Chairman and Chief Executive Officer PARTICIPANT: By: /s/ Tun Aye Sai ------------------------------------------------- Tun Aye Sai 8 EX-10.9 10 h21197exv10w9.txt NON QUALIFIED STOCK NON-QUALIFIED STOCK OPTION AGMT - GARRY WARD EXHIBIT 10.9 FAR EAST ENERGY CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT GENERAL INFORMATION Name: Garry Ward Award Date: December 23, 2004 Number of Shares Subject to Option: 200,000 Exercise Price: $2.00 Vesting: One fifth upon the Award Date and one fifth each succeeding anniversary of the Award Date until fully vested Expiration Date: December 23, 2014 FAR EAST ENERGY CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT THIS NONQUALIFIED STOCK OPTION AGREEMENT (this "AGREEMENT") is made as of this 23rd day of December, 2004, by and between Far East Energy Corporation, a Nevada corporation (the "CORPORATION"), and Garry Ward ("PARTICIPANT"). NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth and of such other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. GRANT OF OPTION. A. Subject to the terms and conditions hereinafter set forth, the Corporation, with the approval and at the direction of the Compensation Committee of the Board of Directors (the "COMMITTEE"), and the Participant hereby acknowledge and agree that the Corporation granted to Participant, as of the Award Date, an option to purchase up to 200,000 shares of the common stock of the Corporation ("COMMON STOCK") at a price of U.S. $2.00 per share (as may be adjusted in accordance with Article 5, the "EXERCISE PRICE"). Such option is hereinafter referred to as the "OPTION," and the shares of Common Stock purchasable upon exercise of the Option are hereinafter referred to as the "SHARES." The Option is intended by the parties hereto to be, and shall be treated as, a nonqualified stock option (as such term is defined under Section 422 of the Internal Revenue Code of 1986, as amended). B. The right to exercise 20% of the Option (or a portion thereof) shall vest and first become exercisable on the Award Date, and an additional 20% shall vest on each succeeding anniversary of the Award Date until all of the Option is vested (the "VESTING DATE(S)"), so that all of the Shares subject to the Option shall be fully vested on December 23, 2008; provided, however, that Participant has been continuously employed or otherwise retained by the Corporation during the period from the Award Date until the applicable Vesting Date. 2. TERMINATION OF OPTION. The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after December 23, 2014 (the "OPTION TERM"). 3. EXERCISE OF OPTION. A. Participant may exercise the Option with respect to all or any part of the number of Shares then exercisable hereunder by giving the Secretary of the Corporation written notice of intent to exercise. The notice of exercise shall specify the number of Shares as to which Participant is exercising and the date of exercise thereof, which date shall be not less than five (5) days after the giving of such notice (unless an earlier time shall have been mutually agreed upon 1 in writing). All or any portion of the vested portion of the Option may be exercised by Participant at any time on or before December 23, 2014. B. Notwithstanding anything contained in this Article 3 to the contrary, the Option may be exercised only in compliance with all applicable securities laws and only by (i) Participant's completion, execution and delivery to the Corporation of a notice of exercise and, if required by the Corporation, an "investment letter" as supplied by the Corporation and (ii) the payment to the Corporation, as provided in Article 3D hereof, of an amount equal to the amount obtained by multiplying the Exercise Price by the number of Shares being purchased pursuant to such exercise as shall be specified by Participant in such notice of exercise. Participant shall not sell, transfer, assign, pledge for a loan, margin, hypothecate or exchange the Option or the option shares, except pursuant to the laws of descent and except that Participant's estate, executors or administrators, or personal or legal representatives may exercise the Option in accordance with the terms of Article 3C hereof in the event of the death or Disability of Participant. "DISABILITY" as used in this Agreement shall mean the inability of Participant to substantially perform his duties under this Agreement, as a result of a physical or mental illness or personal injury he has incurred, as determined by an independent physician selected with the approval of the Corporation and Participant. C. In the event the Participant ceases to be an employee of the Corporation for any reason, except due to the Participant's death or Disability, the Option to the extent exercisable, may be exercised for three months following termination of employment (but not beyond the Option Term). To the extent the Option is not exercisable at the time of termination of employment, the Option shall be immediately forfeited. D. In the event of the death or Disability of Participant at such time that Participant shall possess an Option pursuant to the terms of this Agreement, Participant, Participant's estate, executors or administrators, or personal or legal representatives (as applicable) shall be entitled to exercise the Option within three months following the Participant's death or Disability (but not beyond the Option Term). Any person, other than Participant, so desiring to exercise Participant's Option shall be required, as a condition to the exercise of the Option, to furnish to the Corporation such documentation as the Corporation shall deem satisfactory to evidence the authority of such person to exercise the Option on behalf of Participant. In the event of the exercise of such Option by Participant's estate, executors or administrators, or personal or legal representatives, all references herein to Participant shall, to the extent applicable, be deemed to refer to and include such estate, executors or administrators, or personal or legal representatives, as the case may be. E. Notwithstanding anything contained in this Article 3 to the contrary, the Committee or the Board of Directors of the Corporation (the "BOARD"), may, in its sole discretion, permit the Option to vest and be exercisable in whole or in part immediately prior to the time of a Change in Control notwithstanding that the Option is not fully vested, and the Participant shall have the right to exercise this Option from and after the date of the Change in Control. A "CHANGE IN CONTROL" shall mean to have occurred at such time as either (i) any "person", as such term is used in Section 14(d) of the Securities Exchange Act of 1934, as 2 amended (other than the Company, or any employee benefit plan (or related trust) maintained or sponsored by the Company, or an entity controlled by the Company) (a "PERSON"), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, or any successor rule), directly or indirectly, of fifty percent (50%) or more of the combined voting power of the Company's outstanding voting securities then entitled to vote generally in the election of directors (the "OUTSTANDING VOTING SECURITIES"); provided that the following shall not be deemed to result in a Change in Control: (A) any acquisition directly from the Company; or (B) any acquisition by merger, consolidation, share exchange or similar transaction that is not described in clause (ii) of this Section 3E as long as no Person resulting from such transaction obtains beneficial ownership of fifty percent (50%) or more of the then Outstanding Voting Securities or (ii) a consolidation, share exchange or similar transaction involving the Company in which the stockholders of the Company immediately prior to such transaction do not own, directly or indirectly, at least fifty percent (50%) of the Outstanding Voting Securities or voting power of the issued and outstanding capital stock of the Company's successor immediately after such transaction. F. The Exercise Price shall be paid in full by Participant for the Shares purchased on or before the exercise date specified in the notice of exercise, at Participant's option, in one or a combination of the following methods: (i) in cash or by electronic funds transfer; (ii) by check payable to the order of the Corporation; (iii) if authorized by and the Board or the Committee, by a promissory note of the Participant; (iv) by notice and third party payment in such manner as may be authorized by the Board or the Committee; (v) by the delivery of shares of Common Stock of the Corporation already owned by the Participant; or (vi) pursuant to a "cashless exercise" procedure (the "CASHLESS EXERCISE RIGHT") pursuant to which the Participant shall surrender to the Corporation this Option and a notice of exercise, duly completed and executed by the Participant to evidence the exercise of the Cashless Exercise Right by authorizing the Corporation to withhold from issuance a number of Shares issuable upon such exercise of the Option which, when multiplied by the Fair Market Value (as defined below) of such Shares, is equal to the aggregate Exercise Price (and such withheld Shares shall no longer be issuable under this Option). Shares of Common Stock used to satisfy the Exercise Price of an Option shall be valued at their Fair Market Value on the date of exercise. G. The "FAIR MARKET VALUE" shall be determined as follows: (a) if the security at issue is listed on a national securities exchange or admitted to unlisted trading privileges on such an exchange or quoted on either the National Market System or the Small Cap Market of the automated quotation service operated by The Nasdaq Stock Market, Inc., the Fair Market Value shall be the last reported sale price of that security on such exchange or system on the day for which the Fair Market Value is to be determined or, if no such sale is made on such day, the average of the highest closing bid and lowest asked price for such day on such exchange or system; or (b) if the security at issue is not so listed or quoted or admitted to unlisted trading privileges, the Fair Market Value shall be the average of the last reported highest 3 bid and lowest asked prices quoted on the Electronic Bulletin Board operated by The Nasdaq Stock Market, Inc., or, if not so quoted, then by the National Quotation Bureau, Inc. on the last business day prior to the day for which the Fair Market Value is to be determined; or (c) if the security at issue is not so listed or quoted or admitted to unlisted trading privileges and bid and asked prices are not reported, the Fair Market Value shall be determined in such reasonable manner as may be prescribed from time to time by the Board. H. Upon the exercise of all or any portion of the Option by Participant, or as soon thereafter as is practicable, the Corporation shall issue and deliver to Participant (or to any broker or, if acceptable to the Corporation, to any other person designated by Participant) a certificate or certificates evidencing such number of Shares as Participant has elected to purchase. Such certificate or certificates shall be registered in the name of Participant (or the designated broker or other person) and, if applicable, shall bear an appropriate investment warranty legend, any legend required by an applicable securities law, rule or regulation and, if applicable, a legend referring to the restrictions provided hereunder and any legend required by applicable law. Upon the exercise of the Option and the issuance and delivery of such certificate or certificates, Participant (or the person to whom such stock certificates are registered) shall have all the rights of a stockholder with respect to such Shares and to receive all dividends or other distributions paid or made with respect thereto. In the event that the capital stock of the Corporation is converted in whole or in part into securities of any other entity, a determination as to whether the securities of the other entity so received (if any) shall be subject to the restrictions set forth in this Agreement shall be made solely by the other entity. 4. RIGHTS PRIOR TO EXERCISE. Participant shall have no equity interest in the Corporation or any voting, dividend, liquidation or dissolution rights with respect to any capital stock of the Corporation solely by reason of having an Option or having executed this Agreement. Prior to the exercise of all or a portion of the Option, as set forth in Article 3A hereof, and the issuance and delivery of a certificate or certificates evidencing the Shares purchased pursuant to the exercise of all or a portion of such Option, Participant shall have no interest in, or any voting, dividend, liquidation or dissolution rights with respect to, the Shares, except to the extent that Participant has exercised all or a portion of such Option and has been issued and received delivery of a certificate or certificates evidencing the Shares purchased pursuant to such exercise. 5. ADJUSTMENT OF PURCHASE AND NUMBER OF SHARES. A. ADJUSTMENT. The number and kind of securities purchasable upon the exercise of this Option and the Exercise Price shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) Reclassification, Consolidation or Merger. At any time while this Option remains outstanding and unexpired, in case of (i) any reclassification or change of outstanding securities issuable upon exercise of this Option (other than a change in par 4 value, or from par value to no par value per share, or from no par value per share to par value or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of the Option), (ii) any consolidation or merger of the Corporation with or into another corporation (other than a merger with another corporation in which the Corporation is a continuing corporation and which does not result in any reclassification or change, other than a change in par value, or from par value to no par value per share, or from no par value per share to par value, or as a result of a subdivision or combination of outstanding securities issuable upon the exercise of this Option), or (iii) any sale or transfer to another corporation of the property of the Corporation as an entirety or substantially as an entirety, the Corporation, or such successor or purchasing corporation, as the case may be, shall without payment of any additional consideration therefore, execute a new Option providing that the holder of this Option shall have the right to exercise such new Option (upon terms not less favorable to the holder than those then applicable to this Option) and to receive upon such exercise, in lieu of each share of Common Stock theretofore issuable upon exercise of this Option, the kind and amount of shares of stock, other securities, money or property receivable upon such reclassification, change, consolidation, merger, sale or transfer. Such new Options shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 5A. The provisions of this Section 5A(a) shall similarly apply to successive reclassifications, changes, consolidations, mergers, sales and transfers. (b) Subdivision or Combination of Shares. If the Corporation at any time while this Option remains outstanding and unexpired, shall subdivide or combine its capital stock, the Exercise Price shall be proportionately reduced, in case of subdivision of such shares as of the effective date of such subdivision, or, if the Corporation shall take a record of holders of its capital stock for the purpose of so subdividing, as of such record date, whichever is earlier, or shall be proportionately increased, in the case of combination of such shares, as of the effective date of such combination, or, if the Corporation shall take a record of holders of its capital stock for the purpose of so combining, as of such record date, whichever is earlier. (c) Stock Dividends. If the Corporation at any time which this Option is outstanding and unexpired shall pay a dividend in shares of, or make other distribution of shares of, its capital stock, then the Exercise Price shall be adjusted, as of the date the Corporation shall take a record of the holders of its capital stock for the purpose of receiving such dividend or other distribution (or if no such record is taken, as at the date of such payment or other distribution), to that price determined by multiplying the Exercise Price in effect immediately prior to such payment or other distribution by a fraction (i) the numerator of which shall be the total number of shares of capital stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of its capital stock outstanding immediately after such dividend or distribution. The provisions of this Section 5A(c) shall not apply under any of the circumstances for which an adjustment is provided in Section 5A(a) or 5A(b). 5 (d) Liquidating Dividends, Etc. If the Corporation at any time while this Option is outstanding and unexpired makes a distribution of its assets to the holders of its capital stock as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Corporation's assets (other than under the circumstances provided for in the Sections 5A(a) through (c)), the holder of this Option shall be entitled to receive upon the exercise hereof, in addition to the shares of Common Stock receivable upon such exercise, and without payment of any consideration other than the Exercise Price, an amount in cash equal to the value of such distribution per share of Common Stock multiplied by the number of shares of Common Stock which, on the record date for such distribution, are issuable upon exercise of this Option (with no further adjustment being made following any event which causes a subsequent adjustment in the number of shares of Common Stock issuable upon the exercise hereof), and an appropriate provision therefor should be made a part of any such distribution. The value of a distribution which is paid in other than cash shall be determined in good faith by the Board. B. NOTICE OF ADJUSTMENTS. Whenever any of the Exercise Price or the number of shares of Common Stock purchasable under the terms of this Option at that Exercise Price shall be adjusted pursuant to Section 5A hereof, the Corporation shall promptly make a certificate signed by its Chief Executive Officer, President or a Vice President and by its Treasurer or Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis upon which the Board made any determination hereunder), and the Exercise Price and number of shares of Common Stock purchasable at that Exercise Price after giving effect to such adjustment, and shall promptly cause copies of such certificate to be mailed (by First Class and Postage Prepaid) to the registered holder of this Option. 6. HEADINGS. The headings and other captions contained in this Agreement are for convenience of reference only, and shall not be used in interpreting, construing or enforcing any of the provisions of this Agreement. 7. ENTIRE AGREEMENT. This Agreement sets forth all of the promises, agreements, conditions, understandings, warranties and representations between the parties hereto with respect to the Shares, and there are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, between them with respect to the Shares other than as set forth herein. Any and all prior agreements between the parties hereto with respect to any stock acquisition rights regarding the Shares are hereby revoked. This Agreement is, and is intended by the parties to be, an integration of any and all prior agreements or understandings, oral or written, with respect to the Option and the Shares. 8. NOTICES. Any and all notices provided for herein shall be sufficient if in writing, and sent by hand delivery, by an overnight delivery service that produces a signed receipt evidencing 6 delivery or by certified or registered mail (return receipt requested and first class postage prepaid), in the case of the Corporation, to its principal office, and in the case of Participant, to Participant's address as shown on the Corporation's records. 9. INVALID OR UNENFORCEABLE PROVISIONS. The provisions of this Agreement shall be deemed severable, and the invalidity or unenforceability of any one or more of the provisions hereof shall not affect the validity and enforceability of the other provisions hereof. Participant agrees that the breach or alleged breach by the Corporation of (a) any covenant contained in another agreement (if any) between the Corporation and Participant or (b) any obligation owed to Participant by the Corporation, shall not affect the validity or enforceability of the covenants and agreements of Participant set forth herein. 10. MODIFICATIONS. No change or modification of this Agreement shall be valid unless the same is in writing and signed by the parties hereto; provided, however, that Participant hereby covenants and agrees to execute any amendment to this Agreement which shall be required or desirable (in the opinion of the Corporation or its counsel) in order to comply with any rule or regulation promulgated or proposed under the Internal Revenue Code of 1986, as amended, by the Internal Revenue Service. 11. GOVERNING LAW. The validity, construction, interpretation and effect of this Agreement shall exclusively be governed by and determined in accordance with the laws of Texas (other than the conflicts-of-law or choice-of-law rules thereof), except to the extent preempted by federal law, which solely to the extent of such preemption shall govern. Venue shall lie only in the State and Federal Courts in and for the County of Harris, Texas, as to all disputes arising under this Agreement, and such venue is hereby consented to by the Corporation and Participant. 12. COUNTERPARTS. This Agreement may be executed in counterparts, each of which, when taken together, shall constitute one original agreement. [SIGNATURE PAGE FOLLOWS.] 7 IN WITNESS WHEREOF, the Corporation has caused its duly authorized officer to execute and attest to this Agreement, and to apply the corporate seal hereto, and Participant has placed his or her signature hereon, effective as of this 23rd day of December, 2004. CORPORATION: FAR EAST ENERGY CORPORATION By: /s/ Michael R. McElwrath ------------------------------------------------- Michael R. McElwrath, Chairman and Chief Executive Officer PARTICIPANT: By: /s/ Garry Ward ------------------------------------------------- Garry Ward 8 -----END PRIVACY-ENHANCED MESSAGE-----