EX-99.12 13 d37844dex9912.htm EX-99.12 EX-99.12

Exhibit 99.12

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

 

 

    )   
In re:    )    Chapter 11
   )   
CHAPARRAL ENERGY, INC., et al.,1    )    Case No. 20-_____ (___)
   )   

Debtors.

    )    (Joint Administration Requested)

 

    )   

DISCLOSURE STATEMENT FOR THE DEBTORS’

JOINT PREPACKAGED CHAPTER 11 PLAN OF REORGANIZATION

 

John H. Knight    Damian S. Schaible
Amanda R. Steele    Angela M. Libby
Brendan J. Schlauch    Jacob S. Weiner
RICHARDS, LAYTON & FINGER, P.A.    DAVIS POLK & WARDWELL LLP
One Rodney Square    450 Lexington Avenue
920 North King Street    New York, New York 10017
Wilmington, Delaware 19801    Telephone:    (212) 450-4000
Telephone:    (302) 651-7700    Facsimile:     (212) 701-5800
Facsimile:     (302) 651-7701   

Proposed Co-Counsel to the Debtors and

Debtors in Possession

   
Dated: August 15, 2020   

 

THIS IS A SOLICITATION OF VOTES TO ACCEPT OR REJECT THE PLAN IN ACCORDANCE WITH BANKRUPTCY CODE SECTION 1125 AND WITHIN THE MEANING OF BANKRUPTCY CODE SECTION 1126, 11 U.S.C. §§ 1125, 1126. THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED BY THE BANKRUPTCY COURT. THE DEBTORS INTEND TO SUBMIT THIS DISCLOSURE STATEMENT TO THE BANKRUPTCY COURT FOR APPROVAL FOLLOWING COMMENCEMENT OF SOLICITATION AND THE DEBTORS’ FILING FOR RELIEF UNDER CHAPTER 11 OF THE BANKRUPTCY CODE. THE INFORMATION IN THIS DISCLOSURE STATEMENT IS SUBJECT TO CHANGE.

 

1 

The Debtors in these anticipated cases, along with the last four digits (or five digits, in cases in which multiple Debtors have the same last four digits) of each Debtor’s federal tax identification number, are: CEI Acquisition, L.L.C. (1817); CEI Pipeline, L.L.C. (6877); Chaparral Biofuels, L.L.C. (1066); Chaparral CO2, L.L.C. (1656); Chaparral Energy, Inc. (90941); Chaparral Energy, L.L.C. (20941); Chaparral Exploration, L.L.C. (1968); Chaparral Real Estate, L.L.C. (1655); Chaparral Resources, L.L.C. (1710); Charles Energy, L.L.C. (3750); Chestnut Energy, L.L.C. (9730); Green Country Supply, Inc. (2723); Roadrunner Drilling, L.L.C. (2399); and Trabajo Energy, L.L.C. (9753). The Debtors’ address is 701 Cedar Lake Boulevard, Oklahoma City, OK 73114.

PRELIMINARY STATEMENT

On August 15, 2020, the Company (as defined below) entered into the Restructuring Support Agreement attached hereto as Exhibit C with certain holders that own, or manage with the authority to act on behalf of the beneficial owners of, (i) approximately 78% in aggregate principal amount of loans under the Company’s prepetition reserve-based revolving credit facility (the “Consenting Revolving Lenders”) and (ii) approximately 78% in aggregate principal amount of the Company’s approximately $300 million in aggregate principal amount of 8.75% senior unsecured notes (the “Consenting Senior Noteholders” and, together with the Consenting Revolving Lenders, the “Consenting Creditors”). The Restructuring Support Agreement provides for the restructuring of the Debtors as a going concern through the filing of chapter 11 cases with the United States Bankruptcy Court for the District of Delaware and the confirmation of the Debtors’ Joint Prepackaged Chapter 11 Plan of Reorganization for Chaparral Energy, Inc. and its Debtor Affiliates attached hereto as Exhibit A (as may be amended, supplemented, or otherwise modified from time to time in accordance with its terms, the “Plan”).

The Plan is the outcome of extensive negotiations among the Company and certain of its key stakeholders—including Royal Bank of Canada, as administrative agent (in such capacity, the “RBL Agent”) for the Debtors’ prepetition reserve-based based revolving credit facility (the “RBL Facility”), the lenders under the RBL Facility (the “RBL Lenders”), and an ad hoc group of holders of the Company’s 8.75% senior unsecured notes (the “Ad Hoc Group”)—that began several months ago. The Plan contemplates a restructuring that provides for, among other things, (i) participation by certain holders of RBL Claims in a new first-lien first-out revolving credit facility (the “Exit Revolving Facility”) and receipt by other holders of RBL Claims of new first-lien second-out term loans (the “Second Out Term Loans”) to replace the prepetition RBL Credit Facility, (ii) the equitization of the Company’s approximately $300 million of Senior Notes Claims, (iii) a new money rights offering of new second lien convertible notes at an aggregate subscription price of $35 million, backstopped in full by certain holders of the Company’s Senior Notes, (iv) reinstatement and payment in the ordinary course of business of all General Unsecured Claims, and (v) the cancellation of all Interests in Chaparral Parent and distribution of Cash and/or New Warrants to holders of Chaparral Parent Equity Interests. The restructuring contemplated by the Restructuring Support Agreement and the Plan will deleverage the Company’s balance sheet and leave it positioned to succeed in the highly competitive oil and natural gas industry.

The Company’s decision to enter into the Restructuring Support Agreement and solicit votes for the Plan was precipitated by the historic decline in prices for oil and natural gas, which began in late 2018 and has been exacerbated recently by the coronavirus (“COVID-19”) pandemic and certain actions taken by Russia and Saudi Arabia. Prior to entering into the Restructuring Support Agreement, the Company took numerous actions and pursued many strategic avenues aimed at adapting to these evolving market conditions and preserving value for its stakeholders. However, the onset of COVID-19 and sustained low commodity prices made it clear that material changes to the Company’s balance sheet were necessary. The Plan that the Company is proposing, and which is supported by the Consenting Creditors, will significantly reduce the Company’s debt and further advance the Company’s efforts to position itself for long-term success.

The same challenges that have affected the Company have caused the distress and the commencement of chapter 11 cases of many other oil and natural gas companies. The Company is confident that, upon emergence, it will be better positioned to navigate the industry storm.

 

-ii-

IMPORTANT INFORMATION REGARDING THIS DISCLOSURE STATEMENT

DISCLOSURE STATEMENT, DATED AUGUST 15, 2020

SOLICITATION OF VOTES ON THE DEBTORS’ JOINT PREPACKAGED CHAPTER 11 PLAN OF REORGANIZATION FROM THE HOLDERS OF OUTSTANDING:

 

VOTING CLASS    NAME OF CLASS UNDER THE PLAN
CLASS 3    RBL CLAIMS
CLASS 4    SENIOR NOTES CLAIMS

IF YOU ARE IN CLASS 3 OR CLASS 4 YOU ARE RECEIVING THIS DOCUMENT AND THE ACCOMPANYING MATERIALS BECAUSE YOU ARE ENTITLED TO VOTE ON THE PLAN

 

DELIVERY OF BALLOTS

BALLOTS MUST BE ACTUALLY RECEIVED BY THE SOLICITATION AGENT BY THE VOTING DEADLINE, WHICH IS 5:00 P.M., PREVAILING EASTERN TIME, ON SEPTEMBER 15, 2020, VIA THE ENCLOSED PREPAID, PRE-ADDRESSED RETURN ENVELOPE

OR

AT THE FOLLOWING ADDRESSES:

VIA FIRST-CLASS MAIL, OVERNIGHT COURIER, OR HAND DELIVERY TO:

CHAPARRAL 2020 BALLOT PROCESSING

C/O KURTZMAN CARSON CONSULTANTS LLC

222 N. PACIFIC COAST HIGHWAY, SUITE 300

EL SEGUNDO, CA 90245

OR

SOLELY FOR HOLDERS OF CLASS 3 RBL CLAIMS:

VIA EMAIL TO

CHAPARRAL2020INFO@KCCLLC.COM

OR

SOLELY FOR HOLDERS OF CLASS 4 SENIOR NOTES CLAIMS:

IN A RETURN ENVELOPE ADDRESSED TO YOUR NOMINEE OR VIA EMAIL DIRECTLY TO YOUR NOMINEE, IN ACCORDANCE WITH INSTRUCTIONS PROVIDED BY YOUR NOMINEE

BALLOTS RECEIVED VIA FACSIMILE WILL NOT BE COUNTED

IF YOU HAVE ANY QUESTIONS ON THE PROCEDURE FOR VOTING ON THE PLAN, PLEASE CALL THE SOLICITATION AGENT AT (866) 523-2941 (TOLL-FREE) OR (781) 575-2044 OR EMAIL CHAPARRAL2020INFO@KCCLLC.COM

 

-iii-

This disclosure statement (including all exhibits hereto and as may be amended or modified from time to time and including all exhibits and supplements thereto, in accordance with its terms, this “Disclosure Statement”) provides information regarding the Plan that the Debtors are seeking to have confirmed by the Bankruptcy Court. A copy of the Plan is attached hereto as Exhibit A. The Debtors are providing the information in this Disclosure Statement to certain holders of Claims for purposes of soliciting votes to accept or reject the Plan.

This Disclosure Statement contains, among other things, descriptions and summaries of provisions of the Plan being proposed by the Debtors. The Debtors reserve the right to modify the Plan consistent with section 1127 of title 11 of the United States Code (as now in effect or hereafter amended, the “Bankruptcy Code”), Rule 3019 of the Federal Rules of Bankruptcy Procedure (together with the local rules of the Bankruptcy Court, as now in effect or hereafter amended, the “Bankruptcy Rules”).

Pursuant to the Restructuring Support Agreement, the Plan is currently supported by the Debtors, Consenting Revolving Lenders holding approximately 78% of the amount of RBL Claims, and Consenting Senior Noteholders holding approximately 78% of the amount of Senior Notes Claims. Holders of Allowed General Unsecured Claims will not be impaired by the Plan and, as a result, the right to receive payment in full on account of existing obligations is not altered by the Plan. During the Chapter 11 Cases, the Debtors intend to operate their businesses in the ordinary course and will seek authorization from the Bankruptcy Court to make payment in full on a timely basis to all trade creditors, employees, royalty and working interest owners, and insurance providers, among others, of all undisputed amounts due prior to and during the Chapter 11 Cases.

The consummation and effectiveness of the Plan are subject to certain material conditions precedent described herein and set forth in Article IX of the Plan. There is no assurance that the Bankruptcy Court will confirm the Plan or, if the Bankruptcy Court does confirm the Plan, that the conditions necessary for the Plan to become effective will be satisfied or, in the alternative, waived.

The Debtors urge each holder of a Claim or Interest to consult with its own advisors with respect to any legal, financial, securities, tax, or business advice in reviewing this Disclosure Statement, the Plan, and each proposed transaction contemplated by the Plan.

The Debtors strongly encourage holders of Claims in Class 3 and Class 4 to read this Disclosure Statement (including the Risk Factors described in Article VIII hereof) and the Plan in their entirety before voting to accept or reject the Plan. Assuming the requisite acceptances to the Plan are obtained, the Debtors will seek the Bankruptcy Court’s approval of the Plan at the Confirmation Hearing.

The Rights Offering will be conducted pursuant to separate Rights Offering Procedures. Any disclosure contained herein concerning the Rights Offering is solely for information purposes.

 

-iv-

RECOMMENDATION BY THE DEBTORS AND CREDITOR SUPPORT

EACH DEBTOR’S BOARD OF DIRECTORS, MEMBER, OR MANAGER, AS APPLICABLE, HAS APPROVED THE TRANSACTIONS CONTEMPLATED BY THE PLAN AND DESCRIBED IN THIS DISCLOSURE STATEMENT, AND EACH DEBTOR BELIEVES THAT THE COMPROMISES CONTEMPLATED UNDER THE PLAN ARE FAIR AND EQUITABLE, MAXIMIZE THE VALUE OF EACH OF THE DEBTOR’S ESTATES, AND PROVIDE THE BEST RECOVERY TO CLAIM AND INTEREST HOLDERS. AT THIS TIME, EACH DEBTOR BELIEVES THAT THE PLAN AND RELATED TRANSACTIONS REPRESENT THE BEST ALTERNATIVE FOR ACCOMPLISHING THE DEBTORS’ OVERALL RESTRUCTURING OBJECTIVES. EACH OF THE DEBTORS, THEREFORE, STRONGLY RECOMMENDS THAT ALL HOLDERS OF CLAIMS WHOSE VOTES ARE BEING SOLICITED SUBMIT BALLOTS TO ACCEPT THE PLAN BY RETURNING THEIR BALLOTS SO AS TO BE ACTUALLY RECEIVED BY THE SOLICITATION AGENT NO LATER THAN SEPTEMBER 15, 2020 AT 5:00 P.M. (PREVAILING EASTERN TIME) FOR CLASS 3 AND CLASS 4 PURSUANT TO THE INSTRUCTIONS SET FORTH HEREIN AND ON THE BALLOTS.

HOLDERS OF APPROXIMATELY 78% OF THE RBL CLAIMS AND APPROXIMATELY 78% OF THE SENIOR NOTES CLAIMS HAVE ALREADY AGREED, SUBJECT TO THE TERMS AND CONDITIONS OF THE RESTRUCTURING SUPPORT AGREEMENT, TO SUPPORT AND VOTE IN FAVOR OF THE PLAN.

 

-v-

SPECIAL NOTICE REGARDING FEDERAL AND STATE SECURITIES LAWS

The Bankruptcy Court has not reviewed this Disclosure Statement or the Plan, and the securities to be issued on or after the Effective Date will not have been the subject of a registration statement filed with the United States Securities and Exchange Commission (the “SEC”) under the United States Securities Act of 1933 as amended (the “Securities Act”) or any securities regulatory authority of any state under any state securities law (“Blue Sky Laws”). The Plan has not been approved or disapproved by the SEC or any state regulatory authority and neither the SEC nor any state regulatory authority has passed upon the accuracy or adequacy of the information contained in this Disclosure Statement or the Plan. Any representation to the contrary is a criminal offense. The Debtors are relying on section 4(a)(2) of the Securities Act and/or Regulation D thereunder, and similar Blue Sky Laws provisions, as well as Regulation S under the Securities Act to (i) offer to certain holders of Senior Notes Claims that are “accredited investors” as defined in Rule 501 of the Securities Act (“Accredited Investors”) or are not “U.S. Persons” as defined in Regulation S (such holders, the “Eligible Holders”) New Common Stock prior to the Petition Date, in connection with the solicitation of votes to accept or reject the Plan (the “Solicitation”), and (ii) offer, issue, and distribute the Backstop Premium and the New Convertible Notes to certain holders of Senior Notes Claims that are Accredited Investors pursuant to and in accordance with the terms of the Backstop Commitment Agreement and Rights Offering Procedures, in each case without registration under the Securities Act or the Blue Sky Laws.

After the Petition Date, the Debtors will rely on section 1145(a) of the Bankruptcy Code to exempt from registration under the Securities Act and Blue Sky Laws the offer, issuance, and distribution of New Common Stock and New Warrants under the Plan. Neither the Solicitation nor this Disclosure Statement constitutes an offer to sell or the solicitation of an offer to buy securities in any state or jurisdiction in which such offer or solicitation is not authorized.

 

-vi-

DISCLAIMER

This Disclosure Statement contains summaries of certain provisions of the Plan and certain other documents and financial information. The information included in this Disclosure Statement is provided solely for the purpose of soliciting acceptances of the Plan and should not be relied upon for any purpose other than to determine whether and how to vote on the Plan. All holders of Claims entitled to vote to accept or reject the Plan are advised and encouraged to read this Disclosure Statement and the Plan in their entirety before voting to accept or reject the Plan. The Debtors believe that these summaries are fair and accurate. The summaries of the financial information and the documents that are attached to, or incorporated by reference in, this Disclosure Statement are qualified in their entirety by reference to such information and documents. In the event of any inconsistency or discrepancy between a description in this Disclosure Statement, on the one hand, and the terms and provisions of the Plan or the financial information and documents incorporated in this Disclosure Statement by reference, on the other hand, the Plan or the financial information and documents, as applicable, shall govern for all purposes.

Except as otherwise provided in the Plan or in accordance with applicable law, the Debtors are under no duty to update or supplement this Disclosure Statement. The Bankruptcy Court’s approval of this Disclosure Statement does not constitute a guarantee of the accuracy or completeness of the information contained herein or the Bankruptcy Court’s endorsement of the merits of the Plan. The statements and financial information contained in this Disclosure Statement have been made as of the date hereof unless otherwise specified. Holders of Claims or Interests reviewing the Disclosure Statement should not assume at the time of such review that there have been no changes in the facts set forth in this Disclosure Statement since the date of this Disclosure Statement. No holder of a Claim or Interest should rely on any information, representations, or inducements that are not contained in or are inconsistent with the information contained in this Disclosure Statement, the documents attached to this Disclosure Statement, or the Plan. This Disclosure Statement does not constitute legal, business, financial, or tax advice. Any Person or Entity desiring any such advice should consult with their own advisors. Additionally, this Disclosure Statement has not been approved or disapproved by the Bankruptcy Court, the SEC, or any securities regulatory authority of any state under Blue Sky Laws. The Debtors are soliciting acceptances to the Plan prior to commencing any cases under chapter 11 of the Bankruptcy Code.

FORWARD-LOOKING STATEMENTS

The financial information contained in or incorporated by reference into this Disclosure Statement has not been audited, except as specifically indicated otherwise. The Debtors’ management, in consultation with the Debtors’ advisors, has prepared the financial projections attached hereto as Exhibit D and described in this Disclosure Statement (the “Financial Projections”). The Financial Projections, while presented with numerical specificity, necessarily were based on a variety of estimates and assumptions that are inherently uncertain and may be beyond the control of the Debtors’ management. Important factors that may affect actual results and cause the management forecasts not to be achieved include, but are not limited to, risks and uncertainties relating to the Debtors’ businesses (including their ability to achieve strategic goals, objectives, and targets over applicable periods), industry performance, the regulatory environment, general business and economic conditions and other factors. The Debtors caution that no representations can be made as to the accuracy of these projections or to their ultimate performance compared to the information contained in the forecasts or that the forecasted results will be achieved. No independent auditor or accountant has reviewed or approved the Financial Projections. The Financial Projections may not be relied upon as a guarantee or other assurance that the actual results will occur.

Regarding contested matters, adversary proceedings, and other pending, threatened, or potential litigation or other actions, this Disclosure Statement does not constitute, and may not be construed as, an admission of fact, liability, stipulation, or waiver by the Debtors or any other party, but rather as a statement made in the context of settlement negotiations in accordance with Rule 408 of the Federal Rules of Evidence and any analogous state or foreign laws or rules. As such, this Disclosure Statement shall not be admissible in any non-bankruptcy proceeding involving the Debtors or any other party in interest, nor shall it be construed to be conclusive advice on the tax, securities, financial or other effects of the Plan to holders of Claims against the Debtors or any other party in interest. Please refer to Section VIII of this Disclosure Statement, entitled “Risk Factors” for a discussion of certain risk factors that holders of Claims voting on the Plan should consider.

 

-vii-

Except as otherwise expressly set forth herein, all information, representations, or statements contained herein have been provided by the Debtors. No person is authorized by the Debtors in connection with this Disclosure Statement, the Plan, or the Solicitation to give any information or to make any representation or statement regarding this Disclosure Statement, the Plan, or the Solicitation, in each case, other than as contained in this Disclosure Statement and the exhibits attached hereto or as otherwise incorporated herein by reference or referred to herein. If any such information, representation, or statement is given or made, it may not be relied upon as having been authorized by the Debtors.

This Disclosure Statement contains certain forward-looking statements, all of which are based on various estimates and assumptions. Such forward-looking statements are subject to inherent uncertainties and to a wide variety of significant business, economic, and competitive risks, including, but not limited to, those summarized herein. When used in this Disclosure Statement, the words “anticipate,” “believe,” “estimate,” “will,” “may,” “intend,” and “expect” and similar expressions generally identify forward-looking statements. Although the Debtors believe that their plans, intentions, and expectations reflected in the forward-looking statements are reasonable, they cannot be sure that they will be achieved. These statements are only predictions and are not guarantees of future performance or results. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by a forward-looking statement. All forward-looking statements attributable to the Debtors or Persons or Entities acting on their behalf are expressly qualified in their entirety by the cautionary statements set forth in this Disclosure Statement. Forward-looking statements speak only as of the date on which they are made. Except as required by law, the Debtors expressly disclaim any obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.

[Remainder of Page Intentionally Left Blank]

 

-viii-

TABLE OF CONTENTS

 

                 Page  

I.

  

Executive Summary

      1  
  A.   Purpose of This Disclosure Statement and the Plan      1  
  B.   Overview of the Transactions Contemplated by the Plan      1  
  C.   Summary of Treatment of Claims and Interests and Description of Recoveries Under the Plan      3  
  D.   Voting on the Plan.      4  
  E.   Confirmation and Consummation of the Plan      5  
    1.   Confirmation Hearing      6  
    2.   Effect of Confirmation and Consummation of the Plan      6  
  F.   Additional Plan-Related Documents      6  

II.

  

The Debtors’ Business, Corporate History, and Capital Structure

      7  
  A.   The Debtors’ Business and Corporate History      7  
  B.   The Debtors’ Prepetition Capital Structure      8  
    1.   RBL Credit Facility      9  
    2.   Senior Notes      10  
    3.   Financing Leases      10  
    4.   Chaparral Parent’s Common Stock      10  
  C.   Litigation Matters      11  
    1.   Royalties Class Action Lawsuit      11  
    2.   W.H. Davis Case      13  
    3.   Bayou City Demand Letter      13  
    4.   Unsettled Claims in the Prior Bankruptcy Cases      13  
  D.   Employees, Material Benefits Plans, and Management and Board of Directors      14  
    1.   Employees      14  
    2.   Management Team and Board of Directors      14  
    3.   Agreement with SVP      15  

III.

  

Events Leading to These Chapter 11 Cases

      15  
  A.   Current State of the Oil and Gas Industry and Impact on Debtors and Their Peers.      15  
  B.   Operational Initiatives – Cash Flow Improvement Project, Suspension of Drilling and Completion Activity, Increase of Crude Storage at Lease Locations, and Shut-In of Non-Essential Oil Production      16  
  C.   Evaluation of Liability Management Transactions; Hiring of Restructuring Advisors; Appointment of Special Committee of the Chaparral Parent Board of Directors      17  
  D.   Borrowing Base Redetermination and Financial Obligations Under Debt Instruments      17  
  E.   Forbearance Agreements      17  

IV.

  

The Debtors’ Entry Into the Restructuring Support Agreement.

      18  
  A.   The Primary Components of the Restructuring Support Agreement.      19  
  B.   The Debtors’ Proposed Disclosure Statement and Solicitation Process      20  
  C.   Employee and Equity Considerations in the Plan      21  
 

The Debtors’ First Day Motions and Certain Related Relief

      21  
 

D.

     Other Requested First Day Relief and Retention Applications      22  

V.

  

Summary of the Plan

      22  
  A.   Treatment of Unclassified Claims      22  
    1.   Administrative Claims      22  
    2.   Professional Fee Claims      23  
    3.   Priority Tax Claims      24  
  B.   Classification and Treatment of Claims and Interests      24  
    1.   Classification of Claims and Interests      24  

    2.   Treatment of Classes of Claims and Interests      25  
   

Class 1 — Other Secured Claims

     25  
   

Class 2 — Other Priority Claims

     25  
   

Class 3 — RBL Claims

     26  
   

Class 4 — Senior Notes Claims

     26  
   

Class 5 — General Unsecured Claims

     27  
   

Class 6 — Intercompany Claims

     27  
   

Class 7 — Intercompany Interests

     27  
   

Class 8 — Chaparral Parent Equity Interests

     28  
   

Class 9 — Other Chaparral Parent Interests

     29  
  C.  

Means for Implementation of the Plan

      29  
    1.   General Settlement of Claims and Interests      29  
    2.   Restructuring Transactions      29  
    3.   Sources of Consideration for Plan Distributions      30  
    4.   Exemption From Registration Requirements      32  
    5.   Corporate Existence      33  
    6.   Corporate Action      33  
    7.   Vesting of Assets in the Reorganized Debtors      33  
    8.   Cancellation of Notes, Instruments, Certificates, and Other Documents      34  
    9.   Effectuating Documents; Further Transactions      34  
    10.   Exemptions From Certain Taxes and Fees      35  
    11.   New Corporate Governance Documents      35  
    12.   Directors and Officers.      35  
    13.   Management Incentive Plan      36  
    14.   Preservation of Causes of Action      36  
    15.   Preservation of Royalty and Working Interests      36  
    16.   Restructuring Support Agreement.      36  
    17.   Executory Contracts and Expired Leases.      37  
    18.   Procedures for Resolving Disputed Claims and Interests.      40  

  

   D.  

Conditions Precedent to Confirmation and Consummation of the Plan

      42  
    1.   Conditions Precedent to the Effective Date      42  
    2.   Waiver of Conditions Precedent to Confirmation or the Effective Date      43  
    3.   Substantial Consummation      43  
    4.   Effect of Non-Occurrence of Conditions to Consummation      43  
  E.   Settlement, Release, Injunction, and Related Provisions      43  
    1.   Compromise and Settlement of Claims, Interests, and Controversies      43  
    2.   Discharge of Claims      44  
    3.   Release of Liens      44  
    4.   Debtor Release      44  
    5.   Third-Party Release      45  
    6.   Exculpation      46  
    7.   Injunction      46  
    8.   Protection Against Discriminatory Treatment      47  
    9.   Recoupment      47  
    10.   Reimbursement or Contribution      47  
    11.   Term of Injunctions or Stays      47  
    12.   Document Retention      47  
  F.  

Modification, Revocation, or Withdrawal of the Plan; Reservation of Rights

      47  
    1.   Amendment and Modification of the Plan      47  
    2.   Effect of Confirmation on Modifications      48  
    3.   Revocation or Withdrawal of the Plan      48  

VI.

  

Confirmation of the Plan

      48  
  A.     The Confirmation Hearing      48  
  B.     Deadline to Object to Approval of the Disclosure Statement and Confirmation of the Plan      48  
  C.     Requirements for Approval of the Disclosure Statement      48  

 

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  D.   Requirements for Confirmation of the Plan.      48  
    1.   Requirements of Section 1129(a) of the Bankruptcy Code      48  
    2.   Debtor Release, Third-Party Release, Exculpation, and Injunction Provisions      49  
    3.   Best Interests of Creditors — Liquidation Analysis      51  
    4.   Feasibility/Financial Projections      51  
    5.   Acceptance by Impaired Classes      51  
    6.   Confirmation Without Acceptance by All Impaired Classes      52  
    7.   The Structure of the Rights Offering Is Consistent with the Bankruptcy Code      53  
    8.   Valuation of the Debtors      54  

VII.

   Voting Instructions      54  
  A.   Overview      54  
  B.   Solicitation Procedures      54  
    1.   Solicitation Agent      54  
    2.   Solicitation Package      54  
    3.   Voting Deadline      54  
    4.   Distribution of the Solicitation Package and Plan Supplement      55  
  C.   Voting Procedures      55  
  D.   Voting Tabulation      56  

VIII.

   Risk Factors      56  
  A.   Risks Related to the Restructuring      57  
    1.   The Debtors Will Consider All Available Restructuring Alternatives If the Restructuring Transactions Are Not Implemented, and Such Alternatives May Result in Lower Recoveries for Holders of Claims Against the Debtors      57  
    2.   Even If the Restructuring Transactions Are Successful, the Debtors Will Continue to Face Risks      57  
    3.   Risks Related to the Exit Facility, the New Convertible Notes, New Common Stock, and New Warrants      57  
    4.   Risk of Recharacterization of New Convertible Notes.      60  
    5.   The New Convertible Notes May Not Be Rated or May Receive a Lower Rating than Anticipated.      60  
    6.   A Decline in the Reorganized Debtors’ Credit Ratings Could Negatively Affect the Debtors’ Ability to Access the Capital Markets in the Future      60  
    7.   Risks Related to Confirmation and Consummation of the Plan      60  
  B.   Risks Related to Recoveries Under the Plan      62  
    1.   The Debtors’ Historical Financial Information May Not Be Comparable to the Financial Information of the Reorganized Debtors      62  
    2.   The Debtors May Not Be Able to Achieve Their Projected Financial Results or Meet Their Post-Restructuring Debt Obligations      63  
    3.   Estimated Valuations of the Debtors, the Exit Facility Loans, the New Common Stock, the New Convertible Notes, and the New Warrants and Estimated Recoveries to Holders of Allowed Claims and Interests Are Not Intended to Represent Potential Market Values      63  
    4.   Certain Tax Implications of the Debtors’ Bankruptcy and Reorganization May Increase the Tax Liability of the Reorganized Debtors      63  
  C.   Risks Related to the Offer and Issuance of Securities Under the Plan      63  
    1.   The Debtors Do Not Intend to Offer to Register or to Exchange the New Common Stock, the New Convertible Notes, or the New Warrants in a Registered Exchange Offer      63  
    2.   There Is No Established Market for the New Common Stock, the New Convertible Notes, or the New Warrants      64  
    3.   Pending Lawsuits May Affect the Value of Securities to Be Issued Under the Plan and Recoveries Under the Plan      64  
    4.   The Settlement of the Royalty Class Action Lawsuit May Not be Consummated.      65  
    5.   The Debtors Could Modify the Rights Offering Procedures      65  

 

-iii-

    6.   The Restructuring Support Agreement May Be Terminated and Thus Terminate the Rights Offering      65  
  D.  

Risk Factors Related to the Business Operations of the Debtors and Reorganized Debtors

      65  
    1.   The Debtors May Not Be Able to Generate Sufficient Cash to Service All of Their Indebtedness      65  
    2.   The Debtors Will File Voluntary Petitions for Relief Under Chapter 11 of the Bankruptcy Code and Will Be Subject to the Risks and Uncertainties Associated With Any Chapter 11 Restructuring      65  
    3.   Operating in Bankruptcy for a Long Period of Time May Harm the Debtors’ Businesses.      66  
    4.   The Debtors May Not Be Able to Achieve Their Projected Financial Results.      66  
    5.   Oil and Gas Price Volatility May Continue to Adversely Affect the Debtors’ and the Reorganized Debtors’ Financial Condition, Financial Results, Cash Flows, Access to Capital, and Ability to Grow.      68  
    6.   Global Oil Prices May Not Return to pre-COVID-19 Levels for Several Months or Years, If Ever.      69  
    7.   The Actual Quantities and Present Value of the Company’s Proved Reserves May Be Lower Than the Company Has Estimated.      69  
    8.   The Predictability of the Company’s Operating Results and the Company’s Future Development Plans May Be Affected by the Results of Multi-Well Pad Drilling.      69  
    9.   If the Company Is Not Able to Replace Reserves, It May Not Be Able to Sustain Production.      70  
    10.   Development, Acquisition, and Exploration Operations Require Substantial Capital and the Debtors May Be Unable to Obtain Needed Capital or Financing on Satisfactory Terms or at All, Which Could Lead to a Loss of Properties and a Decline in the Debtors’ Oil and Natural Gas Reserves.      70  
    11.   The Company Cannot Control the Activities on Properties It Does Not Operate and Is Unable to Ensure the Proper Operation, Profitability, or Other Impacts of These Non-Operated properties.      71  
    12.   The Company’s Producing Properties Are Predominantly Located in Oklahoma Where the Company’s Development Opportunities, Consisting of the Company’s Inventory of Drilling Locations, Are Geographically Concentrated in the STACK Play in Oklahoma. The Company Is Therefore Vulnerable to Risks Associated With Operating in a Single Geographic Area. In Addition, the Company Owns a Large Amount of Proved Reserves Attributable to a Small Number of Producing Horizons Within This Area.      71  
    13.   Costs of Environmental Liabilities Could Exceed the Company’s Estimates and Adversely Affect the Company’s Operating Results.      71  
    14.   Oil and Natural Gas Drilling and Production Operations Can Be Hazardous and May Expose the Company to Uninsurable Losses or Other Liabilities.      72  
    15.   Potential for the Loss of Key Members of the Executive Management Team and Employee and Labor Risks      73  
  E.  

Miscellaneous Risk Factors and Disclaimers

      73  
    1.   The Financial Information Is Based on the Debtors’ Books and Records and, Unless Otherwise Stated, No Audit Was Performed      73  
    2.   No Legal or Tax Advice Is Provided by This Disclosure Statement      73  
    3.   No Admissions Made      73  
    4.   Failure to Identify Litigation Claims or Projected Objections      73  
    5.   Information Was Provided by the Debtors and Was Relied Upon by the Debtors’ Advisors      73  
    6.   No Representations Outside This Disclosure Statement Are Authorized      73  

IX.

  

Important Securities Laws Disclosures

      74  
    A.   Plan Consideration      74  

 

-iv-

  B.  

Exemption From Registration Requirements; Issuance and Resale of New Common Stock and New Warrants; Definition of “Underwriter” Under Section 1145(b) of the Bankruptcy Code

      74  
    1.   Exemption From Registration Requirements; Issuance and Resale of New Common Stock and New Warrants      74  
    2.   Definition of “Underwriter” Under Section 1145(b) of the Bankruptcy Code; Implications for Resale of New Common Stock      75  
  C.  

Rights to Purchase New Convertible Notes in the Rights Offering

      76  
  D.  

Private Placement Securities

      76  
    1.   Issuance      76  
    2.   Subsequent Transfers      76  

X.

  

Certain U.S. Federal Income Tax Consequences of the Plan

      78  
  A.  

Introduction

      78  
  B.  

Certain U.S. Federal Income Tax Consequences to Debtors and Reorganized Debtors.

      79  
    1.   Effects of Restructuring on Tax Attributes of Debtors.      79  
    2.   Cancellation of Debt and Reduction of Tax Attributes.      79  
  C.  

Certain U.S. Federal Income Tax Consequences to U.S. Holders of Certain Claims.

      81  
    1.   Consequences to U.S. Holders of RBL Claims (Class 3).      81  
    2.   Consequences to U.S. Holders of Senior Notes Claims (Class 4).      82  
    3.   Treatment of Subscription Rights.      84  
    4.   Accrued Interest and OID.      84  
    5.   Market Discount.      84  
    6.   Dividends (and Constructive Dividends) on New Common Stock and Constructive Dividends on New Convertible Notes.      85  
    7.   Sale, Redemption or Other Taxable Disposition of New Common Stock.      85  
    8.   Limitation on Use of Capital Losses.      86  
    9.   Certain Considerations Regarding Exit Facility Loans.      86  
    10.   Certain Considerations Regarding New Convertible Notes.      87  
    11.   Medicare Tax.      89  
  D.  

Certain U.S. Federal Income Tax Consequences to Non-U.S. Holders of Certain Claims.

      89  
    1.   Gain Recognition on Exchange of Claims.      90  
    2.   Interest Payments; Accrued Interest (and OID).      90  
    3.   Dividends on New Common Stock and Constructive Dividends on New Convertible Notes.      91  
    4.   Sale, Redemption or Other Taxable Disposition of New Common Stock or New Convertible Notes.      91  
    5.   Conversion of New Convertible Notes into New Common Stock.      93  
  E.  

FATCA.

      93  
  F.  

Information Reporting and Backup Withholding.

      94  

XI.

  

Recommendation of the Debtors

      95  

 

-v-

EXHIBITS

 

Exhibit A    Plan of Reorganization
Exhibit B    Corporate Structure of the Debtors
Exhibit C    Restructuring Support Agreement
Exhibit D    Financial Projections
Exhibit E    Valuation Analysis
Exhibit F    Liquidation Analysis

I. Executive Summary

 

A.

Purpose of This Disclosure Statement and the Plan.

Chaparral Energy, Inc. (“Chaparral Parent”) and certain of its direct and indirect subsidiaries, as debtors and debtors in possession (each, a “Debtor” and, collectively, the “Debtors” or the “Company” or “Chaparral”), submit this Disclosure Statement pursuant to sections 1125 and 1126 of the Bankruptcy Code to Holders of Class 3 RBL Claims and Class 4 Senior Notes Claims against the Debtors in connection with the solicitation of acceptances with respect to the Plan. A copy of the Plan is attached hereto as Exhibit A and incorporated herein by reference.1 The Plan constitutes a separate chapter 11 plan for each of the Debtors.

THE DEBTORS BELIEVE THAT THE COMPROMISES AND SETTLEMENTS CONTEMPLATED BY THE PLAN ARE FAIR AND EQUITABLE, MAXIMIZE THE VALUE OF THE DEBTORS’ ESTATES, AND MAXIMIZE RECOVERIES TO HOLDERS OF CLAIMS. THE DEBTORS BELIEVE THE PLAN IS THE BEST AVAILABLE ALTERNATIVE FOR IMPLEMENTING A RESTRUCTURING OF THE DEBTORS’ BALANCE SHEET. THE DEBTORS STRONGLY RECOMMEND THAT YOU VOTE TO ACCEPT THE PLAN.

 

B.

Overview of the Transactions Contemplated by the Plan.

Chaparral Energy, Inc. and its subsidiaries are an independent oil and natural gas exploration and production company headquartered in Oklahoma City. Founded in 1988, the Company has over 212,000 net surface acres in the Mid-Continent region. The Company is focused in the oil window of the Anadarko Basin in the heart of Oklahoma, where it has approximately 114,000 net acres.

The Company employs approximately 102 full-time and part-time personnel. As of the date of this Disclosure Statement, the Debtors have approximately $488.5 million in aggregate principal amount of funded debt obligations, consisting of approximately $188.5 million aggregate principal amount outstanding under a reserve-based revolving credit facility (the “RBL Credit Facility”) and $300 million in aggregate principal amount of unsecured notes (the “Senior Notes” and, the holders thereof, the “Senior Noteholders”).

To implement a comprehensive financial restructuring of their funded debt, the Debtors will commence chapter 11 cases (the “Chapter 11 Cases”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) after commencement of the solicitation process. The Debtors will seek joint administration of the Chapter 11 Cases for procedural purposes and, upon commencement of the Chapter 11 Cases, will file the Plan, this Disclosure Statement, and a motion seeking to approve proposed solicitation procedures and schedule a combined hearing on the adequacy of the Disclosure Statement and confirmation of the Plan. On August 15, 2020, the Company entered into a restructuring support agreement (together with all exhibits thereto, and as amended, restated, and supplemented from time to time, the “Restructuring Support Agreement”) with certain Holders of the RBL Claims and Senior Notes Claims that sets forth the principal terms of the Restructuring Transactions and requires the Consenting Creditors to support the Plan.

As set forth in the Plan, the Restructuring Transactions provide for a comprehensive restructuring of Claims against and Interests in the Debtors, deleverage the Company’s capital structure and preserve the going-concern value of the Debtors’ businesses, maximize recoveries available to all constituents, and provide for an equitable distribution to the Debtors’ stakeholders. More specifically, the Restructuring Transactions provide, among other things, that:

 

1 

Capitalized terms used but not defined in this Disclosure Statement have the meaning ascribed to such terms in the Plan or in the Restructuring Support Agreement (as defined herein), as applicable. Additionally, this Disclosure Statement incorporates the rules of interpretation located in Article I of the Plan. Any summary provided in this Disclosure Statement of any documents attached to this Disclosure Statement, including the Plan, is qualified in its entirety by reference to the Plan, the exhibits, and other materials referenced in the Plan, the Plan Supplement, and the documents being summarized. In the event of any inconsistencies between the terms of this Disclosure Statement and the Plan, the Plan shall govern.

 

1

  •  

All Allowed Administrative Claims, Priority Tax Claims, Other Priority Claims, and Other Secured Claims will be paid in full in cash or receive such treatment that renders them Unimpaired under the Bankruptcy Code;

 

  •  

Each Holder of an Allowed RBL Claim will receive (a) its pro rata share (determined as a percentage of all Allowed RBL Claims) of the All Lender Portion and (b) (i) if such Holder elects to participate in the Exit Revolving Facility, (x) such Holder’s pro rata share (determined as a percentage of all Allowed RBL Claims owned by Holders electing to participate in the Exit Revolving Facility) of the Exit Facility Revolving Lender Cash Portion and (y) Exit Facility Revolving Loans with a principal amount equal to the amount of such Holder’s Allowed RBL Claim (after application of the All Lender Portion and the Exit Facility Revolving Lender Cash Portion to such Holder’s Allowed RBL Claim) and commitments under the Exit Revolving Facility, upon the terms and conditions set forth in the Exit Facility Term Sheet, and (ii) if such Holder does not elect to participate in the Exit Revolving Facility, Second Out Term Loans with a principal amount equal to the amount of such Holder’s RBL Claim (after application of the All Lender Portion to such Holder’s Allowed RBL Claim);

 

  •  

Each Holder of an Allowed Senior Notes Claim will receive its pro rata share (determined as a percentage of all Senior Notes Claims) of (i) 100% of the total issued and outstanding New Common Stock, subject to dilution by the Management Incentive Plan, the New Common Stock issued upon conversion of the New Convertible Notes, the Backstop Premium, and the New Common Stock issued upon exercise of the New Warrants, and (ii) the Subscription Rights;

 

  •  

All Allowed General Unsecured Claims will be reinstated and paid in the ordinary course of business in accordance with the terms and conditions of the particular transaction or agreement giving rise to such Allowed General Unsecured Claim;

 

  •  

All Chaparral Parent Equity Interests will be cancelled, released, and extinguished, and will be of no further force or effect without any distribution to the Holders of such Interests on account of such Interests. Notwithstanding the foregoing, in exchange for each such Holder (a) agreeing to provide a release to the Released Parties and (b) not objecting to the Plan, (i) each Holder of an Allowed Chaparral Parent Equity Interest that is a Partial Cash-Out Equity Interest shall receive such Holder’s pro rata share (determined as a percentage of all Allowed Chaparral Parent Equity Interests as of the Effective Date) of (a) the All Holder Settlement Portion and (b) the New Warrants, and (ii) each Holder of an Allowed Chaparral Parent Equity Interest that is a Full Cash-Out Equity Interest shall receive (a) such Holder’s pro rata share (determined as a percentage of all Allowed Chaparral Parent Equity Interests as of the Effective Date) of the All Holder Settlement Portion and (b) Cash in an amount equal to $0.01508 per share; and2

 

  •  

The Reorganized Debtors will raise $35 million of new money by issuing the New Convertible Notes pursuant to the Rights Offering, which will be backstopped in full by the Backstop Parties in accordance with the terms of the Backstop Commitment Agreement. Each Holder of an Allowed Senior Notes Claim on the record date for the Rights Offering that is a “qualified institutional buyer” (within the meaning of Rule 144A under the Securities Act), is an “accredited investor” as such term is defined in Rule 501 under the Securities Act, or is not a “U.S. Person” as defined in Regulation S under the Securities Act will have the opportunity to purchase its pro rata share of the New Convertible Notes.

 

2 

Notwithstanding the foregoing, if any of the Prior Bankruptcy Claims become fixed, liquidated, and allowed in the Prior Bankruptcy Cases after the Effective Date, then the Holders of the Prior Bankruptcy Equity Interests arising from such Prior Bankruptcy Claims shall be entitled to receive Cash in an amount equal to the amount such Holder would have otherwise received had such Holder’s Prior Bankruptcy Equity Interests been Allowed Chaparral Parent Equity Interests as of the Effective Date (assuming all distributions on account of such Chaparral Parent Equity Interests had been made on the Effective Date), solely to the extent that such amount does not cause the total Cash paid to Holders of Prior Bankruptcy Equity Interests after the Effective Date to exceed the Cash-Out Cap, in each case in accordance with Article VI of the Plan. For the avoidance of doubt, any Holder of a Chaparral Parent Equity Interest that affirmatively elects to “opt out” of the releases contained in Article VIII of the Plan or objects to the Plan, shall not be entitled to receive the consideration described in this paragraph or in clauses (i) and (ii) above.

 

2

As described below, you are receiving this Disclosure Statement because you are a Holder of a Claim entitled to vote to accept or reject the Plan. Prior to voting on the Plan, you are encouraged to read this Disclosure Statement and all documents attached to this Disclosure Statement in their entirety. As reflected in this Disclosure Statement, there are risks, uncertainties, and other important factors that could cause the Debtors’ actual performance or achievements to be materially different from those they may project, and the Debtors undertake no obligation to update any such statement. Certain of these risks, uncertainties, and factors are described in Section VIII of this Disclosure Statement, entitled “Risk Factors.”

 

C.

Summary of Treatment of Claims and Interests and Description of Recoveries Under the Plan.

The Plan organizes the Debtors’ creditor and equity constituencies into groups called “Classes.” For each Class, the Plan describes: (1) the underlying Claim or Interest; (2) the recovery available to the Holders of Claims or Interests in that Class under the Plan; (3) whether the Class is Impaired or Unimpaired under the Plan; (4) the form of consideration, if any, that Holders in such Class will receive on account of their respective Claims or Interests; and (5) whether the Holders of Claims or Interests in such Class are entitled to vote to accept or reject the Plan.

The proposed distributions and classifications under the Plan are based upon a number of factors, including the Debtors’ valuation and liquidation analyses. The valuation of the Reorganized Debtors as a going concern is based upon the value of the Debtors’ assets and liabilities as of an assumed Effective Date of September 30, 2020 and incorporates various assumptions and estimates, as discussed in detail in the Valuation Analysis prepared by the Debtors, together with their proposed financial advisor and investment banker, Rothschild & Co. US Inc. (“Rothschild”) and Intrepid Partners, LLC (“Intrepid”).

The table below provides a summary of the classification, description, treatment, and anticipated recovery of Claims and Interests under the Plan. This information is provided in summary form below for illustrative purposes only and is qualified in its entirety by reference to the provisions of the Plan. Any estimates of Claims or Interests in this Disclosure Statement may vary from the final amounts allowed by the Bankruptcy Court. Your ability to receive distributions under the Plan depends upon the ability of the Debtors to obtain Confirmation and meet the conditions necessary to consummate the Plan. The recoveries available to holders of Claims are estimates and actual recoveries may materially differ based on, among other things, whether the amount of Claims actually Allowed exceeds the estimates provided below. In such an instance, the recoveries available to holders of Allowed Claims could be materially lower when compared to the estimates provided below. To the extent that any inconsistency exists between the summaries contained in this Disclosure Statement and the Plan, the terms of the Plan shall govern.

 

3

For a more detailed description of the treatment of Claims and Interests under the Plan and the sources of satisfaction for Claims and Interests, see Section V of this Disclosure Statement, entitled “Summary of the Plan.”

 

SUMMARY OF ESTIMATED RECOVERIES3

Class

   

Claim/Interest

   

Status

   

Voting Rights

   

Projected4

Amount of

Allowed Claims

or Interests

   

Projected

Plan Recovery

1    Other Secured Claims    Unimpaired   

Not Entitled to Vote

(Deemed to Accept)

    N/A    100%
2    Other Priority Claims    Unimpaired   

Not Entitled to Vote

(Deemed to Accept)

    N/A    100%
3    RBL Claims    Impaired    Entitled to Vote    $190,334,352    100%
4    Senior Notes Claims    Impaired    Entitled to Vote    $315,334,755    15%–47%
5    General Unsecured Claims    Unimpaired   

Not Entitled to Vote

(Deemed to Accept)

    N/A    100%
6    Intercompany Claims    Unimpaired / Impaired   

Not Entitled to Vote

(Deemed to Accept or Reject)

    N/A    N/A
7    Intercompany Interests    Unimpaired / Impaired   

Not Entitled to Vote

(Deemed to Accept or Reject)

    N/A    N/A
8    Chaparral Parent Equity Interests    Impaired   

Not Entitled to Vote

(Deemed to Reject)

    N/A    N/A
9    Other Chaparral Parent Interests    Impaired   

Not Entitled to Vote

(Deemed to Reject)

    N/A    N/A

 

D.

Voting on the Plan.

Certain procedures will be used to collect and tabulate votes on the Plan, as summarized in Section VII of this Disclosure Statement, entitled “Voting Instructions.” Readers should carefully read the voting instructions in Section VII herein.

 

3 

The estimated recoveries presented for Senior Notes Claims are estimated recoveries to Holders of Claims on account of their Claims and do not reflect consideration for Backstop Parties on account of their commitments. Any additional distributions made to Backstop Parties are made solely on account of new capital and consideration provided to the Debtors. The high end of the recovery range correlates to the high-end of the Plan Equity Value (as defined in Exhibit E) range as set forth in the Valuation Analysis (as defined herein) (net of the value attributable to the New Warrants) and assumes that (i) the New Convertible Notes are converted into New Common Stock, and (ii) holders of Senior Notes participate in the Rights Offering; the low end of the recovery range correlates to the low-end of the Plan Equity Value (as defined in Exhibit E) range as set forth in the Valuation Analysis (as defined herein) (net of the value attributable to the New Warrants) and assumes that (i) the New Convertible Notes are converted into New Common Stock and (ii) holders of Senior Notes do not participate in the Rights Offering.

4 

Unless otherwise indicated, all Claim amounts in this Disclosure Statement and accompanying exhibits are estimates as of August 16, 2020.

 

4

Only Holders of RBL Claims and Senior Notes Claims, which are classified in Classes 3 and 4 of the Plan, respectively, are entitled to vote on the Plan (the “Voting Classes”). Only Holders of RBL Claims and Senior Notes Claims that are Eligible Holders may vote on the Plan prior to the Petition Date. Holders of Claims in Classes 1, 2, and 5 are conclusively presumed to accept the Plan because they are Unimpaired by the Plan. Holders of Interests in Classes 8 and 9 are deemed to reject the Plan. Holders of Claims or Interests in Classes 6 and 7 are deemed to reject or presumed to accept the Plan because they are (1) Unimpaired under the Plan and presumed to accept the Plan or (2) Impaired and entitled to no recovery under the Plan and deemed to reject the Plan.

The Voting Deadline is 5:00 p.m., prevailing Eastern Time, on September 15, 2020. To be counted as votes to accept or reject the Plan, each ballot (a “Ballot”) must be properly executed, completed, and delivered (either by using the return envelope provided, by first-class mail, overnight courier, personal delivery, or electronic submission) such that it is actually received before the Voting Deadline by Kurtzman Carson Consultants LLC (the “Solicitation Agent”) as follows:

DELIVERY OF BALLOTS

 

  1.

Ballots must be actually received by the Solicitation Agent before the Voting Deadline.

 

 

  2.

Ballots may be returned by the following methods: (a) in the enclosed prepaid, pre-addressed return envelope; (b) via first-class mail, overnight courier, or hand delivery to the address set forth below; (c) solely for holders of Class 3 RBL Claims, via email to Chaparral2020Info@kccllc.com; or (d) solely for holders of Class 4 Senior Notes Claims, in a return envelope addressed to your Nominee or via email to your Nominee in accordance with instructions provided by your Nominee.

 

CHAPARRAL 2020 BALLOT PROCESSING

C/O KURTZMAN CARSON CONSULTANTS LLC

222 N. PACIFIC COAST HIGHWAY, SUITE 300

EL SEGUNDO, CA 90245

If you have any questions on the procedures for voting on the Plan, please contact the Solicitation Agent by calling (866) 523-9241 (toll-free) or (781) 575-2044 or emailing Chaparral2020Info@kccllc.com.

 

IF YOU HAVE ANY QUESTIONS ABOUT THE SOLICITATION OR VOTING PROCESS, PLEASE CONTACT THE SOLICITATION AGENT. ANY BALLOT RECEIVED AFTER THE VOTING DEADLINE OR OTHERWISE NOT IN COMPLIANCE WITH THE VOTING INSTRUCTIONS WILL NOT BE COUNTED EXCEPT AS DETERMINED BY THE DEBTORS.

 

E.

Confirmation and Consummation of the Plan.

Under section 1128(a) of the Bankruptcy Code, the Bankruptcy Court, after notice, may hold a hearing to confirm a plan of reorganization. If the Debtors file the Chapter 11 Cases, they will file a motion on the Petition Date requesting that the Bankruptcy Court set a date and time as soon as practicable after the Petition Date for a hearing (such hearing, the “Confirmation Hearing”) for the Bankruptcy Court to determine whether the Disclosure Statement contains adequate information under section 1125(a) of the Bankruptcy Code, whether the Debtors’ prepetition solicitation of acceptances in support of the Plan complied with section 1126(b) of the Bankruptcy Code, and whether the Plan should be confirmed in light of both the affirmative requirements of the Bankruptcy Code and objections, if any, that are timely filed, as permitted by section 105(d)(2)(B)(2)(v) of the Bankruptcy Code. The Confirmation Hearing, once set, may be continued from time to time without further notice other than an adjournment announced in open court or a notice of adjournment filed with the Bankruptcy Court and served on those parties who have requested notice under Bankruptcy Rule 2002 and the Entities who have filed an objection to the Plan, if any, without

 

5

further notice to parties in interest. The Bankruptcy Court, in its discretion and prior to the Confirmation Hearing, may put in place additional procedures governing the Confirmation Hearing. Subject to section 1127 of the Bankruptcy Code, the Plan may be modified, if necessary, prior to, during, or as a result of the Confirmation Hearing, without further notice to parties in interest.

Additionally, section 1128(b) of the Bankruptcy Code provides that any party in interest may object to Confirmation. The Debtors, in the same motion requesting a date for Confirmation of the Plan, will request that the Bankruptcy Court set a date and time for parties in interest to file objections to the adequacy of the Disclosure Statement, the Debtors’ prepetition solicitation of acceptances in support of the Plan, or Confirmation of the Plan. All such objections must be filed with the Bankruptcy Court and served on the Debtors and certain other parties in interest in accordance with the applicable order of the Bankruptcy Court so that they are received before the deadline to file such objections.

 

  1.

Confirmation Hearing.

At the Confirmation Hearing, the Bankruptcy Court will determine whether the Disclosure Statement contains adequate information under section 1125(a) of the Bankruptcy Code, the Debtors’ prepetition solicitation of acceptances in support of the Plan complied with section 1126(b) of the Bankruptcy Code, and the Plan should be confirmed in light of both the affirmative requirements of the Bankruptcy Code and objections, if any, that are timely filed, and subject to satisfaction or waiver of each condition precedent in Article IX of the Plan. For a more detailed discussion of the Confirmation Hearing, see Section VI of this Disclosure Statement, entitled “Confirmation of the Plan.”

 

  2.

Effect of Confirmation and Consummation of the Plan.

Following Confirmation, and subject to satisfaction or waiver of each condition precedent in Article IX of the Plan, the Plan will be consummated on the Effective Date. Among other things, on the Effective Date, certain release, injunction, exculpation, and discharge provisions set forth in Article VIII of the Plan will become effective. Accordingly, it is important to read the provisions contained in Article VIII of the Plan very carefully so that you understand how Confirmation and Consummation—which effectuates such release, injunction, exculpation, and discharge provisions—will affect you and any Claim or Interest you may hold with respect to the Debtors so that you may cast your vote accordingly. These provisions are described in Section V of this Disclosure Statement.

 

F.

Additional Plan-Related Documents.

The Debtors will file certain documents that provide more details about implementation of the Plan in the Plan Supplement, which will be filed with the Bankruptcy Court no later than seven (7) calendar days before the Confirmation Objection Deadline and otherwise in accordance with the Restructuring Support Agreement. The Debtors will serve a notice that will inform all parties that the initial Plan Supplement was filed, list the information included therein, and explain how copies of the Plan Supplement may be obtained. Eligible Holders of Claims entitled to vote to accept or reject the Plan shall not be entitled to change their vote based on the contents of the Plan Supplement after the Voting Deadline. The Plan Supplement will include:

 

  •  

the New Corporate Governance Documents;

 

  •  

the New Stockholders Agreement;

 

  •  

the Restructuring Steps Memorandum;

 

  •  

the Rejected Executory Contract and Unexpired Lease List;

 

  •  

the identity of the members of the Reorganized Chaparral Parent Board and the officers of Reorganized Chaparral Parent;

 

6

  •  

the Backstop Commitment Agreement;

 

  •  

the Exit Facility Credit Agreement;

 

  •  

the New Convertible Notes Indenture; and

 

  •  

the New Warrants Agreements.

Each of the foregoing Plan Supplement documents and/or forms of documents, agreements, schedules, and exhibits to the Plan are subject to the consent rights of the Consenting Creditors on the terms set forth in the Restructuring Support Agreement.

 

THE FOREGOING EXECUTIVE SUMMARY IS ONLY A GENERAL OVERVIEW OF THIS DISCLOSURE STATEMENT AND THE MATERIAL TERMS OF, AND TRANSACTIONS PROPOSED BY, THE PLAN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED DISCUSSIONS APPEARING ELSEWHERE IN THIS DISCLOSURE STATEMENT AND THE EXHIBITS ATTACHED TO THIS DISCLOSURE STATEMENT, INCLUDING THE PLAN.

II. The Debtors’ Business, Corporate History, and Capital Structure

 

A.

The Debtors’ Business and Corporate History

Chaparral Parent, the Class A common stock of which is listed on the New York Stock Exchange (“NYSE”) under the symbol “CHAP”, is a holding company with no operations and directly or indirectly owns all of the Debtors in the Chapter 11 Cases. The Debtors are involved in the acquisition, exploration, development, production and operation of oil and natural gas properties primarily in Oklahoma. The Company is a leading operator in the STACK play,5 having assembled a highly contiguous position of approximately 114,000 net acres in the normally-pressured “black oil” window in Kingfisher, Garfield, and Canadian Counties, Oklahoma.

The Debtors typically serve as the operator of wells in which they have a significant economic interest. An “operator” is the party that is engaged in the severance of oil or gas for a certain geographic unit, often established pursuant to state law, for the benefit of itself and other parties with mineral interests or leasehold interests in the same unit. As an operator, the Debtors conduct the day-to-day business of producing oil and gas at the site and initially cover the expenses incurred on behalf of the Debtors and the owners of working interests in a designated unit covered by a joint operating agreement, pooling order, or similar agreement.

Beginning in the early 1990s, the Company’s operations in the area later to become known as the STACK were focused on vertical wells and waterfloods. Beginning in late 2013, however, the Company concentrated on the horizontal development of the Mississippian-age Osage and Meramec formations, the Devonian-age Woodford Shale formation, and the Pennsylvanian-age Oswego formation. Notwithstanding operational success at the time, beginning in 2014, the Company began to experience significant revenue, cash flow, and liquidity challenges, due in large part to the collapse in the market price for crude oil and natural gas. Declining revenues made it increasingly difficult for the Company to continue to service its debts and, in May 2016, the Company commenced chapter 11 cases (the “Prior Bankruptcy Cases”). The Company’s First Amended Joint Plan of Reorganization (the “Prior Bankruptcy Plan”) was confirmed on March 10, 2017, and the Company emerged from chapter 11 on March 21, 2017 with a significantly deleveraged balance sheet. The Prior Bankruptcy Cases remain pending in the United States Bankruptcy Court for the District of Delaware (solely with respect to the Prior Bankruptcy Cases, the “Prior Bankruptcy Court”).6

 

5 

The STACK is a play in the Anadarko basin of Oklahoma in which the Company operates and derives its name from the acronym standing for Sooner Trend Anadarko Canadian Kingfisher. It is a horizontal drilling play in an area with multiple productive reservoirs that had previously been drilled with vertical wells.

6 

More detail regarding the Prior Bankruptcy Cases and the events that preceded the Prior Bankruptcy Cases can be found in the Declaration of Mark A. Fischer, Chief Executive Officer of Chaparral Energy, Inc. in Support of Chapter 11 Petitions and First Day Pleadings (Docket No. 14) and the Disclosure Statement for the Joint Plan of Reorganization for Chaparral Energy, Inc., and its Affiliate Debtors Under Chapter 11 of the Bankruptcy Code (Docket No. 763), each of which was filed on the docket for the Prior Bankruptcy Cases.

 

7

Upon emergence from bankruptcy in March 2017, the Company increased its leasing and drilling activities from 2017 to 2019, assembling its current acreage position and increasing its STACK production at a compound annual growth rate of approximately 51.1% as it focused on expanding its understanding of the productive extent and hydrocarbon content of the play and holding acreage with production. During this time the Company successfully tested productive zones in the play, introduced new completions to improve recoveries, demonstrated repeatability of results, reduced cycle times, and de-risked a sizeable portion of its acreage in the play. Additionally, during that period, the Company commenced the evaluation of full section infill development with multi-well patterns to help determine optimum well spacing and to maximize economic recovery of oil and natural gas from each formation.

On June 28, 2018, Chaparral Parent completed the issuance and sale at par of $300 million in aggregate principal amount of the Senior Notes.

At the beginning of the quarter ended March 31, 2020, Chaparral management commenced a comprehensive cash improvement effort. The initiative, which involves the formation and collaboration of multiple working teams, is intended to identify, validate and implement opportunities to improve the Company’s cash flow across all parts of its business—drilling and completions capital expenditures, lease operating expenses, production uptime and efficiency, development planning, and general and administrative expenses. Many of the measures identified by the teams were implemented and are yielding expanded cash flow at the project level already. However, because of the extraordinary events affecting the oil and gas industry discussed below, initiatives that are scale-dependent are expected to be fully realized only if activity returns to more normal levels.

The rapid, global spread of COVID-19 in the first quarter of 2020 and the resulting economic repercussions created significant volatility in the oil and gas industry. Stay-at-home and similar protective measures that were enacted by federal, foreign, state, and local governments to slow the spread of the virus contributed to a significant deterioration in the domestic and global demand for oil and gas. Compounding the impact of COVID-19, the oil production output alliance between Russia, Saudi Arabia, and other oil producing nations (“OPEC+”) broke down as both sides were unable to reach agreement in early March 2020 over how much to restrict production in order to stabilize crude oil prices. As a result, Saudi Arabia and Russia both initiated efforts to increase production, driving down oil prices. OPEC+ was later able to agree on production cuts, but that has done little to aid in oil price recovery because of the significant drop in global demand.

This combination of events has led to a severe supply-demand oil imbalance. This imbalance has created a great deal of uncertainty in the oil and gas industry, which has adversely affected the Debtors’ liquidity and balance sheet and made a restructuring necessary.

 

B.

The Debtors’ Prepetition Capital Structure.

The following table depicts the Debtors’ prepetition capital structure, exclusive of accrued but unpaid interest and fees, as of the date of this Disclosure Statement:

 

8

Type of Debt

   

Description

   

Maturity

   

Principal

Outstanding7

RBL Credit Facility    Reserve-based revolving credit facility secured by a first-priority lien on substantially all of the Debtors’ assets and guaranteed by substantially all of Chaparral Parent’s wholly owned direct and indirect subsidiaries    December 2022    $188.5 million
Senior Notes    Unsecured notes issued by Chaparral Parent and guaranteed by substantially all of Chaparral Parent’s wholly owned direct and indirect subsidiaries    July 2023    $300 million
Financing Leases    Financing leases that consist of fleet trucks and office equipment    Various    $☐☐☐☐☐ million

 

  1.

RBL Credit Facility.

Chaparral Parent is a party to and the borrower under that certain Tenth Restated Credit Agreement (as amended, restatement, supplemented, or modified from time to time, the “RBL Credit Agreement”) with the RBL Agent and the RBL Lenders. The RBL Credit Agreement provides for a $750 million facility collateralized by the Company’s oil and natural gas properties and is scheduled to mature on December 21, 2022. The RBL Credit Facility is guaranteed by each of Chaparral Parent’s direct and indirect subsidiaries other than Trabajo Energy, L.L.C., Charles Energy, L.L.C., and Chestnut Energy, L.L.C. Availability under the RBL Credit Agreement is subject to a borrowing base based on the value of the Company’s oil and natural gas properties. The borrowing base is redetermined by the RBL Agent semiannually effective May 1 and November 1 of each year and the RBL Lenders may request a borrowing base redetermination once between each scheduled redetermination or upon the occurrence of certain specified events. The RBL Lenders establish a borrowing base by making an estimate of the collateral value of the Company’s oil and natural gas properties then applying an advance rate. If oil and natural gas prices decrease from the amounts used in estimating the collateral value of the Company’s oil and natural gas properties, the borrowing base may be reduced, thus reducing funds available under the borrowing base. As of the date of this Disclosure Statement, the borrowing base was $175 million and approximately $188.5 million in principal was outstanding under the RBL Credit Facility, plus any accrued but unpaid interest, indemnification obligations, fees and expenses and other obligations incurred in connection therewith.

On April 1, 2020, the Company borrowed $15 million and on April 2, 2020, following discussions with and the recommendation of their advisors, the Company provided notice pursuant to the RBL Credit Agreement to borrow an additional $90 million, which increased the total amount outstanding under the RBL Credit Agreement to $250 million. The borrowing was made by the Company as a precautionary measure in order to increase its cash position and thereby provide for flexibility in a challenging business environment. Access to this additional liquidity, which in the Debtors’ view was the least expensive funded source of liquidity available, proved critical to the Company’s ability to fund operations during negotiations with all major creditor constituencies regarding the terms of a consensual balance sheet restructuring. Subsequent to the borrowing, the Company was notified by the RBL Agent that the RBL Lenders had exercised their right to make an interim redetermination of the Company’s borrowing base. The RBL Lenders’ redetermination notice stated that the Company’s borrowing base was decreased from $325 million to $175 million, effective April 3, 2020. The RBL Lenders subsequently reaffirmed the borrowing base at the same level on May 5, 2020, in conjunction with the Company’s scheduled semiannual redetermination process. As a result of the borrowing base redetermination, the $90 million borrowing, once funded, created a borrowing base deficiency in the

 

7 

Amounts are exclusive of any accrued but unpaid interest, indemnification obligations, fees and expenses, and other obligations associated with the indebtedness described in this table.

 

9

amount of $75 million under the RBL Credit Agreement (the “Borrowing Base Deficiency”). The Company notified the RBL Agent that, per the terms of the RBL Credit Agreement, it intended to eliminate such Borrowing Base Deficiency by repaying the amount of the Borrowing Base Deficiency in six equal monthly installments, with the payment of $12.5 million plus interest made on May 1, 2020, and two subsequent $12.5 million monthly payments having been made thereafter.

 

  2.

Senior Notes.

On June 29, 2018, Chaparral Parent completed the issuance and sale at par of $300 million in aggregate principal amount of senior unsecured notes in a private placement under Rule 144A and Regulation S of the Securities Act. The Senior Notes bear interest at a rate of 8.75% per year (payable semiannually in arrears on January 15 and July 15 of each year) and have a maturity date of July 15, 2023. The Senior Notes are guaranteed by each of the Debtors that are guarantors under the RBL Credit Facility. UMB Bank, N.A., serves as indenture trustee for the Senior Notes. As of the date of this Disclosure Statement, there is $300 million aggregate principal amount outstanding under the Senior Notes, plus any accrued but unpaid interest, indemnification obligations, fees and expenses and other obligations incurred in connection therewith.

 

  3.

Financing Leases.

During 2019, the Company entered into lease financing agreements for its fleet trucks and office copiers for $1,911,000. The fleet truck financing obligations are for 48-month terms with the option for the Company to purchase the vehicle at any time during the lease term by paying the lessor’s remaining unamortized cost in the vehicle. At the end of the lease term, the lessor’s remaining unamortized cost in the vehicle will be a de minimis amount and hence ownership of the vehicle can be transferred to the Company at minimal cost. There are no residual value guarantees or non-lease components under these leases. The Company also entered into a lease financing arrangement for a limited number of office copiers in 2019. As of the date of this Disclosure Statement, there is approximately $1,442,000 outstanding in respect of the Company’s financing lease obligations.

 

  4.

Chaparral Parent’s Common Stock.

Chaparral Parent is the direct or indirect parent of each of the Debtors. Chaparral Parent’s Class A common stock is publicly traded on the NYSE under the ticker symbol “CHAP.” Upon the Petition Date, the NYSE will have broad discretion to suspend trading in Chaparral Parent’s shares and commence delisting proceedings. There can be no assurance as to whether or not Chaparral Parent’s shares will be delisted upon or after the Petition Date. As of the date of this Disclosure Statement, Chaparral Parent has 192,130,071 authorized shares of common stock, $0.01 par value, of which 47,790,146 are outstanding. Chaparral Parent has 5,000,000 authorized shares of preferred stock, none of which are issued and outstanding.

As of the date of this Disclosure Statement, Chaparral Parent has no outstanding stock options. In addition, as of the date of this Disclosure Statement the Company has outstanding equity-based awards that were granted under its 2017 Chaparral Energy, Inc. Management Incentive Plan (the “MIP”) and Chaparral Energy, Inc. 2019 Long-Term Incentive Plan (the “LTIP”). The Company’s equity based awards are in the form of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”). In December 2019, the Company also granted equity awards in the form of RSAs to its recently appointed chief executive officer under an inducement equity grant. The RSAs and RSUs vest periodically through December 20, 2022. Any RSAs or RSUs that have not vested or are not scheduled to be settled as of the Petition Date shall be canceled, discharged, released, and extinguished, and will be of no further force or effect without any distribution to the holders thereof and are classified as Class 9 Other Chaparral Parent Interests under the Plan.

In addition, as described below, a number of claims remain pending in the Prior Bankruptcy Cases and subject to the Prior Bankruptcy Court’s jurisdiction. Under the Prior Bankruptcy Plan, if any claims that are classified in Class 6 or Class 8 of the Prior Bankruptcy Plan (such claims, the “Prior Bankruptcy Claims”) becomes fixed, liquidated, and allowed in the Prior Bankruptcy Cases, the Company would be required to satisfy such claim through the issuance of additional Class A common stock at an implied price per share of $31.418. For the avoidance of doubt, the holders of the Prior Bankruptcy Claims are not entitled to receive the New Common Stock on account of such claims. However, the holders of Prior Bankruptcy Claims may receive consideration made available to holders of Chaparral Parent’s Class A common stock as of the Petition Date, subject to the terms and conditions set forth in the Plan.

 

10

C.

Litigation Matters.

 

  1.

Royalties Class Action Lawsuit

On June 7, 2011, Naylor Farms, Inc. filed a putative class action lawsuit captioned Naylor Farms, Inc. v. Chaparral Energy, LLC, Case No. 5-11-cv-00634-HE (the “Royalties Class Action Lawsuit”) against the Company in the United States District Court for the Western District of Oklahoma (“Oklahoma District Court”) alleging that the Company improperly deducted post-production costs from royalties paid to the plaintiffs and other non-governmental royalty interest owners from crude oil and natural gas wells that the Company operates in Oklahoma. The plaintiffs have alleged a number of claims, including breach of contract, fraud, breach of fiduciary duty, unjust enrichment, and other claims and seek termination of leases, recovery of compensatory damages, interest, punitive damages and attorney fees on behalf of the class. The plaintiffs sought damages in excess of $5 million, the majority of which consisted of interest and may increase with the passage of time. The Company responded to the petition, denied the allegations and raised arguments and defenses. The plaintiffs filed a motion for class certification in October 2015. In addition, the plaintiffs filed a motion for summary judgment asking the Oklahoma District Court to determine as a matter of law that natural gas is not marketable until it is in the condition and location to enter an interstate pipeline. On May 9, 2016, the Company filed voluntary bankruptcy petitions in the Prior Bankruptcy Court. The filing of the bankruptcy petitions automatically stayed the proceeding in the Oklahoma District Court, except that by agreement the stay was lifted for the limited purpose of determining whether the class should be certified.

On January 17, 2017, the Oklahoma District Court certified a modified class of plaintiffs with oil and gas leases containing specific language. The modified class constitutes less than 60% of the leases that the plaintiffs originally sought to certify. After additional briefing on the subject, on April 18, 2017, the Oklahoma District Court issued an order denying Chaparral Energy, L.L.C.’s motion to reconsider its class certification order on the basis that plaintiffs filed a notice amending the class definition, specifying June 1, 2006 as the commencement of the class period. On May 3, 2019, the United States Court of Appeals for the Tenth Circuit affirmed the Oklahoma District Court’s class certification order.

In addition to filing claims on behalf of the named and putative plaintiffs, on August 15, 2016, the named plaintiffs in the class action filed a proof of claim in the Prior Bankruptcy Cases on behalf of all putative class members claiming damages in excess of $150 million. The Company objected to the filing of a single class claim on behalf of the entire unnamed class, asserting instead that anyone claiming an injury should file an individual proof of claim on his or her or its own behalf. On April 20, 2017, after the Oklahoma District Court ruled that the class could include only claims relating back to June 1, 2006 and that the class would be limited to leases with Mittelstaedt clauses, the plaintiffs filed an amended proof of claim reducing the claim to an amount in excess of $90 million inclusive of actual and punitive damages, statutory interest and attorney fees. On May 24, 2017, the Prior Bankruptcy Court denied the Company’s objection, ruling that the plaintiffs could file a class claim on behalf of the class. The Prior Bankruptcy Court’s order did not establish liability or otherwise address the merits of the plaintiffs’ claims; rather it permitted the assertion of a class claim within the Prior Bankruptcy Cases. The Prior Bankruptcy Court’s order was affirmed by the United States District Court for the District of Delaware on September 24, 2019. On October 24, 2019, the Company filed its notice of appeal to the United States Court of Appeals for the Third Circuit (the proceeding thereby initiated, the “Third Circuit Appeal”). The Third Circuit has not rendered a decision with respect to the class proof of claim and no decision on the merits has been rendered by either the Oklahoma District Court or the Prior Bankruptcy Court. On July 7, 2020, with an agreement in principle to settle the Royalty Class Action Lawsuit having been reached (as described below), the Third Circuit granted the request of the plaintiffs and Chaparral Energy, L.L.C. to postpone oral argument with respect to Chaparral Energy, L.L.C.’s appeal.

 

11

The Prior Bankruptcy Plan provided that each holder of a claim related to the Royalty Class Action Lawsuit (each, a “Royalty Payment Litigation Claim”) would receive its pro rata share of the Class A common stock in Chaparral Parent in an amount equal to the amount such holder would have received had the Class A common stock been issued on the effective date of the Prior Bankruptcy Plan.8

Because the Third Circuit has not yet rendered a decision with respect to whether the filing of a class claim should have been permitted in the Prior Bankruptcy Cases, the class proof of claim and the merits of the damages claim have not been considered by any court.

During the period leading up to the commencement of the Chapter 11 Cases, the Company engaged in settlement negotiations with counsel to the class certified in the Royalty Class Action Lawsuit. On July 6, 2020, after multiple rounds of negotiations spanning nearly four years, the Company and the class representative reached an agreement in principle on the terms of a settlement and, on August 15, 2020, Chaparral Energy, L.L.C. and the class representative entered into a settlement agreement (the “Settlement Agreement”) to settle all claims related to the Royalty Class Action Lawsuit, including, for the avoidance of doubt, all alleged claims arising prior to the petition date in the Prior Bankruptcy Cases and all alleged claims arising thereafter.

Pursuant to the Settlement Agreement, Chaparral Energy, L.L.C. has agreed to:

 

  •  

pay $2,500,000 to the settlement class;

 

  •  

pay $850,000 to counsel to the settlement class for attorney fees, in exchange for a release of all liens or claims asserted by all counsel related to the Royalty Class Action Lawsuit;

 

  •  

pay $150,000 to the class representative for services rendered as class representative; and

 

  •  

allow the class proof of claim filed in the Prior Bankruptcy Cases in an aggregate amount of $45,000,000 (provided that all other individual proofs of claims filed for similar claims are withdrawn).

The effectiveness of the settlement is subject to numerous conditions precedent, including approval by the Court. Upon the Court’s final approval of the Settlement Agreement, the members of the class who do not opt out of the settlement will provide the Debtors with a release of all past and present claims with respect to the allegations in the Royalty Class Action Lawsuit, and the Royalty Class Action Lawsuit will be dismissed with prejudice.

Upon the final approval of the Settlement Agreement and the effectiveness of the settlement, the plaintiffs, in full satisfaction, settlement, discharge, and release of their claims asserted in the Prior Bankruptcy Cases, shall be deemed to hold 1,432,300 shares of Class A common stock in Chaparral Parent as of the Petition Date on account of the $45 million allowed class proof of claim and shall be entitled to receive any distribution under the Plan provided to the holders of Chaparral Parent Equity Interests that are Full Cash-Out Equity Interests, subject to the terms and conditions of the Plan, including the Cash-Out Cap. For the avoidance of doubt, if any plaintiff elects to “opt out” of the releases contained in Article VIII of the plan on a timely submitted opt out form or objects to the plan, such plaintiff shall not be entitled to receive any consideration on account of its Chaparral Parent Equity Interests, as provided in Article III.B.8 of the Plan. Chaparral Parent shall not be required to issue Class A common stock to any holder of any claim related to the Royalty Class Action Lawsuit after the Petition Date and any such holder’s claims in the Prior Bankruptcy Case shall not provide such holder with any right to receive the New Common Stock of Reorganized Chaparral.

 

8 

Specifically, Article III(B)(8)(ii)(3) of the Prior Bankruptcy Plan provides: “to the extent a Holder’s Royalty Payment Litigation Claim becomes an Allowed Royalty Payment Litigation Claim after the Effective Date, such Holder shall receive New Equity Interests in an amount equal to the amount such Holder would have otherwise received had such Holder’s Royalty Payment Litigation Claim been an Allowed Royalty Payment Litigation Claim as of the Effective Date (assuming all distributions on account of such Claim had been made on the Effective Date).”

 

12

  2.

W.H. Davis Case

The W. H. Davis Family Limited Partnership and its affiliates (collectively, “Davis”) filed proofs of claim in the Prior Bankruptcy Cases. Davis claimed that the Company owed Davis $17,262,000 as the result of Chaparral’s alleged diversion of carbon dioxide from the Camrick Unit9 and the North Perryton Unit to the Farnsworth Unit. All these units were divested by the Company as part of its EOR asset sale in November 2017. While the Company denies all claims asserted by Davis, the Company determined it was prudent to explore settlement of the claims. Accordingly, the Company and Davis agreed at mediation to settle its claims for an allowed claim of $2,650,000 classified in Class 6 under the Prior Bankruptcy Plan, which agreement was memorialized in a settlement term sheet executed by both parties on the day of the mediation, a settlement agreement executed by both parties thereafter, and a settlement stipulation executed by both parties that was filed with the Prior Bankruptcy Court in the Prior Bankruptcy Cases.    Several months after the settlement was executed, Davis asserted that they received insufficient shares of Class A common stock, and filed a motion to enforce the settlement or, alternatively, to vacate it (the “Davis Motion”). On August 14, 2020, Davis stipulated to the termination of such contest without payment by the Company of any consideration therefor.

 

  3.

Bayou City Demand Letter

On September 25, 2017, the Company entered into a joint development agreement (“JDA”) with BCE Roadrunner LLC (“BCE”), a wholly owned subsidiary of Bayou City Energy Management, LLC, pursuant to which BCE funded 100% of the Company’s drilling, completion and equipping costs associated with 30 STACK wells, subject to well cost caps that vary by well-type across location and targeted formations, ranging from $3,400,000 to $4,000,000 per gross well. The JDA provided the Company with a means to accelerate the delineation of its position within its Garfield County and Canadian County acreage, realizing further efficiencies and holding additional acreage by production, and potentially adding reserves. In exchange, BCE received 85% of the Company’s original working interest in each well (on a wellbore-only basis), with the Company retaining 15% of its original interests until the program reaches a 14% internal rate of return. If this 14% threshold is achieved, ownership interest in all wells would shift such that the Company would own 75% of its original working interests and BCE would retain 25% of the Company’s original working interests. The Company retained all acreage and reserves outside of the wellbores, with both parties paying their working interest share of lease operating expenses. The Company has drilled and completed all wells under the JDA.

On April 17, 2020, BCE issued a default notice the (“Default Notice”) to the Company, alleging that the Company failed to perform certain material obligations under the JDA, and demanding reimbursement of approximately $3,329,000 paid by BCE under the JDA. BCE has asserted that such alleged claims are secured claims. The Company disputes that any default or event of default has occurred or is continuing under the JDA and reserves all rights with respect thereto.

 

  4.

Unsettled Claims in the Prior Bankruptcy Cases

In addition to the litigation claims described above, a number of other Prior Bankruptcy Claims remain pending and subject to the Prior Bankruptcy Court’s jurisdiction in the Prior Bankruptcy Cases. If any such Prior Bankruptcy Claims become fixed, liquidated, and allowed in the Prior Bankruptcy Cases, under the terms of the Prior Bankruptcy Plan, the Company would be required to satisfy such claims through the issuance of additional Class A common stock at an implied price per share of $31.418. For the avoidance of doubt, the holders of the Prior Bankruptcy Claims are not entitled to receive the New Common Stock on account of such claims. However, the holders of Prior Bankruptcy Claims may receive consideration made available to holders of Chaparral Parent Equity Interests that are Full Cash-Out Equity Interests as of the Petition Date, subject to the terms and conditions set forth in the Plan.

Under the Plan, if any of the Prior Bankruptcy Claims become fixed, liquidated, and allowed in the Prior Bankruptcy Cases after the Effective Date, then the Holders of the Prior Bankruptcy Equity Interests arising from such Prior Bankruptcy Claims shall be entitled to receive Cash in an amount equal to the amount such holder would have otherwise received had such holder’s Prior Bankruptcy Equity Interests been Allowed Chaparral Parent Equity Interests as of the Effective Date (assuming all distributions on account of such Chaparral Parent Equity Interests had been made on the Effective Date), solely to the extent that such amount does not cause the total Cash paid to Holders of Prior Bankruptcy Equity Interests after the Effective Date to exceed the Cash-Out Cap, in each case in accordance with Article VI of the Plan. For the avoidance of doubt, any holder of a Chaparral Parent Equity Interest that affirmatively elects to “opt out” of the releases contained in Article VIII of the Plan or objects to the Plan shall not be entitled to receive a distribution under the Plan.

 

9 

A “unit” is the joining of all or substantially all interests in a reservoir or field, rather than a single tract, to provide for development and operation without regard to separate property interests.

 

13

As of the date of this Disclosure Statement, the Debtors estimate that the Prior Bankruptcy Claims have a face amount no greater than $92,000,000 in the aggregate. Therefore, if such claims are allowed in full, the holders thereof would be entitled, under the Prior Bankruptcy Plan, to approximately 2,928,258 shares of Class A common stock in Chaparral Parent at the implied price per share of $31.418. Under the terms of the Plan, the holders thereof would therefore be entitled to receive approximately $116,000 in Cash (assuming such holders do not opt out of the releases contained in Article VIII of the Plan or object to the Plan). Therefore, the Cash-Out Cap with respect to such claims has been set to $150,000, which is approximately 1.3x greater than the Debtors’ estimate of their maximum estimated liability with respect to the claims pending in the Prior Bankruptcy Cases.

Under the Plan, any Administrative Claim, Other Priority Claim, Other Secured Claim, and/or Convenience Class Claim (in each case as defined in the Prior Bankruptcy Plan) that becomes fixed, liquidated, and allowed in the Prior Bankruptcy Cases after the Petition Date shall be paid in full in cash upon the earlier of (x) the Effective Date and (y) the date on which such claim becomes fixed, liquidated, and allowed, subject to the terms and conditions of Article VI of the Plan.

 

D.

Employees, Material Benefits Plans, and Management and Board of Directors.

 

  1.

Employees

As of the date of this Disclosure Statement, the Debtors had approximately 102 employees in both full- and part-time positions, including petrotechnical and business professionals in a variety of disciplines, including engineering, geology, land, financial, legal, and human resources. Of the Debtors’ Employees, 66 were located at the Debtors’ headquarters in Oklahoma City, Oklahoma and the remainder work primarily in the field supporting the Debtors’ oil and gas operations. None of the Debtors’ employees are represented by a union. The Debtors also supplement their workforce by employing approximately eight independent contractors, including geologists, telemetry and information technology support specialists, land administration specialists, procurement support, marketing support, and consultants.

 

  2.

Management Team and Board of Directors

As of the date of this Disclosure Statement, the Debtors’ management team includes:

 

        

Name

   

Position

  Charles Duginski    President and Chief Executive Officer
  Justin Byrne    Vice President, General Counsel and Secretary
  Clint Calhoun    Vice President – Resource Development
  Stephanie Carnes    Vice President, Corporate Controller
  Josh Walker    Vice President – Completions & Operations

As of the date of this Disclosure Statement, Chaparral Parent’s board of directors (the “Board”) includes:

 

        

Name

   

Position

  Marcus Rowland    Chairman
  Charles Duginski    President and Chief Executive Officer
  Douglas E. Brooks    Director
  Samuel Langford    Director
  Mark McFarland    Director
  Kenneth W. Moore    Director
  Gysle Shellum    Director

 

14

The members of the Board will be deemed to have resigned as directors as of the Effective Date. On the Effective Date, the New Chaparral Parent Board will consist of seven members who, along with the officers, directors, and/or managers of each of the Reorganized Debtors, and in accordance with section 1129(a)(5) of the Bankruptcy Code, will be disclosed in the Plan Supplement. The members of the New Chaparral Parent Board shall be appointed in accordance with the terms of the Restructuring Support Agreement, and from and after the Effective Date, each director, officer, or manager of the Reorganized Debtors shall serve pursuant to the terms of their respective charters and bylaws or other formation and constituent documents, and applicable laws of the respective Reorganized Debtor’s jurisdiction of formation.

 

  3.

Agreement with SVP

On December 20, 2019, the Company entered into the amended and restated support agreement (the “Amended SVP Agreement”) with Strategic Value Partners, LLC and certain investment funds directly and indirectly managed by SVP (collectively, “SVP”) to, among other things, increase the number of individuals that SVP was entitled to designate to serve on the Board from one to two (the “SVP Designees”) and increase the authorized number of directors on the Board from seven to eight. Pursuant to the Amended SVP Agreement, Michael Kuharski and Mark “Mac” McFarland were appointed to the Board and were designated as SVP Designees.

On August 14, 2020 (the “SVP Effective Date”), the Company entered into a letter agreement (the “SVP Letter Agreement”) with SVP, supplementing the Amended SVP Agreement. Pursuant to the SVP Letter Agreement, as of the SVP Effective Date:

 

  •  

The number of SVP Designees decreased from two to zero;

 

  •  

Mr. McFarland tendered his resignation to the Board, subject to acceptance by the Board;

 

  •  

the Board did not accept Mr. McFarland’s resignation, as a result of which Mr. McFarland continued as a director but ceased to be an SVP Designee;

 

  •  

the total authorized number of directors on the Board was decreased from eight to seven;

 

  •  

SVP agreed not to object to, or commence any proceeding against, the Plan; and

 

  •  

the Company and SVP entered into mutual releases with respect to any claims through the SVP Effective Date.

Prior to, and in contemplation of the approval and execution of, the SVP Letter Agreement, Michael Kuharski unconditionally resigned from the Board and from the nominating and governance committee, the only Board committee on which Mr. Kuharski served.

III. Events Leading to These Chapter 11 Cases.

 

A.

Current State of the Oil and Gas Industry and Impact on Debtors and Their Peers.

The Company is in the midst of an unprecedented decline in crude oil prices brought about by the COVID-19 pandemic and other macroeconomic factors, which has drastically reduced demand for crude oil. The rapid, global spread of COVID-19 in the first half of 2020 and the resulting economic repercussions have created significant volatility in the oil and gas industry. Stay-at-home and similar protective measures that were enacted by federal, foreign, state and local governments to slow the spread of the virus contributed to a significant deterioration in the domestic and global demand for oil and gas. Compounding the impact of COVID-19, the oil production output alliance among OPEC+ broke down as parties were unable to reach agreement in early March 2020 over how much

 

15

to restrict production in order to stabilize crude oil prices. As a result, Saudi Arabia and Russia both initiated efforts to increase production, driving down oil prices. OPEC+ was later able to agree on production cuts, but that announcement has done little to aid in oil price recovery because of the significant drop in global demand. The cash price for oil in the commodities futures markets have deteriorated significantly to the point that, on April 20, 2020, the front-month futures contract for West Texas Intermediate crude oil prices dipped into the negative.

Additionally, the COVID-19 pandemic has increased volatility and caused negative pressure in the capital and credit markets. As a result, and in light of the Company’s debt incurrence restrictions in its existing debt documents, access in the current environment to the capital markets or financing on terms that the Company would find acceptable would be challenging if not impossible. While exploration and production companies like Chaparral have operated in challenging market conditions since the prices for crude oil plunged in November 2018 from four-year highs, the current volatility in commodity markets has made it especially difficult for companies to execute out-of-court deleveraging alternatives. In the first seven months of 2020, at least 17 exploration and production companies have filed for bankruptcy including Bridgemark Corporation on January 14; Southland Royalty Company LLC on January 27; Sheridan Holding Company I, LLC on March 23; Echo Energy Partners I, LLC on March 24; Whiting Petroleum Company on April 1; Ultra Petroleum Corp. on May 14; Gavilan Resources, LLC on May 15; Templar Energy, LLC on June 1; Extraction Oil & Gas, Inc. on June 14; Chisholm Oil and Gas Operating, LLC on June 17; Sable Permian Resources LLC on June 25; Chesapeake Energy Corporation on June 28; California Resources Corporation on July 15; Bruin E&P Partners, LLC on July 17; Rosehill Resources Inc. on July 26; Denbury Resources, Inc. on July 30; and Fieldwood Energy LLC on August 3.

 

B.

Operational Initiatives – Cash Flow Improvement Project, Suspension of Drilling and Completion Activity, Increase of Crude Storage at Lease Locations, and Shut-In of Non-Essential Oil Production

The Company has taken a number of actions to improve cash flows in 2019 and 2020, including general efforts in 2019 and 2020 to reduce its corporate workforce, focus on capturing savings from current weakness in the sector, optimize water handling costs, and take a data-driven approach to improve fixed costs and to reduce workover expenses. Further, at the beginning of the quarter ended March 31, 2020, the Company commenced a comprehensive and programmatic cash improvement initiative. The initiative, which involves the formation and collaboration of multiple working teams, is intended to identify, validate and implement opportunities to improve the Company’s cash flow across all parts of its business: drilling and completions capital expenditures, lease operating expenses, production uptime and efficiency, development planning, and general and administrative expenses. Many of the measures identified by the teams have been implemented and are yielding expanded cash flow at the project level already.

Additionally, in the first quarter of 2020, reacting immediately to the rapidly deteriorating commodity price environment, the Company took material actions to maximize the value of its assets and improve its financial position. Because the Company had (i) a strong hedge position for crude oil in 2020, the terms of which did not require the physical delivery of any oil or gas and (ii) no material volume commitments or other contractual obligations to produce oil or gas, management determined that it was not prudent or necessary to continue developing its inventory or to sell all of its products at the prevailing low market prices. Accordingly, the Company suspended all drilling and stimulation operations in early April, deferring completions of recently drilled wells. Further, the Company shut-in the six-well Greenback pad that came online in early March even though it was performing above expectations. The Company subsequently shut-in operated production that is not associated with waterfloods or exposed to well-specific mechanical or other risks during the months of May and June 2020. In order to facilitate a swift restart of sales, management took steps in April to increase crude storage in the tank batteries at our operated lease locations. As tank batteries filled, the majority of our operated production was curtailed. Furthermore, as part of the April 2020 shut-in, management implemented procedures and precautions to protect mechanical and reservoir integrity and to minimize the cost and timing of resuming production. The Company wanted to ensure that production could be resumed efficiently on these shut-in wells once commodity prices recover sufficiently. With improved crude prices in June 2020, the Company began a phased restart to the curtailed production and by the end of the month nearly all the Company’s operated wells had returned to production.

 

16

C.

Evaluation of Liability Management Transactions; Hiring of Restructuring Advisors; Appointment of Special Committee of the Chaparral Parent Board of Directors

Prior to the March 2020 global collapse of oil prices, the Company was focused on evaluating various liability management transactions that could right-size its assets and capital structure and set the Debtors on a path for long-term success despite the industry downturn. In December 2019, the Company retained Rothschild and Intrepid as financial advisor and investment banker and engaged Davis Polk & Wardwell LLP (“Davis Polk”) as legal counsel. The Company and its advisors initiated a process to formulate, evaluate, and consider various potential strategic and financial alternatives with a view to maximizing enterprise value including, among other alternatives, a debt-for-debt exchange of the Senior Notes or an equitization of the Senior Notes. However, after the March 2020 global collapse of oil prices, viable out-of-court restructuring options became increasingly unlikely and, after full consideration of the Company’s potential strategic and financial alternatives, it became clear that an in-court process would be necessary to maximize value for the Company and its stakeholders while positioning the Company for long-term success.

In May 2020, in connection with its restructuring efforts, the Board formed a special committee composed of select independent directors to review and evaluate strategic and financial alternatives for the Company.

 

D.

Borrowing Base Redetermination and Financial Obligations Under Debt Instruments

As discussed above, on April 2, 2020, following discussions with and the recommendation of their advisors, the Company provided notice to the RBL Lenders to borrow an additional $90 million, which increased the total amount outstanding under the Credit Agreement to $250 million. Subsequent to the borrowing, the Company was notified by the RBL Agent that the RBL Lenders had exercised their right to make an interim redetermination of the Company’s borrowing base, which decreased the borrowing base from $325 million to $175 million effective April 3, 2020. As a result of the borrowing base redetermination, the $90 million borrowing, once funded, created a $75 million Borrowing Base Deficiency, which the Company notified the RBL Agent it intended to eliminate by repaying the amount of the Borrowing Base Deficiency in six equal monthly installments of $12.5 million. Therefore, as of the date of this Disclosure Statement, the Company has no ability to further draw on the RBL Credit Facility and no other source of additional liquidity.

 

E.

Forbearance Agreements

Following constructive discussions with key stakeholders, the Company elected not to pay the July 15, 2020 coupon to the holders of the Senior Notes, which triggered a 30 day grace period under the indenture. To provide additional time for negotiations with its creditors regarding a comprehensive deleveraging transaction, on July 15, 2020, the Company entered into a forbearance agreement (the “Forbearance Agreement”) with its RBL Lenders pursuant to which the RBL Lenders agreed to forbear from exercising rights and remedies arising as a result of the Debtors’ election not to make the interest payment to the holders of the Senior Notes.

The terms of the forbearance agreement required that the Debtors provide the administrative agent with a proposed process and timeline for liquidating its existing hedges, and the hedge counterparties all indicated a willingness to participate in an orderly unwind of the Company’s hedge portfolio. In light of the Company’s ongoing liquidity concerns, the Company concluded that an orderly, prepetition unwind of their hedge portfolio, effectuated in coordination with the Company’s hedge counterparties, would allow the Company to obtain more value for hedges than they would if such hedge counterparties elected to unilaterally terminate hedges postpetition, without communicating or coordinating with the Company. On July 22, 2020, the RBL Agent approved the Company’s proposed timeline and process for unwinding the Company’s hedges. The timeline and process were subsequently documented in the first amendment to Forbearance Agreement, which was entered into on July 24, 2020 among the Company, the RBL Lenders, the RBL Agent, and the other parties thereto (the “First Amendment”). The First Amendment required that, by July 31, 2020, the Company (i) unwind all of its hedges and (ii) use all or a portion of the hedge unwind proceeds to repay a portion of the borrowings under the RBL Credit Agreement, together with accrued interest and any applicable break funding payments under the RBL Credit Agreement. The Company unwound its hedges prior to the July 31, 2020 deadline and received a net amount of approximately $28.2 million, of which $24 million was used to reduce the loans outstanding under the RBL Facility.

 

17

On July 29, 2020, the Company, the RBL Agent, and certain RBL Lenders entered into a second amendment to the Forbearance Agreement (the “Second Amendment”), pursuant to which the forbearance period set to expire on July 29, 2020 was extended to August 9, 2020, subject to further extension through August 14, 2020, with the consent of the RBL Agent and the Company, and pursuant to which the RBL Lenders agreed to forbear from exercising any remedies for any default or event of default resulting from any failure by the Company to pay the scheduled August 3, 2020 Borrowing Base Deficiency payment (in addition to certain cross-defaults under the Senior Notes). In addition, on July 30, 2020, the Company and the holders of at least 75% of the principal amount of outstanding Senior Notes entered into a noteholder forbearance agreement (the “Noteholder Forbearance Agreement”), pursuant to which such holders agreed, during the forbearance period, to forbear from exercising certain remedies under the Indenture (including acceleration) for any default or event of default resulting from any failure by the Company to pay the scheduled August 3, 2020 Borrowing Base Deficiency payment under the RBL Credit Agreement. In addition, under the Noteholder Forbearance Agreement, subject to the occurrence of such an event of default, the holders waived any such event of default and the consequences thereof under the Indenture, which waiver was effective solely for the period commencing at 12:01 a.m. (New York City time) on August 4, 2020 until the end of the forbearance period, which was set to expire on August 14, 2020. The Company and the RBL Agent consented pursuant to the Second Amendment to extend the RBL Lender’s forbearance to August 14, 2020.

On August 13, 2020, (i) the Company, the RBL Agent, and certain RBL Lenders entered into a third amendment to the Forbearance Agreement, pursuant to which, among other things, the forbearance period set to expire on August 14, 2020 was extended to August 17, 2020, and agreed to forbear from exercising any remedies for certain additional defaults and (ii) the Company and the holders of at least 75% of the principal amount of outstanding Senior Notes entered into an amendment of the Noteholder Forbearance Agreement, pursuant to which, among other things, the forbearance period set to expire August 14, 2020 was extended to August 17, 2020, and the Senior Notes agreed to forbear from exercising certain remedies under the Indenture (including acceleration) for any default or event of default resulting from the Company’s election not to pay the July 15, 2020 coupon to the holders of the Senior Notes through August 17, 2020.    

The Forbearance Agreement and subsequent amendments and the Noteholder Forbearance Agreement and subsequent amendment provided the Company and its stakeholders with valuable runway to negotiate and document a consensual, comprehensive restructuring.

IV. The Debtors’ Entry Into the Restructuring Support Agreement.

On August 15, 2020, the Company agreed to the terms of a comprehensive deleveraging transaction embodied in the Restructuring Support Agreement with certain RBL Lenders and members of the Ad Hoc Group. The Ad Hoc Group is represented by Stroock & Stroock & Lavan LLP, Perella Weinberg Partners LP, Tudor, Pickering, Holt & Co., and Young Conaway Stargatt & Taylor, LLP.

The groundwork for this agreement was laid over the course of several months of discussions among the Company and its advisors, the advisors to the RBL Lenders, and the advisors to the Ad Hoc Group. From April through August 2020, the Company and its advisors actively engaged in good-faith negotiations with the RBL Lenders, the Ad Hoc Group, and their respective advisors with the aim of driving a consensual, comprehensive restructuring transaction that would materially decrease the Company’s leverage and poise the Company for success going forward. In order for the Company’s various creditor constituencies to understand the scope and complexity of the Debtors’ businesses, including current operations and financial projections, and potential liabilities, certain of the Debtors’ creditors, including the members of the Ad Hoc Group and its advisors, were provided access to certain confidential and non-public information and documentation relating to the Company’s operations.

In the course of these negotiations, the Debtors, the RBL Lenders, and the Ad Hoc Group exchanged and considered, with the assistance of their respective advisors, numerous restructuring proposals. The negotiations culminated on August 15, 2020 with the execution of the Restructuring Support Agreement by the RBL Lenders, the members of the Ad Hoc Group, and the Company, which requires each party to support the consummation of the “Restructuring Transactions” through a prepackaged bankruptcy case. Importantly, the Restructuring Support Agreement includes an agreement on the consensual use of cash collateral, a fully committed $175 million exit facility, and a fully backstopped rights offering for $35 million of convertible notes, each of which is essential to the Company’s proposed restructuring.

 

18

On August 15, 2020, following the execution of the Restructuring Support Agreement, the Debtors commenced solicitation of the Plan by delivering copies of the Plan and the related Disclosure Statement (including Ballots) to Holders of Class 3 RBL Claims and Holders of Class 4 Senior Notes Claims, the only Classes entitled to vote to accept or reject the Plan. The Debtors established September 15, 2020 at 5:00 p.m., prevailing Eastern Time (the “Voting Deadline”), as the deadline for the receipt of votes to accept or reject the Plan from Holders of Class 3 RBL Claims and Class 4 Senior Notes Claims, as the deadline for the receipt of votes to accept or reject the Plan from Holders of Class 4 Senior Notes Claims.

 

A.

The Primary Components of the Restructuring Support Agreement.

The primary components of the Restructuring Transactions, which will be implemented through the Plan, but are comprised of a number of non-severable, interrelated transactions, include the following:

 

  •  

All Allowed Administrative Claims, Priority Tax Claims, Other Priority Claims, and Other Secured Claims will be paid in full in cash or receive such treatment that renders them Unimpaired under the Bankruptcy Code;

 

  •  

Each Holder of an Allowed RBL Claim will receive (a) its pro rata share (determined as a percentage of all Allowed RBL Claims) of the All Lender Portion and (b) (i) if such Holder elects to participate in the Exit Revolving Facility, (x) such Holder’s pro rata share (determined as a percentage of all Allowed RBL Claims owned by Holders electing to participate in the Exit Revolving Facility) of the Exit Facility Revolving Lender Cash Portion and (y) Exit Facility Revolving Loans with a principal amount equal to the amount of such Holder’s Allowed RBL Claim (after application of the All Lender Portion and the Exit Facility Revolving Lender Cash Portion to such Holder’s Allowed RBL Claim) and commitments under the Exit Revolving Facility, upon the terms and conditions set forth in the Exit Facility Term Sheet, and (ii) if such Holder does not elect to participate in the Exit Revolving Facility, Second Out Term Loans with a principal amount equal to the amount of such Holder’s RBL Claim (after application of the All Lender Portion to such Holder’s Allowed RBL Claim);

 

  •  

Each Holder of an Allowed Senior Notes Claim will receive its pro rata share (determined as a percentage of all Senior Notes Claims) of (i) 100% of the total issued and outstanding New Common Stock, subject to dilution by the Management Incentive Plan, the New Common Stock issued upon conversion of the New Convertible Notes, the Backstop Premium, and the New Common Stock issued upon exercise of the New Warrants, and (ii) the Subscription Rights;

 

  •  

All Allowed General Unsecured Claims will be reinstated and paid in the ordinary course of business in accordance with the terms and conditions of the particular transaction or agreement giving rise to such Allowed General Unsecured Claim;

 

  •  

All Chaparral Parent Equity Interests will be cancelled, released, and extinguished, and will be of no further force or effect without any distribution to the Holders of such Interests on account of such Interests. Notwithstanding the foregoing, in exchange for each such Holder (a) agreeing to provide a release to the Released Parties and (b) not objecting to the Plan, (i) each Holder of an Allowed Chaparral Parent Equity Interest that is a Partial Cash-Out Equity Interest shall receive such Holder’s pro rata share (determined as a percentage of all Allowed Chaparral Parent Equity Interests as of the Effective Date) of (a) the All Holder Settlement Portion and (b) the New Warrants, and (ii) each Holder of an Allowed Chaparral Parent Equity Interest that is a Full Cash-Out Equity Interest shall receive (a) such Holder’s pro rata share (determined as a percentage of all Allowed Chaparral Parent Equity Interests as of the Effective Date) of the All Holder Settlement Portion and (b) Cash in an amount equal to $0.01508 per share; and10

 

10 

Notwithstanding the foregoing, if any of the Prior Bankruptcy Claims become fixed, liquidated, and allowed in the Prior Bankruptcy Cases after the Effective Date, then the Holders of the Prior Bankruptcy Equity Interests arising from such Prior Bankruptcy Claims shall be entitled to receive Cash in an amount equal to the amount such Holder would have otherwise received had such Holder’s Prior Bankruptcy Equity Interests been Allowed Chaparral Parent Equity Interests as of the Effective Date (assuming all distributions on account of such Chaparral Parent Equity Interests had been made on the Effective Date), solely to the extent that such amount does not cause the total Cash paid to Holders of Prior Bankruptcy Equity Interests after the Effective Date to exceed the Cash-Out Cap, in each case in accordance with Article VI of the Plan. For the avoidance of doubt, any Holder of a Chaparral Parent Equity Interest that affirmatively elects to “opt out” of the releases contained in Article VIII of the Plan objects to the Plan, shall not be entitled to receive the consideration described in this paragraph or in clauses (i) and (ii) above.

 

19

  •  

The Reorganized Debtors will raise $35 million of new money by issuing the New Convertible Notes pursuant to the Rights Offering, which will be backstopped in full by the Backstop Parties in accordance with the terms of the Backstop Commitment Agreement. Each Holder of an Allowed Senior Notes Claim on the record date for the Rights Offering that is a “qualified institutional buyer” (within the meaning of Rule 144A under the Securities Act), is an “accredited investor” as such term is defined in Rule 501 under the Securities Act, or is not a “U.S. Person” as defined in Regulation S under the Securities Act will have the opportunity to purchase its pro rata share of the New Convertible Notes.

 

  •  

Mutual releases among: (a) each of the Debtors; (b) the Reorganized Debtors; (c) the RBL Agent; (d) the Indenture Trustee; (e) the Ad Hoc Group and each member of the Ad Hoc Group; (f) Consenting Senior Noteholders; (g) each of the Backstop Parties; (h) the Exit Facility Lenders, Exit Facility Agent, New Convertible Notes Indenture Trustee, and holders of the New Convertible Notes; (i) each Holder of an RBL Claim or a Senior Notes Claim; (j) each Holder of a Chaparral Parent Equity Interest; (k) each current and former Affiliate of each Entity in clause (a) through the following clause (l); and (l) each Related Party of each Entity in clause (a) through this clause (l); provided, however, that in each case, an Entity shall not be a Released Party if it affirmatively elects to “opt out” of being a Releasing Party..

The Restructuring Support Agreement and the Plan provide for a deleveraging restructuring supported by Holders of approximately 78% in amount of RBL Claims and Holders of approximately 78% in amount of Senior Notes Claims. The Debtors believe the restructuring contemplated by the Restructuring Support Agreement is in the best interests of their estates and all stakeholders.

Nonetheless, the Debtors maintain a broad “fiduciary out” under the Restructuring Support Agreement, which provides, in relevant part, “Notwithstanding anything to the contrary in this [Restructuring Support Agreement], nothing in this Agreement shall require a Company Party or the Governing Body of a Company Party to take or refrain from taking any action with respect to the Restructuring Transactions (including terminating this [Restructuring Support Agreement] under Section 10) to the extent the Governing Body of such Company Party determines in good faith, after consultation with counsel, that taking or refraining from taking such action, as applicable, would be inconsistent with its or their fiduciary obligations under applicable Law or a violation of applicable Law.”

 

B.

The Debtors’ Proposed Disclosure Statement and Solicitation Process.

Following the execution of the Restructuring Support Agreement, the Debtors commenced solicitation of the Plan on August 15, 2020 by delivering a copy of the Plan and the Disclosure Statement (including Ballots) to Holders of Class 3 RBL Claims and Holders of Class 4 Senior Notes Claims, the only Classes entitled to vote to accept or reject the Plan.    The Debtors will seek Bankruptcy Court approval of the Voting Deadline at the outset of the Chapter 11 Cases. As soon as practicable after the Voting Deadline, the Solicitation Agent will file with the Bankruptcy Court the Voting Report setting forth the voting results for Class 3 RBL Claims and Class 4 Senior Notes Claims. Based on the execution of the Restructuring Support Agreement by the Consenting Creditors, the Debtors believe that the Voting Report likely will show that the Holders of Claims entitled to vote on the Plan have overwhelmingly voted to accept the Plan. Accordingly, on the Petition Date, the Debtors intend to file the Plan, this Disclosure Statement, and a motion to approve the Solicitation Procedures and schedule the Confirmation Hearing to consider approval of this Disclosure Statement and Confirmation of the Plan. The following table sets forth the timetable for the solicitation process and the anticipated Chapter 11 Cases:

 

Event

   

Date

Voting Record Date

Rights Offering Record Date

    August 11, 2020
Commencement of Solicitation    August 15, 2020
Petition Date    August 16, 2020

 

20

Event

   

Date

Distribution of Combined Notice and Equity Holder Opt Out Forms    Three business days after entry of the order approving solicitation procedures
Commencement of Rights Offering Subscription Period    September 4, 2020, at 5:00 p.m. (Prevailing Eastern Time)
Plan Supplement Deadline    September 8, 2020
Voting Deadline    September 15, 2020, at 5:00 p.m. (Prevailing Eastern Time)

Objection Deadline

Opt Out Deadline11

Rights Offering Subscription Instruction and Payment Deadline

    September 21, 2020, at 4:00 p.m. (Prevailing Eastern Time) (or such other date and time as the Court may direct)
Reply Deadline    September 24, 2020, at 12:00 p.m. (Prevailing Eastern Time) (or such other date and time as the Court may direct)
Combined Hearing    September 28, 2020, or as soon as possible thereafter (or such other date and time as the Court may direct)

 

C.

Employee and Equity Considerations in the Plan.

On and after the Effective Date, the Reorganized Chaparral Parent Board shall be authorized to adopt the Management Incentive Plan, enact and enter into related policies and agreements, and grant awards under the Management Incentive Plan to participants in such forms and subject to the terms and conditions (including anti-dilution protections and vesting conditions) determined by the Reorganized Chaparral Parent Board. For the avoidance of doubt, the types of awards and the terms and conditions of the Management Incentive Plan (including any awards, related agreements, policies, programs, other arrangements, and the Management Incentive Plan participants) shall be determined, and initial grants thereunder shall be made, solely by the Reorganized Chaparral Parent Board no later than 30 days following the Effective Date.

The Debtors’ First Day Motions and Certain Related Relief.

To minimize disruption to the Debtors’ operations and effectuate the terms of the Plan, upon the commencement of the Chapter 11 Cases, the Debtors intend to file motions seeking various relief, including, but not limited to, authority to: (1) obtain postpetition use of cash collateral; (2) continue utilizing the Debtors’ prepetition cash management system, including with respect to intercompany transactions; (3) pay certain prepetition claims in the ordinary course of business; (4) pay prepetition wages and certain administrative costs related to those wages; (5) pay certain taxes and fees that accrued or arose in the ordinary course of business before the Petition Date; (6) maintain and honor certain obligations on account of royalty interests, working interest disbursements, lease obligations, operating expenditures, joint interest billings, and amounts owed to certain critical vendors and suppliers; (7) maintain and honor certain obligations on account of the Debtors’ insurance policies and surety bond program; (8) pay certain insurer and surety providers; (9) enter into postpetition hedging arrangements; (10) maintain the Debtors’ prepetition fuel card program; and (11) establish and implement restrictions and notification requirements regarding the tax ownership and certain transfers of Chaparral’s common stock.

Additionally, the Debtors intend to file a motion seeking, among other things, (1) entry of an order scheduling the Confirmation Hearing and approving the form of notices and procedures related thereto, (2) approval of the Solicitation Procedures, and (3) approval of the Rights Offering Procedures.

 

11 

The “Opt Out Deadline” is the deadline for holders to return the Opt Out Forms.

 

21

D.

Other Requested First Day Relief and Retention Applications.

The Debtors also plan to file motions and/or applications seeking certain customary relief, including the entry of an order directing the joint administration of the Debtors’ Chapter 11 Cases under a single docket and the entry of an order approving the retention of Kurtzman Carson Consultants LLC as Solicitation Agent.

In addition, the Debtors plan to file applications approving the retention of the Debtors’ bankruptcy advisors, including Davis Polk & Wardwell LLP as legal counsel, Rothschild and Intrepid as financial advisor and

investment banker, Opportune LLP as financial advisor, and Ernst & Young as tax advisor, to be heard by the Bankruptcy Court at a hearing subsequent to the first hearing.

V. Summary of the Plan

 

SECTION V OF THIS DISCLOSURE STATEMENT IS INTENDED ONLY TO PROVIDE A SUMMARY OF THE KEY TERMS, STRUCTURE, CLASSIFICATION, TREATMENT, AND IMPLEMENTATION OF THE PLAN, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ENTIRE PLAN AND EXHIBITS TO THE PLAN. ALTHOUGH THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT INCLUDE SUMMARIES OF THE PROVISIONS CONTAINED IN THE PLAN AND IN DOCUMENTS REFERRED TO THEREIN, THIS DISCLOSURE STATEMENT DOES NOT PURPORT TO BE A PRECISE OR COMPLETE STATEMENT OF ALL RELATED TERMS AND PROVISIONS, AND SHOULD NOT BE RELIED ON FOR A COMPREHENSIVE DISCUSSION OF THE PLAN. INSTEAD, REFERENCE IS MADE TO THE PLAN AND ALL SUCH DOCUMENTS FOR THE FULL AND COMPLETE STATEMENTS OF SUCH TERMS AND PROVISIONS. THE PLAN ITSELF (INCLUDING ATTACHMENTS) AND THE PLAN SUPPLEMENT WILL CONTROL THE TREATMENT OF HOLDERS OF CLAIMS AND INTERESTS UNDER THE PLAN. TO THE EXTENT THERE ARE ANY INCONSISTENCIES BETWEEN THIS SECTION V AND THE PLAN (INCLUDING ANY ATTACHMENTS TO THE PLAN) AND THE PLAN SUPPLEMENT, THE PLAN AND PLAN SUPPLEMENT, AS APPLICABLE, SHALL GOVERN.

 

 

A.

Treatment of Unclassified Claims.

In accordance with section 1123(a)(1) of the Bankruptcy Code, Administrative Claims and Priority Tax Claims have not been classified and thus are excluded from the Classes of Claims and Interests set forth in Article III of the Plan.

 

  1.

Administrative Claims.

Unless otherwise agreed to by the Holders of an Allowed Administrative Claim and the Debtors , or the Reorganized Debtors, or as otherwise set forth in an order of the Bankruptcy Court (including pursuant to the procedures specified therein), as applicable, each Holder of an Allowed Administrative Claim (other than Holders of Professional Fee Claims and Claims for fees and expenses pursuant to section 1930 of chapter 123 of title 28 of the United States Code) related to the Chapter 11 Cases will receive in full and final satisfaction of its Administrative Claim an amount of Cash equal to the amount of such Allowed Administrative Claim in accordance with the following: (1) if an Administrative Claim is Allowed as of the Effective Date, on or as soon as reasonably practicable after the Effective Date (or, if not then due, when such Allowed Administrative Claim is due or as soon as reasonably practicable thereafter); (2) if such Administrative Claim is not Allowed as of the Effective Date, no later than sixty days after the date on which an order Allowing such Administrative Claim becomes a Final Order, or as soon as reasonably practicable thereafter; (3) if such Allowed Administrative Claim is based on liabilities incurred by the Debtors in the ordinary course of their business after the Petition Date, in accordance with the terms and conditions of the particular transaction giving rise to such Allowed Administrative Claim without any further action by the Holders of such Allowed Administrative Claim; or (4) at such time and upon such terms as set forth in a Final Order of the Bankruptcy Court.

 

22

Notwithstanding anything to the contrary contained herein, any unpaid Claim payable on account of Ad Hoc Group Fees and Expenses shall constitute Allowed Administrative Claims and shall be paid on a current basis in full in Cash on the Effective Date, or to the extent accrued after the Effective Date, on a current basis in full in Cash as invoiced. Nothing herein shall require the Consenting Senior Noteholders, the Ad Hoc Group or the Ad Hoc Noteholder Group Representatives, to file applications, a Proof of Claim or otherwise seek approval of the Bankruptcy Court as a condition to the payment of such Allowed Administrative Claims. Notwithstanding anything to the contrary contained herein, if the Backstop Premium is paid in cash, the Claims on account of Backstop Premium shall constitute Allowed Administrative Claims and shall be paid pursuant to the term and the Backstop Commitment Agreement without further order of the Bankruptcy Court.

 

  2.

Professional Fee Claims.

 

  (a)

Professional Fee Escrow Account.

As soon as reasonably practicable after the Confirmation Date, and no later than one Business Day prior to the Effective Date, the Debtors shall establish and fund the Professional Fee Escrow Account with Cash equal to the Professional Fee Escrow Amount. The Professional Fee Escrow Account shall be maintained in trust solely for the Professionals and for no other Entities until all Professional Fee Claims Allowed by the Bankruptcy Court have been irrevocably paid in full to the Professionals pursuant to one or more Final Orders of the Bankruptcy Court. No Liens, claims, or interests shall encumber the Professional Fee Escrow Account or Cash held in the Professional Fee Escrow Account in any way. Such funds shall not be considered property of the Estates, the Debtors, or the Reorganized Debtors.

The amount of Professional Fee Claims owing to the Professionals shall be paid in Cash to such Professionals from the funds held in the Professional Fee Escrow Account as soon as reasonably practicable after such Professional Fee Claims are Allowed by an order of the Bankruptcy Court; provided, however, that obligations with respect to Allowed Professional Fee Claims shall not be limited nor be deemed limited to funds held in the Professional Fee Escrow Account. When all Professional Fee Claims Allowed by the Bankruptcy Court have been irrevocably paid in full to the Professionals pursuant to one or more Final Orders of the Bankruptcy Court, any remaining funds held in the Professional Fee Escrow Account shall promptly be paid to the Reorganized Debtors without any further notice to or action, order, or approval of the Bankruptcy Court or any other Entity.

 

  (b)

Final Fee Applications and Payment of Professional Fee Claims.

All final requests for payment of Professional Fee Claims for services rendered and reimbursement of expenses incurred prior to the Confirmation Date must be filed no later than 45 days after the Effective Date. The Bankruptcy Court shall determine the Allowed amounts of such Professional Fee Claims after notice and a hearing in accordance with the procedures established by the Bankruptcy Code, Bankruptcy Rules, and prior Bankruptcy Court orders. The amount of the Allowed Professional Fee Claims owing to the Professionals shall be paid in Cash to such Professionals, including from funds held in the Professional Fee Escrow Account when such Professional Fee Claims are Allowed by entry of an order of the Bankruptcy Court.

 

  (c)

Professional Fee Escrow Amount.

The Professionals shall provide a reasonable and good-faith estimate of their fees and expenses incurred in rendering services to the Debtors before and as of the Effective Date projected to be outstanding as of the Effective Date, and shall deliver such estimate to the Debtors no later than five days before the anticipated Effective Date; provided, however, that such estimate shall not be considered an admission or limitation with respect to the fees and expenses of such Professional and such Professionals are not bound to any extent by the estimates. If a Professional does not provide an estimate, the Debtors may estimate a reasonable amount of unbilled fees and expenses of such Professional, taking into account any prior payments; provided, however, that such estimate shall not be binding or considered an admission with respect to the fees and expenses of such Professional. The total aggregate amount so estimated as of the Effective Date shall be utilized by the Debtors to determine the amount to be funded to the Professional Fee Escrow Account, provided, however, that the Reorganized Debtors shall use Cash on hand to increase the amount of the Professional Fee Escrow Account to the extent fee applications are filed after the Effective Date in excess of the amount held in the Professional Fee Escrow Account based on such estimates.

 

23

  (d)

Post-Confirmation Date Fees and Expenses.

From and after the Confirmation Date, the Debtors or Reorganized Debtors, as applicable, shall, in the ordinary course of business and without any further notice to or action, order, or approval of the Bankruptcy Court, pay in Cash the reasonable and documented legal, professional, or other fees and expenses related to implementation of the Plan and Consummation incurred by the Debtors or the Reorganized Debtors, as applicable. Upon the Confirmation Date, any requirement that Professionals comply with sections 327 through 331 and 1103 of the Bankruptcy Code in seeking retention or compensation for services rendered after such date shall terminate, and the Reorganized Debtors may employ and pay any Professional in the ordinary course of business without any further notice to or action, order, or approval of the Bankruptcy Court.

 

  3.

Priority Tax Claims.

Pursuant to section 1129(a)(9)(C) of the Bankruptcy Code, unless otherwise agreed by the Holder of an Allowed Priority Tax Claim and the applicable Debtor or Reorganized Debtor, each Holder of an Allowed Priority Tax Claim will receive, at the option of the applicable Debtor or Reorganized Debtor (subject to the reasonable consent of the Required Backstop Parties and the Required Consenting Noteholders), in full satisfaction of its Allowed Priority Tax Claim that is due and payable on or before the Effective Date, either (i) Cash equal to the amount of such Allowed Priority Tax Claim on the Effective Date or (ii) treatment in accordance with the terms set forth in section 1129(a)(9)(C) of the Bankruptcy Code. For the avoidance of doubt, Holders of Allowed Priority Tax Claims will receive interest on such Allowed Priority Tax Claims after the Effective Date in accordance with sections 511 and 1129(a)(9)(C) of the Bankruptcy Code.

 

B.

Classification and Treatment of Claims and Interests.

 

  1.

Classification of Claims and Interests.

The Plan constitutes a separate chapter 11 plan of reorganization for each Debtor. The Plan does not contemplate and is conditioned on there being no substantive consolidation of any of the Debtors. For brevity and convenience, the classification and treatment of Claims and Interests have been arranged into one chart. Such classification shall not affect any Debtor’s status as a separate legal entity, change the organization or corporate governance structure of the Debtors’ business enterprise, constitute a change of control of any Debtor for any purpose, cause a merger or consolidation of any legal entities, or cause the transfer of any assets; and, except as otherwise provided by or permitted under the Plan, all Debtors shall continue to exist as separate legal entities.

Except for the Claims addressed in Article II of the Plan, all Claims and Interests are classified in the Classes set forth below in accordance with section 1122 of the Bankruptcy Code. A Claim or an Interest is classified in a particular Class only to the extent that the Claim or Interest qualifies within the description of that Class and is classified in other Classes to the extent that any portion of the Claim or Interest qualifies within the description of such other Classes. A Claim or an Interest also is classified in a particular Class for the purpose of receiving distributions under the Plan only to the extent that such Claim or Interest is an Allowed Claim or Interest in that Class and has not been paid, released, or otherwise satisfied prior to the Effective Date.

The following chart represents the classification of Claims and Interests for each Debtor pursuant to the Plan:

 

Class

   

Claim or Interest

   

Status

   

Voting Rights

1   

Other Secured Claims

    Unimpaired   

Not Entitled to Vote

(Deemed to Accept)

2   

Other Priority Claims

    Unimpaired   

Not Entitled to Vote

(Deemed to Accept)

3   

RBL Claims

    Impaired    Entitled to Vote
4   

Senior Notes Claims

    Impaired    Entitled to Vote

 

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Class

   

Claim or Interest

   

Status

   

Voting Rights

5   

General Unsecured Claims

    Unimpaired   

Not Entitled to Vote

(Deemed to Accept)

6   

Intercompany Claims

    Unimpaired / Impaired   

Not Entitled to Vote

(Deemed to Accept or Reject)

7   

Intercompany Interests

    Unimpaired / Impaired   

Not Entitled to Vote

(Deemed to Accept or Reject)

8   

Chaparral Parent Equity Interests

    Impaired   

Not Entitled to Vote

(Deemed to Reject)

9    Other Chaparral Parent Interests    Impaired   

Not Entitled to Vote

(Deemed to Reject)

 

  2.

Treatment of Classes of Claims and Interests.

To the extent a Class contains Allowed Claims or Allowed Interests with respect to any Debtor, the classification of Allowed Claims and Allowed Interests is specified below.

Class 1 — Other Secured Claims

 

  (a)

Classification: Class 1 consists of any Other Secured Claims.

 

  (b)

Treatment: Except to the extent that a Holder of an Allowed Other Secured Claim agrees to less favorable treatment of its Allowed Claim, in full and final satisfaction, settlement, release, and discharge of and in exchange for each Allowed Other Secured Claim, each such Holder shall receive, at the option of the applicable Debtor(s) (subject to the reasonable consent of the Required Backstop Parties and the Required Consenting Noteholders), either:

 

  (i)

payment in full in Cash;

 

  (ii)

delivery of collateral securing any such Claim and payment of any interest required under section 506(b) of the Bankruptcy Code;

 

  (iii)

Reinstatement of such Allowed Other Secured Claim; or

 

  (iv)

such other treatment rendering its Allowed Other Secured Claim Unimpaired in accordance with section 1124 of the Bankruptcy Code.

 

  (c)

Voting: Class 1 is Unimpaired under the Plan. Holders of Allowed Other Secured Claims are conclusively presumed to have accepted the Plan pursuant to section 1126(f) of the Bankruptcy Code. Holders of Allowed Other Secured Claims are not entitled to vote to accept or reject the Plan.

Class 2 — Other Priority Claims

 

  (a)

Classification: Class 2 consists of any Other Priority Claims.

 

  (b)

Treatment: Except to the extent that a Holder of an Allowed Other Priority Claim agrees to less favorable treatment of its Allowed Claim, in full and final satisfaction, settlement, release, and discharge of and in exchange for each Allowed Other Priority Claim, each such Holder shall receive, at the option of the applicable Debtor(s) (subject to the reasonable consent of the Required Backstop Parties and the Required Consenting Noteholders), either (i) payment in full in Cash or (ii) such other treatment rendering its Allowed Other Priority Claim Unimpaired in accordance with section 1124 of the Bankruptcy Code.

 

25

  (c)

Voting: Class 2 is Unimpaired under the Plan. Holders of Allowed Other Priority Claims are conclusively presumed to have accepted the Plan pursuant to section 1126(f) of the Bankruptcy Code. Holders of Allowed Other Priority Claims are not entitled to vote to accept or reject the Plan.

Class 3 — RBL Claims

 

  (a)

Classification: Class 3 consists of any RBL Claims against any Debtor.

 

  (b)

Allowance: On the Effective Date, the RBL Claims shall be Allowed in their entirety for all purposes of the Plan in the aggregate principal amount of $188,500,000, plus any accrued and unpaid interest (accruing at the default rate to the extent provided under the RBL Credit Agreement), fees, costs, and other expenses arising under, and payable pursuant to, the RBL Credit Agreement on or before the Effective Date, which shall not be subject to any avoidance, reductions, setoff, offset, recharacterization, subordination, counterclaims, cross claims, defenses, disallowance, impairments, or any other challenges under applicable law or regulation by any entity.

Treatment: On the Effective Date, each Holder of an Allowed RBL Claim will receive (a) its pro rata share (determined as a percentage of all Allowed RBL Claims) of the All Lender Portion and (b) (i) if such Holder elects to participate in the Exit Revolving Facility, (x) such Holder’s pro rata share (determined as a percentage of all Allowed RBL Claims owned by Holders electing to participate in the Exit Revolving Facility) of the Exit Facility Revolving Lender Cash Portion and (y) Exit Facility Revolving Loans with a principal amount equal to the amount of such Holder’s Allowed RBL Claim (after application of the All Lender Portion and the Exit Facility Revolving Lender Cash Portion to such Holder’s Allowed RBL Claim) and commitments under the Exit Revolving Facility, upon the terms and conditions set forth in the Exit Facility Term Sheet, and (ii) if such Holder does not elect to participate in the Exit Revolving Facility, Second Out Term Loans with a principal amount equal to the amount of such Holder’s RBL Claim (after application of the All Lender Portion to such Holder’s Allowed RBL Claim). The Liens securing the RBL Credit Facility shall be retained by the Exit Facility Agent to secure the Exit Facility upon the Effective Date.

 

  (c)

Voting: Class 3 is Impaired under the Plan. Holders of Allowed RBL Claims are entitled to vote to accept or reject the Plan.

Class 4 — Senior Notes Claims

 

  (a)

Classification: Class 4 consists of any Senior Notes Claims against any Debtor.

 

  (b)

Allowance: On the Effective Date, Senior Notes Claims shall be Allowed in their entirety for all purposes of the Plan in the aggregate principal amount of $300,000,000, plus any accrued but unpaid interest, fees, expenses and other amounts arising under or in connection with the Senior Notes Indenture, which shall not be subject to any avoidance, reductions, setoff, offset, recharacterization, subordination, counterclaims, cross-claims, defenses, disallowance, impairments or any other challenges under applicable law or regulation by any entity.

 

  (c)

Treatment: Except to the extent that a Holder of an Allowed Senior Notes Claim agrees to less favorable treatment of its Allowed Claim, in full and final satisfaction, settlement, release, and discharge of and in exchange for each Senior Notes Claim, each Holder of an Allowed Senior Notes Claim shall receive its pro rata share (as determined as a percentage

 

26

  of all Senior Notes Claims) of (i) 100% of the total issued and outstanding New Common Stock, subject to dilution by the Management Incentive Plan, the New Common Stock issued upon conversion of the New Convertible Notes, the Backstop Premium, and the New Common Stock issued upon exercise of the New Warrants, and (ii) the Subscription Rights.

 

  (d)

Voting: Class 4 is Impaired under the Plan. Holders of Allowed Senior Notes Claims are entitled to vote to accept or reject the Plan.

Class 5 — General Unsecured Claims

 

  (a)

Classification: Class 5 consists of any General Unsecured Claims against any Debtor.

 

  (b)

Treatment: Except to the extent that a Holder of an Allowed General Unsecured Claim agrees to less favorable treatment of its Allowed Claim, in full and final satisfaction, settlement, release, and discharge of, and in exchange for, each Allowed General Unsecured Claim, each Holder of an Allowed General Unsecured Claim shall be Reinstated and paid in the ordinary course of business in accordance with the terms and conditions of the particular transaction or agreement giving rise to such Allowed General Unsecured Claim.

 

  (c)

Voting: Class 5 is Unimpaired under the Plan. Holders of Allowed General Unsecured Claims are conclusively presumed to have accepted the Plan pursuant to section 1126(f) of the Bankruptcy Code. Holders of Allowed General Unsecured Claims are not entitled to vote to accept or reject the Plan.

Class 6 — Intercompany Claims

 

  (a)

Classification: Class 6 consists of any Intercompany Claims.

 

  (b)

Treatment: Each Allowed Intercompany Claim shall, at the option of the applicable Debtors (subject to the reasonable consent of the Required Backstop Parties and the Required Consenting Noteholders), either on or after the Effective Date, be:

 

  (i)

Reinstated;

 

  (ii)

converted to equity; or

 

  (iii)

extinguished, compromised, addressed, setoff, canceled, or settled, potentially without any distribution on account of such Claims.

 

  (c)

Voting: Holders of Allowed Intercompany Claims are conclusively deemed to have accepted the Plan pursuant to section 1126(f) or rejected the Plan pursuant to section 1126(g) of the Bankruptcy Code. Holders of Allowed Intercompany Claims are not entitled to vote to accept or reject the Plan.

Class 7 — Intercompany Interests

 

  (a)

Classification: Class 7 consists of all Interests in the Debtors other than Chaparral Parent.

 

27

  (b)

Treatment: Intercompany Interests shall be, at the option of the Debtors (subject to the reasonable consent of the Required Backstop Parties and the Required Consenting Noteholders), either:

 

  (i)

Reinstated in exchange for the Debtors’ and the Reorganized Debtors’ agreement under the Plan to make certain distributions to the Holders of Allowed Claims; or

 

  (ii)

discharged, canceled, released, and extinguished and of no further force or effect without any distribution on account of such Interests.

 

  (c)

Voting: Holders of Allowed Intercompany Interests are conclusively deemed to have accepted the Plan pursuant to section 1126(f) or rejected the Plan pursuant to section 1126(g) of the Bankruptcy Code. Holders of Intercompany Interests are not entitled to vote to accept or reject the Plan.

Class 8 — Chaparral Parent Equity Interests

 

  (a)

Classification: Class 8 consists of all Chaparral Parent Equity Interests.

 

  (b)

Treatment: All Chaparral Parent Equity Interests will be cancelled, released, and extinguished, and will be of no further force or effect without any distribution to the Holders of such Interests on account of such Interests. Notwithstanding the foregoing, in exchange for each such Holder (a) agreeing to provide a release to the Released Parties and (b) not objecting to the Plan:

 

  (i)

each Holder of an Allowed Chaparral Parent Equity Interest that is a Partial Cash-Out Equity Interest shall receive such Holder’s pro rata share (determined as a percentage of all Allowed Chaparral Parent Equity Interests as of the Effective Date) of (a) the All Holder Settlement Portion and (b) the New Warrants;

 

  (ii)

each Holder of an Allowed Chaparral Parent Equity Interest that is a Full Cash-Out Equity Interest shall receive (a) such Holder’s pro rata share (determined as a percentage of all Allowed Chaparral Parent Equity Interests as of the Effective Date) of the All Holder Settlement Portion and (b) Cash in an amount equal to $0.01508 per share.

Notwithstanding the foregoing, if any of the Prior Bankruptcy Claims become fixed, liquidated, and allowed in the Prior Bankruptcy Cases after the Effective Date, then the Holders of the Prior Bankruptcy Equity Interests arising from such Prior Bankruptcy Claims shall be entitled to receive Cash in an amount equal to the amount such Holder would have otherwise received had such Holder’s Prior Bankruptcy Equity Interests been Allowed Chaparral Parent Equity Interests as of the Effective Date (assuming all distributions on account of such Chaparral Parent Equity Interests had been made on the Effective Date), solely to the extent that such amount does not cause the total Cash paid to Holders of Prior Bankruptcy Equity Interests after the Effective Date to exceed the Cash-Out Cap, in each case in accordance with Article VI of the Plan. For the avoidance of doubt, any Holder of a Chaparral Parent Equity Interest that affirmatively elects to “opt out” of the releases contained in Article VIII of the Plan or objects to the Plan, shall not be entitled to receive the consideration described in this paragraph or in clauses (i) and (ii) above.

 

  (c)

Voting: Class 8 is Impaired under the Plan. Holders of Chaparral Parent Equity Interests are conclusively deemed to have rejected the Plan pursuant to section 1126(g) of the Bankruptcy Code. Holders of Allowed Chaparral Parent Equity Interests are not entitled to vote to accept or reject the Plan.

 

28

Class 9 — Other Chaparral Parent Interests

 

  (a)

Classification: Class 9 consists of all Other Chaparral Parent Interests.

 

  (b)

Treatment: All Other Chaparral Parent Interests will be canceled, released, and extinguished, and will be of no further force or effect without any distribution to the Holders of such Interests on account of such Interests.

 

  (d)

Voting: Class 9 is Impaired under the Plan. Holders of Allowed Other Chaparral Parent Interests are conclusively deemed to have rejected the Plan pursuant to section 1126(g) of the Bankruptcy Code. Holders of Allowed Other Chaparral Parent Interests are not entitled to vote to accept or reject the Plan.

 

C.

Means for Implementation of the Plan.

 

  1.

General Settlement of Claims and Interests.

Unless otherwise set forth in the Plan, pursuant to sections 363 and 1123 of the Bankruptcy Code and, to the extent applicable, Bankruptcy Rule 9019, and in consideration for the classification, distributions, releases, and other benefits provided under the Plan, upon the Effective Date, the provisions of the Plan shall constitute a good-faith compromise and settlement of all Claims and Interests and controversies resolved pursuant to the Plan.

 

  2.

Restructuring Transactions.

On and after the Confirmation Date, the Debtors or Reorganized Debtors, as applicable, shall take all actions as necessary or appropriate to effectuate the transactions described in, approved by, contemplated by, or necessary to effectuate the Restructuring Support Agreement and the Plan as set forth in the Restructuring Steps Memorandum and may take all actions as may be necessary or appropriate to effect any transaction described in, approved by, contemplated by, or necessary to effectuate the Plan that are consistent with and pursuant to the terms and conditions of the Plan (collectively, the “Restructuring Transactions”), which transactions may include, as applicable: (a) the execution and delivery of appropriate agreements or other documents of merger, amalgamation, consolidation, restructuring, reorganization, conversion, disposition, transfer, arrangement, continuance, dissolution, sale, purchase, or liquidation containing terms that are consistent with the terms of the Plan; (b) the execution and delivery of appropriate instruments of transfer, assignment, assumption, or delegation of any asset, property, right, liability, debt, or obligation on terms consistent with the terms of the Plan and having other terms to which the applicable parties agree; (c) the filing of appropriate certificates or articles of incorporation, reincorporation, formation, merger, consolidation, conversion, amalgamation, arrangement, continuance, or dissolution or other certificates or documentation for other transactions as described in clause (a), pursuant to applicable state law; (d) the execution and delivery of the Rights Offering Documents, the New Convertible Notes Indenture, and the Exit Facility Documents, (e) the execution and delivery of the New Stockholders Agreement and the New Corporate Governance Documents, and any certificates or articles of incorporation, bylaws, or such other applicable formation documents (if any) of each Reorganized Debtor (including all actions to be taken, undertakings to be made, and obligations to be incurred and fees and expenses to be paid by the Debtors and/or the Reorganized Debtors, as applicable); (f) the issuance, distribution, reservation, or dilution, as applicable, of the New Common Stock, as set forth herein; (g) the adoption of the Management Incentive Plan and the issuance and reservation of the New Common Stock to the participants in the Management Incentive Plan as determined by and on the terms and conditions set by the Reorganized Chaparral Parent Board after the Effective Date; and (h) all other actions that the applicable Entities determine to be necessary or appropriate, including making filings or recordings that may be required by applicable law in connection with the Restructuring Transactions, in each case subject to the Creditor Consent Rights.

Without limiting the foregoing, the Restructuring Transactions may include changes to the corporate and/or capital structure of Chaparral Parent and/or any of its subsidiaries to be made on or prior to the Effective Date, in each case, subject to the Creditor Approval Rights and as may be set forth in the Plan Supplement. For the avoidance of doubt, such changes to the corporate and/or capital structure may include, but are not limited to, (i) the conversion of Chaparral Parent and/or one or more of its subsidiaries into corporations, limited liability companies or partnerships, (ii) the creation of one or more newly formed Entities and/or holdings companies, (iii) the merger of one or more existing or newly formed entities and/or holding companies, (iv) the issuance of intercompany liabilities and/or intercompany equity, and (v) any “election” that may be made for United States federal income tax purposes, (vi) the creation of one or more newly formed entities and/or (vi) the restructuring or repositioning of any of the direct or indirect subsidiaries of Chaparral Parent.

 

29

The Confirmation Order shall be deemed, pursuant to both section 1123 and section 363 of the Bankruptcy Code, to authorize, among other things, all actions as may be necessary or appropriate to effect any transaction described in, approved by, contemplated by, or necessary to effectuate the Plan.

 

  3.

Sources of Consideration for Plan Distributions.

The Debtors shall fund distributions under the Plan with (a) Cash on hand, (b) the Exit Facility and the Exit Facility Loans, (c) the cash proceeds of the Rights Offering, (d) the issuance of the New Common Stock, and (e) the issuance of the New Warrants. Each distribution and issuance referred to in Article VI of the Plan shall be governed by the terms and conditions set forth in the Plan applicable to such distribution or issuance and by the terms and conditions of the instruments or other documents evidencing or relating to such distribution or issuance, which terms and conditions shall bind each Entity receiving such distribution or issuance.

 

  (a)

Exit Facility

On the Effective Date, (a) the RBL Credit Agreement will be amended and restated in its entirety by the Exit Facility Credit Agreement, (b) the Debtors and the Reorganized Debtors, as applicable, shall be authorized to execute and deliver, and to consummate the transactions contemplated by, the Exit Facility Documents, without further notice to or order of the Bankruptcy Court, act or action under applicable law, regulation, order, or rule or the vote, consent, authorization or approval of any Entity (other than as expressly required by the Exit Facility Documents), and (c) the Exit Facility Documents shall constitute legal, valid, binding and authorized indebtedness and obligations of the Reorganized Debtors, enforceable in accordance with their respective terms and such indebtedness and obligations shall not be and shall not be deemed to be, enjoined or subject to discharge, impairment, release or avoidance under the Plan, the Confirmation Order or on account of the Confirmation or Consummation of the Plan.

On and as of the Effective Date, (i) the Reorganized Debtors shall execute and deliver the Exit Facility Documents, (ii) all RBL Lenders shall be deemed to be parties to, and bound by, the Exit Facility Credit Agreement, without the need for execution thereof by any such applicable RBL Lender; provided, however, that with respect to any RBL Lender that fails to execute and deliver its signature page to the Exit Facility Credit Agreement, any portion of the Cash to be distributed pursuant to or in connection with the Plan to such RBL Lender will be treated as an undeliverable distribution pursuant to Article VI.E.2 of the Plan until such RBL Lender executes and delivers to Reorganized Chaparral its signature page to the Exit Facility Credit Agreement; (iv) Reorganized Chaparral Parent shall be deemed to have borrowed the Exit Facility Revolving Loans from the Exit Facility Revolving Lenders on the terms and conditions set forth in the Exit Facility Documents (which loans will be guaranteed by the other Reorganized Debtors in accordance with the Exit Facility Documents); (v) Reorganized Chaparral Parent shall be deemed to have borrowed the Second Out Term Loans from the Second Out Term Lenders (which loans will be guaranteed by the other Reorganized Debtors in accordance with the Exit Facility Documents); (vi) the Exit Facility Revolving Lenders shall provide commitments in accordance with the Exit Facility Commitment Letter (as defined in the Restructuring Support Agreement); and (vii) the RBL Cash Payment shall be made and applied as set forth herein.

By voting to accept the Plan, each RBL Lender thereby instructs and directs the RBL Agent, pursuant to the RBL Credit Agreement, and each such vote to accept the Plan will, for all purposes, constitute an instruction from such RBL Lender directing the RBL Agent and the Exit Facility Agent (as applicable), to (i) act as distribution agent to the extent required by the Plan, (ii) execute and deliver the Exit Facility Loan Documents, as well as to execute, deliver, file, record and issue any notes, documents (including UCC financing statements), or agreements in connection therewith, to which the Exit Facility Agent is a party and to promptly consummate the transactions contemplated thereby, and (iii) take any other actions required or contemplated to be taken by the Exit Facility Agent and/or the RBL Agent (as applicable) under the Plan or any of the Restructuring Documents to which it is a party.

 

  (b)

Issuance and Distribution of the New Common Stock and New Warrants

All Interests in Chaparral Parent (including, without limitation, the Chaparral Parent Equity Interests and the Other Chaparral Parent Equity Interests) shall be cancelled, released, and extinguished as of the Effective Date.

 

30

On the Effective Date, the New Common Stock (including the New Common Stock on account of the Backstop Premium) and the New Warrants shall be issued and distributed to the Entities entitled to receive the New Common Stock and New Warrants pursuant to, and in accordance with, the terms of the Plan, the New Corporate Governance Documents, the New Stockholders Agreement, and the New Warrant Agreements. On or prior to the Effective Date, the issuance of the New Common Stock and New Warrants shall be duly authorized without the need for any further corporate action and without any action by the Holders of Claims or other parties in interest. All of the New Common Stock (including the New Common Stock issuable upon the conversion of the New Convertible Notes and upon the exercise of the New Warrants) shall be duly authorized, validly issued, fully paid, and non-assessable when issued in accordance with the terms of such instruments.

The New Warrants shall not include Black-Scholes protection or similar protections in the event of a sale, merger or similar transaction prior to exercise. All shares of New Common Stock issued upon exercise of New Warrants shall be issued in book-entry direct registration form and not through DTC (except as otherwise determined by the Reorganized Chaparral Parent Board in its sole discretion), and as a condition precedent to the issuance of any such shares the recipient will be required to sign a joinder, in the form to be attached to the New Warrant Agreements, pursuant to which it agrees to become a party the New Stockholders Agreement.

 

  (c)

Corporate Governance

Each distribution and issuance of the New Common Stock on the Effective Date shall be governed by the terms and conditions set forth in the Plan applicable to such distribution, issuance, and/or dilution, as applicable, and by the terms and conditions of the instruments evidencing or relating to such distribution, issuance, and/or dilution, as applicable, including the New Corporate Governance Documents and New Stockholders Agreement, the terms and conditions of which shall bind each Entity receiving such distribution of the New Common Stock.    All New Common Stock (including the New Common Stock on account of the Backstop Premium), Subscription Rights and New Warrants issued and distributed under the Plan shall be duly authorized, validly issued, fully paid, and non-assessable (as applicable).

On the Effective Date, Reorganized Chaparral Parent shall enter into and deliver the New Stockholders Agreement, in substantially the form included in the Plan Supplement, to each Holder of New Common Stock, and such parties shall be required to duly execute and deliver to Reorganized Chaparral Parent, as an express condition precedent to such Holder’s receipt of New Common Stock, a counterpart to the New Stockholders Agreement (or any such similar agreement).

On the Effective Date, Reorganized Chaparral Parent and all Holders of New Common Stock then outstanding shall be deemed to be parties to the New Stockholders Agreement, substantially in the form contained in the Plan Supplement, without the need for execution by any such Holder. On the Effective Date, the New Stockholders Agreement shall be binding on the Reorganized Debtors and all parties receiving, and all Holders of, the New Common Shares.

Upon the Effective Date, the New Common Stock shall not be registered under the Securities Act, and shall not be listed for public trading on any securities exchange, and the Reorganized Debtors will not be a reporting company under the Exchange Act (except that the Reorganized Debtors may continue to be a reporting company with respect to the fiscal year ending December 31, 2020); provided, however, that Reorganized Chaparral Parent shall provide financial reporting to holders of the New Common Stock, as set forth in the New Corporate Governance Documents, and the New Stockholders Agreement, as applicable, and agreed to by the Required Consenting Noteholders.

 

  (d)

The Rights Offering and the Backstop Commitments

The Plan provides that the Rights Offering Amount will be raised through the Rights Offering. On the Effective Date, the Debtors shall consummate the Rights Offering, subject to the terms and conditions set forth in the Rights Offering Documents and the Plan, through which each eligible Holder of Subscription Rights shall have the opportunity to purchase their Pro Rata Share (determined as a percentage of all Allowed Senior Notes Claims) of the New Convertible Notes.

 

31

Upon exercise of the Subscription Rights by the Rights Offering Participants, pursuant to the terms of the Rights Offering Procedures, the Plan, and the other Rights Offering Documents, the Reorganized Debtors shall be authorized to issue the New Convertible Notes issuable pursuant to the exercise of Subscription Rights (and the New Common Stock issuable upon conversion of the New Convertible Notes) in accordance with the Plan, the Rights Offering Procedures, and the other Rights Offering Documents.

The Rights Offering Amount will be 100% backstopped by the Backstop Parties, and the Backstop Parties shall be obligated on a several but not joint basis to purchase the Unsubscribed New Convertible Notes in accordance with and subject to the terms and conditions of the Backstop Commitment Agreement.

Subject to, and in accordance with the Backstop Commitment Agreement, as consideration for the Backstop Commitments, on the Effective Date the Backstop Parties shall receive a Backstop Premium, which will be payable on, and as a condition to, the Effective Date in New Common Stock equal to 10.0% of the New Common Stock Total Equity Interests (as defined in the Backstop Commitment Agreement), subject to dilution on account of the Management Incentive Plan, the New Common Stock issued upon conversion of the New Convertible Notes, and the New Common Stock issued upon exercise of the New Warrants, and shall have been fully earned as of the effective date of the Backstop Commitment Agreement.

 

  (e)

Cash on Hand

The Debtors or Reorganized Debtors, as applicable, shall use Cash on hand to fund distributions to certain Holders of Allowed Claims and Allowed Chaparral Parent Equity Interests consistent with the terms of the Plan.

 

  4.

Exemption From Registration Requirements.

All shares of New Common Stock and Subscription Rights, issued and distributed pursuant to the Plan to Holders of Allowed Class 4 Senior Notes Claims on account of their Claims and, in the case of Holders of Allowed Chaparral Parent Equity Interests, New Warrants in consideration for providing the release of the Released Parties and agreeing to support and not object to the Plan, will be issued without registration under the Securities Act or any similar federal, state, or local law in reliance on Section 1145(a) of the Bankruptcy Code.

The offering, issuance, and distribution of shares of New Common Stock, the Subscription Rights and all New Warrants pursuant to the Plan in reliance upon section 1145 of the Bankruptcy Code is exempt from, among other things, the registration requirements of Section 5 of the Securities Act and any other applicable U.S. state or local law requiring registration prior to the offering, issuance, distribution, or sale of securities. Such shares of New Common Stock and New Warrants to be issued under the Plan (a) are not “restricted securities” as defined in Rule 144(a)(3) under the Securities Act, and (b) subject to the terms of the New Stockholders Agreement, are freely tradable and transferable by any initial recipient thereof that (i) is not an “affiliate” of the Debtors as defined in Rule 144(a)(1) under the Securities Act, (ii) has not been such an “affiliate” within 90 days of such transfer, and (iii) is not an entity that is an “underwriter” as defined in subsection (b) of Section 1145 of the Bankruptcy Code.

The offering of the New Convertible Notes pursuant to the Rights Offering and the Backstop Commitment Agreement and the New Common Stock issued in respect of the Backstop Premium will be exempt from the registration requirements of the Securities Act pursuant to section 4(a)(2) of the Securities Act, and will be “restricted securities” subject to transfer restrictions under the U.S. federal securities laws.

Persons who purchase the New Convertible Notes or New Common Stock pursuant to the exemption from registration set forth in section 4(a)(2) of the Securities Act will hold “restricted securities.” Resales of such restricted securities would not be exempted by section 1145 of the Bankruptcy Code from registration under the Securities Act or other applicable law. Holders of restricted securities would, however, be permitted to resell New Convertible Notes or new Common Stock without registration if they are able to comply with the applicable provisions of Rule 144 or Rule 144A or any other registration exemption under the Securities Act, or if such securities are registered with the SEC.

Should the Reorganized Debtors elect, on or after the Effective Date, to reflect all or any portion of the ownership of the Reorganized Chaparral Parent’s New Common Stock or New Warrants through the facilities of DTC, the Reorganized Debtors shall not be required to provide any further evidence other than the Plan or Final Order with respect to the treatment of such applicable portion of the Reorganized Chaparral Parent’s New Common Stock or New Warrants, and such Plan or Final Order shall be deemed to be legal and binding obligations of the Reorganized Debtors in all respects.

 

32

DTC (and any stock transfer agent) shall be required to accept and conclusively rely upon the Plan and Final Order in lieu of a legal opinion regarding whether offering and issuing the Reorganized Chaparral Parent’s New Common Stock or New Warrants are exempt from registration and/or eligible for DTC book-entry delivery, settlement, and depository services.

Notwithstanding anything to the contrary in the Plan, no entity (including, for the avoidance of doubt, DTC or any stock transfer agent) may require a legal opinion regarding the validity of any transaction contemplated by the Plan, including, for the avoidance of doubt, whether the Reorganized Chaparral Parent’s New Common Stock or New Warrants is exempt from registration and/or eligible for DTC book-entry delivery, settlement, and depository services.

 

  5.

Corporate Existence.

Except as otherwise provided in the Plan or the Plan Supplement, each Debtor shall continue to exist after the Effective Date as a separate corporate entity, limited liability company, partnership, or other form, as the case may be, with all the powers of a corporation, limited liability company, partnership, or other form, as the case may be, pursuant to the applicable law in the jurisdiction in which each applicable Debtor is incorporated or formed and pursuant to the respective certificate of incorporation and bylaws (or other formation documents) in effect prior to the Effective Date, except to the extent such certificate of incorporation and bylaws (or other formation documents) are amended under the Plan, the New Corporate Governance Documents, or otherwise, and to the extent such documents are amended, such documents are deemed to be amended pursuant to the Plan and require no further action or approval (other than any requisite filings required under applicable state, provincial, or federal law).

 

  6.

Corporate Action.

On or before the Effective Date, as applicable, all actions contemplated under the Plan or the Plan Supplement shall be deemed authorized and approved in all respects, including: (1) adoption or assumption, as applicable, of the agreements with existing management; (2) selection of the directors, managers, and officers for the Reorganized Debtors; (3) implementation of the Restructuring Transactions; (4) the applicable Reorganized Debtors’ entry into the Exit Facility Documents, New Convertible Notes Indenture, New Warrants Agreements, and New Stockholders Agreement; (5) rejection or assumption, as applicable, of Executory Contracts and Unexpired Leases; (6) the adoption and filing of the New Corporate Governance Documents, the New Stockholders Agreement, and the New Warrants Agreements; and (7) all other acts or actions contemplated, or reasonably necessary or appropriate to promptly consummate the transactions contemplated under the Plan (whether to occur before, on, or after the Effective Date). All matters provided for in the Plan involving the corporate structure of the Debtors or the Reorganized Debtors, as applicable, and any corporate action required by the Debtors or the Reorganized Debtors in connection with the Plan shall be deemed to have occurred and shall be in effect, without any requirement of further action by the security holders, directors, managers, or officers of the Debtors or the Reorganized Debtors, as applicable. On or (as applicable) prior to the Effective Date, the appropriate officers of the Debtors or the Reorganized Debtors, as applicable, shall be authorized to issue, execute, and deliver the agreements, documents, securities, and instruments contemplated under the Plan (or necessary or desirable to effect the transactions contemplated under the Plan) in the name of and on behalf of the Reorganized Debtors, including the Backstop Commitment Agreement, New Stockholders Agreement, Exit Facility Documents, New Convertible Notes Indenture, New Warrants Agreements, and any and all other agreements, documents, securities, or instruments related to the foregoing. The authorizations and approvals contemplated by Article IV.H of the Plan shall be effective notwithstanding any requirements under non-bankruptcy law.

 

  7.

Vesting of Assets in the Reorganized Debtors.

Except as otherwise provided in the Plan or the Plan Supplement, or in any agreement, instrument, or other document incorporated in the Plan, on the Effective Date, all property in each Debtor’s Estate, all Causes of Action, and any property acquired by any of the Debtors under the Plan shall vest in each respective Reorganized Debtor, free and clear of all Liens, Claims, charges, or other encumbrances (except for Liens securing obligations under the Exit Facility Documents, New Convertible Notes Indenture, and Liens securing obligations on account of Other Secured

 

33

Claims that are Reinstated pursuant to the Plan, if any). On and after the Effective Date, except as otherwise provided in the Plan, each Reorganized Debtor may operate its business and may use, acquire, or dispose of property and compromise or settle any Claims, Interests, or Causes of Action without supervision or approval by the Bankruptcy Court and free of any restrictions of the Bankruptcy Code or Bankruptcy Rules.

 

  8.

Cancellation of Notes, Instruments, Certificates, and Other Documents.

On the Effective Date, except to the extent otherwise provided in the Plan, all notes, instruments, certificates, shares, and other documents evidencing Claims or Interests shall be cancelled, and the obligations of the Debtors or the Reorganized Debtors thereunder or in any way related thereto shall be discharged and deemed satisfied in full, and the RBL Agent and the Indenture Trustee shall be released from all duties and obligations thereunder; provided, however, that notwithstanding Confirmation or the occurrence of the Effective Date, any credit document or agreement that governs the rights of the Holder of a Claim or Interest shall continue in effect solely for purposes of (1) allowing Holders of Allowed Claims to receive distributions under the Plan, (2) allowing and preserving the rights of the RBL Agent and the Indenture Trustee to make distributions pursuant to the Plan, (3) preserving the RBL Agent’s and the Indenture Trustee’s rights to compensation and indemnification as against any money or property distributable to the Holders of RBL Claims and Senior Notes Claims, including permitting the RBL Agent and the Indenture Trustee to maintain, enforce, and exercise its charging liens, if any, against such distributions, (4) preserving all rights, including rights of enforcement, of the RBL Agent and the Indenture Trustee against any person other than with respect to any claim released under the Debtor Release or the Third Party Release or claims subject to treatment in this Plan, including with respect to indemnification or contribution from the Holders of RBL Claims and Senior Notes Claims pursuant and subject to the terms of the RBL Credit Agreement and the Senior Notes Indenture as in effect on the Effective Date, (5) permitting the RBL Agent and the Indenture Trustee to enforce any obligation (if any) owed to the RBL Agent or the Indenture Trustee under the Plan, (6) permitting the RBL Agent and the Indenture Trustee to appear in the Chapter 11 Cases or in any proceeding in the Bankruptcy Court or any other court, and (7) permitting the RBL Agent and the Indenture Trustee to perform any functions that are necessary to effectuate the foregoing; provided, further, however, that (a) the preceding proviso shall not affect the discharge of Claims or Interests pursuant to the Bankruptcy Code, the Confirmation Order, or the Plan, or result in any expense or liability to the Debtors or Reorganized Debtors, as applicable, except as expressly provided for in the Plan and (b) except as otherwise provided in the Plan, the terms and provisions of the Plan shall not modify any existing contract or agreement that would in any way be inconsistent with distributions under the Plan. The RBL Agent and the Indenture Trustee shall be discharged and shall have no further obligation or liability except as provided in the Plan and Confirmation Order, and after the performance by the RBL Agent and the Indenture Trustee and their representatives and professionals of any obligations and duties required under or related to the Plan or Confirmation Order, the RBL Agent and the Indenture Trustee shall be relieved of and released from any obligations and duties arising thereunder. The fees, expenses, and costs of the RBL Agent and the Indenture Trustee, including fees, expenses, and costs of its professionals incurred after the Effective Date in connection with the RBL Credit Agreement and the Senior Notes Indenture, as applicable, and reasonable and documented costs and expenses associated with effectuating distributions pursuant to the Plan will be paid by the Reorganized Debtors in the ordinary course. Notwithstanding anything to the contrary herein, in no event will the loans under the RBL Credit Agreement be cancelled or satisfied or repaid in full as a result of the implementation of the Plan, and instead the loans under the RBL Credit Agreement will be restructured as loans under the Exit Facility Credit Agreement as set forth herein and therein, and the Liens securing the RBL Credit Facility shall be retained by the Exit Facility Agent to secure the Exit Facility.

 

  9.

Effectuating Documents; Further Transactions.

On and after the Effective Date, the Reorganized Debtors, and the officers and members of the boards of directors and managers thereof, are authorized to and shall issue, execute, deliver, file, or record such contracts, Securities, instruments, releases, and other agreements or documents and take such actions as may be necessary or appropriate to effectuate, implement, and further evidence the terms and conditions of the Plan, the Restructuring Support Agreement, the Exit Facility Documents, the New Convertible Notes Indenture, the New Warrants Agreements, the New Stockholders Agreement, the New Corporate Governance Documents, and the Securities issued pursuant to the Plan in the name of and on behalf of the Reorganized Debtors, without the need for any approvals, authorizations, or consents except for those expressly required under the Plan.

 

34

  10.

Exemptions From Certain Taxes and Fees.

To the fullest extent permitted by section 1146(a) of the Bankruptcy Code, any transfers (whether from a Debtor to a Reorganized Debtor or to any other Person) of property under the Plan or pursuant to: (a) the issuance, distribution, transfer, or exchange of any debt, equity security, or other interest in the Debtors or the Reorganized Debtors, including the New Common Stock, the Exit Facility, the New Convertible Notes , and the New Warrants; (b) the Restructuring Transactions; (c) the creation, modification, consolidation, termination, refinancing, and/or recording of any mortgage, deed of trust, or other security interest, or the securing of additional indebtedness by such or other means; (d) the making, assignment, or recording of any lease or sublease; (e) the grant of collateral as security for the Exit Facility and the New Convertible Notes; or (f) the making, delivery, or recording of any deed or other instrument of transfer under, in furtherance of, or in connection with, the Plan, including any deeds, bills of sale, assignments, or other instrument of transfer executed in connection with any transaction arising out of, contemplated by, or in any way related to the Plan, shall not be subject to any document recording tax, stamp tax, conveyance fee, intangibles or similar tax, mortgage tax, real estate transfer tax, mortgage recording tax, Uniform Commercial Code filing or recording fee, regulatory filing or recording fee, or other similar tax or governmental assessment, and upon entry of the Confirmation Order, the appropriate state or local governmental officials or agents shall forego the collection of any such tax or governmental assessment and accept for filing and recordation any of the foregoing instruments or other documents without the payment of any such tax, recordation fee, or governmental assessment. All filing or recording officers (or any other Person with authority over any of the foregoing), wherever located and by whomever appointed, shall comply with the requirements of section 1146(c) of the Bankruptcy Code, shall forego the collection of any such tax or governmental assessment, and shall accept for filing and recordation any of the foregoing instruments or other documents without the payment of any such tax or governmental assessment.

 

  11.

New Corporate Governance Documents.

The New Corporate Governance Documents shall, among other things: (1) contain the terms consistent with the documentation set forth in the Plan Supplement; (2) authorize the issuance, distribution, and reservation of the New Common Stock and the New Warrants to the Entities entitled to receive such issuances, distributions and reservations under the Plan; and (3) pursuant to and only to the extent required by section 1123(a)(6) of the Bankruptcy Code, and limited as necessary to facilitate compliance with non-bankruptcy federal laws, prohibit the issuance of non-voting equity Securities.

On or immediately before the Effective Date, Chaparral Parent or Reorganized Chaparral Parent, as applicable, will file its New Corporate Governance Documents with the applicable Secretary of State and/or other applicable authorities in their state of incorporation or formation in accordance with the applicable laws of its respective state of incorporation or formation, to the extent required for such New Corporate Governance Documents to become effective. After the Effective Date, Reorganized Chaparral Parent may amend and restate its formation, organizational, and constituent documents as permitted by the laws of its respective jurisdiction of formation and the terms of such documents.

 

  12.

Directors and Officers.

 

  (a)

Reorganized Chaparral Parent Board

On the Effective Date, the terms of the current members of the Chaparral Parent board of directors shall expire, and the Reorganized Chaparral Parent Board will include those directors set forth in the list of directors of the Reorganized Debtors included in the Plan Supplement. On the Effective Date, the officers and overall management structure of Reorganized Chaparral Parent, and all officers and management decisions with respect to Reorganized Chaparral Parent (and/or any of its direct or indirect subsidiaries), compensation arrangements, and affiliate transactions shall only be subject to the approval of the Reorganized Chaparral Parent Board. From and after the Effective Date, each director, officer, or manager of the Reorganized Debtors shall be appointed and serve pursuant to the terms of their respective charters and bylaws or other formation and constituent documents, the New Stockholders Agreement, and the New Corporate Governance Documents, and applicable laws of the respective Reorganized Debtor’s jurisdiction of formation. To the extent that any such director or officer of the Reorganized Debtors is an “insider” pursuant to section 101(31) of the Bankruptcy Code, the Debtors will disclose the nature of any compensation to be paid to such director or officer.

 

35

  (b)

Senior Management

Effective as of the Effective Date, the Reorganized Debtors will either assume or reject the existing employment agreements with the current members of the senior management team or will enter into new employment agreements on the Effective Date with such individuals (to the extent any applicable member of the senior management team agrees), in each case, upon terms acceptable to the applicable employee, Reorganized Chaparral Parent, the Required Consenting Noteholders, and the Required Backstop Parties.

From and after the Effective Date, each officer or manager of the Reorganized Debtors shall serve pursuant to the terms of the respective Reorganized Debtor’s certificate of incorporation and bylaws or other formation and constituent documents, and applicable laws of the respective Reorganized Debtor’s jurisdiction of formation.

 

  13.

Management Incentive Plan.

The Reorganized Chaparral Parent Board shall be authorized to adopt the Management Incentive Plan, enact and enter into related policies and agreements, and grant awards under the Management Incentive Plan to participants in such forms and subject to the terms and conditions (including anti-dilution protections and vesting conditions) determined by the Reorganized Chaparral Parent Board. For the avoidance of doubt, the types of awards and the terms and conditions of the Management Incentive Plan (including any awards, related agreements, policies, programs, other arrangements, and the Management Incentive Plan participants) shall be determined, and initial grants thereunder shall be made, solely by the Reorganized Chaparral Parent Board no later than 30 days following the Effective Date.

 

  14.

Preservation of Causes of Action.

In accordance with section 1123(b) of the Bankruptcy Code, the Reorganized Debtors shall retain and may enforce all rights to commence and pursue any and all Causes of Action, whether arising before or after the Petition Date, and the Reorganized Debtors’ rights to commence, prosecute, or settle such Causes of Action shall be preserved notwithstanding the occurrence of the Effective Date, other than the Causes of Action released by the Debtors pursuant to the releases and exculpations contained in the Plan, including in Article VIII of the Plan, which shall be deemed released and waived by the Debtors and Reorganized Debtors as of the Effective Date.

The Reorganized Debtors may pursue such Causes of Action, as appropriate, in accordance with the best interests of the Reorganized Debtors. No Entity may rely on the absence of a specific reference in the Plan, the Plan Supplement, or the Disclosure Statement to any Cause of Action against it as any indication that the Debtors or the Reorganized Debtors will not pursue any and all available Causes of Action against it. The Debtors and the Reorganized Debtors expressly reserve all rights to prosecute any and all Causes of Action against any Entity. Unless any Cause of Action against an Entity is expressly waived, relinquished, exculpated, released, compromised, or settled in the Plan or a Final Order of the Bankruptcy Court, the Reorganized Debtors expressly reserve all Causes of Action, for later adjudication, and, therefore no preclusion doctrine, including the doctrines of res judicata, collateral estoppel, issue preclusion, claim preclusion, estoppel (judicial, equitable, or otherwise), or laches, shall apply to such Causes of Action upon, after, or as a consequence of the Confirmation or Consummation.

 

  15.

Preservation of Royalty and Working Interests.

On and after the Effective Date, all Royalty and Working Interests granted by any Debtor will, to the extent required by applicable law, be fully preserved and remain in full force and effect in accordance with the applicable terms of the granting instruments or other governing documents applicable to such Royalty and Working Interests, which granting instruments and governing documents will equally remain in full force and effect to the extent required by applicable law, and no such Royalty and Working Interests will be altered or impaired by the Plan.

 

  16.

Restructuring Support Agreement.

The Restructuring Support Agreement shall be assumed pursuant to the Confirmation Order and the Debtors shall continue to perform thereunder and comply therewith in all respects during the period through and including the Effective Date.

 

36

  17.

Executory Contracts and Expired Leases.

 

  (a)

Assumption of Executory Contracts and Unexpired Leases.

On the Effective Date, except as otherwise provided in the Plan or in any contract, instrument, release, indenture, or other agreement or document entered into in connection with the Plan, all Executory Contracts and Unexpired Leases shall be deemed assumed, including the Restructuring Support Agreement, without the need for any further notice to or action, order, or approval of the Bankruptcy Court, as of the Effective Date under section 365 of the Bankruptcy Code, unless such Executory Contract and Unexpired Lease (1) was assumed or rejected previously by the Debtors; (2) previously expired or terminated pursuant to its own terms; (3) is the subject of a motion to reject filed on or before the Effective Date; or (4) is identified on the Rejected Executory Contract and Unexpired Lease List.

Entry of the Confirmation Order shall constitute a Bankruptcy Court order approving the assumption, assumption and assignment, or rejection, as applicable, of such Executory Contracts or Unexpired Leases as set forth in the Plan and the Rejected Executory Contract and Unexpired Lease List, as applicable, pursuant to sections 365(a) and 1123 of the Bankruptcy Code. Unless otherwise indicated, assumptions, assumptions and assignments, or rejections of Executory Contracts and Unexpired Leases pursuant to the Plan are effective as of the Effective Date. Each Executory Contract or Unexpired Lease assumed pursuant to the Plan or by Bankruptcy Court order but not assigned to a third party before the Effective Date shall re-vest in and be fully enforceable by the applicable contracting Reorganized Debtor in accordance with its terms, except as such terms may have been modified by the provisions of the Plan or any order of the Bankruptcy Court authorizing and providing for its assumption under applicable federal law. Any motions to assume Executory Contracts or Unexpired Leases pending on the Effective Date shall be subject to approval by the Bankruptcy Court on or after the Effective Date by a Final Order. Notwithstanding anything to the contrary in the Plan, the Debtors, or the Reorganized Debtors, as applicable, reserve the right to alter, amend, modify, or supplement the Rejected Executory Contract and Unexpired Lease List at any time through and including thirty days after the Effective Date.

Except as otherwise provided herein or agreed to by the Debtors and the applicable counterparty, each assumed Executory Contract or Unexpired Lease shall include all modifications, amendments, supplements, restatements, or other agreements related thereto, and all rights related thereto, if any, including all easements, licenses, permits, rights, privileges, immunities, options, rights of first refusal, and any other interests. To the maximum extent permitted by law, to the extent that any provision in any Executory Contract or Unexpired Lease assumed or assumed and assigned pursuant to the Plan restricts or prevents, or purports to restrict or prevent, or is breached or deemed breached by, the assumption or assumption and assignment of such Executory Contract or Unexpired Lease (including any “change of control” provision), then such provision shall be deemed modified such that the transactions contemplated by the Plan shall not entitle the non-Debtor party thereto to terminate such Executory Contract or Unexpired Lease or to exercise any other default-related rights with respect thereto. Modifications, amendments, supplements, and restatements to prepetition Executory Contracts and Unexpired Leases that have been executed by the Debtors during the Chapter 11 Cases shall not be deemed to alter the prepetition nature of the Executory Contract or Unexpired Lease or the validity, priority, or amount of any Claims that may arise in connection therewith.

 

  (b)

Claims Based on Rejection of Executory Contracts or Unexpired Leases.

Entry of the Confirmation Order shall constitute a Bankruptcy Court order approving the rejections, if any, of any Executory Contracts or Unexpired Leases as provided for in the Plan or the Rejected Executory Contract and Unexpired Leases List, as applicable.    Unless otherwise provided by a Final Order of the Bankruptcy Court, all Proofs of Claim with respect to Claims arising from the rejection of Executory Contracts or Unexpired Leases, pursuant to the Plan or the Confirmation Order, if any, must be filed with the Solicitation Agent and served on the Reorganized Debtors no later than thirty days after the effective date of such rejection.

Any Claims arising from the rejection of an Executory Contract or Unexpired Lease not filed with the Solicitation Agent within such time shall not be enforceable against the Debtors, the Reorganized Debtors, the Estates, or their property, without the need for any objection by the Debtors or Reorganized Debtors, or further notice to, action, order, or approval of the Bankruptcy Court or any other Entity, and any Claim arising out of the rejection of the Executory Contract or Unexpired Lease shall be deemed fully satisfied, released, and discharged, and be subject to the permanent injunction set forth in Article VIII.G of the Plan, notwithstanding anything in a Proof of Claim to the contrary.

 

37

All Claims arising from the rejection by any Debtor of any Executory Contract or Unexpired Lease pursuant to section 365 of the Bankruptcy Code shall be treated as a General Unsecured Claim pursuant to Article III.B of the Plan and may be objected to in accordance with the provisions of Article VII of the Plan and the applicable provisions of the Bankruptcy Code and Bankruptcy Rules.

 

  (c)

Cure of Defaults and Objections to Cure Amounts and Assumption.

Any monetary defaults under each Executory Contract and Unexpired Lease to be assumed pursuant to the Plan shall be satisfied, pursuant to section 365(b)(1) of the Bankruptcy Code, by payment of the Cure Amount in Cash on the Effective Date or in the ordinary course of business, subject to the limitation described below, or on such other terms as the parties to such Executory Contracts or Unexpired Leases may otherwise agree.

The Debtors shall provide notices of proposed Cure Amounts (if any) to counterparties to Executory Contracts and Unexpired Leases, which shall include a description of the procedures for objecting to assumption thereof based on the proposed Cure Amounts or the Reorganized Debtors’ ability to provide “adequate assurance of future performance thereunder” (within the meaning of section 365 of the Bankruptcy Code). Any objection by a counterparty to an Executory Contract or Unexpired Lease to a proposed assumption or related Cure Amount must be filed, served, and actually received by the counsel to the Debtors and the U.S. Trustee on the Confirmation Objection Deadline or other deadline that may be set by the Court. Any counterparty to an Executory Contract or Unexpired Lease that fails to object timely to the proposed assumption or Cure Amount shall be deemed to have assented to such assumption or Cure Amount.

The payment of the Cure Amount shall be made following the entry of a Final Order or orders resolving the dispute and approving the assumption in the event of a dispute regarding: (1) the amount of any payments to cure such a default; (2) the ability of the Reorganized Debtors or any assignee to provide adequate assurance of future performance under the Executory Contract or Unexpired Lease to be assumed; or (3) any other matter pertaining to assumption.

The Debtor or the Reorganized Debtor, as applicable, shall be authorized to reject any executory contract or unexpired lease to the extent the Debtor or the Reorganized Debtor, as applicable, in the exercise of its sound business judgment, concludes that the amount of the Cure obligation as determined by Final Order or as otherwise finally resolved, renders assumption of such contract or lease unfavorable to the applicable Debtor’s Estate or the Reorganized Debtor. Such rejected contracts, if any, shall be deemed as listed on the Rejected Executory Contract and Unexpired Lease List.

Assumption of any Executory Contract or Unexpired Lease pursuant to the Plan or otherwise shall result in the full release and satisfaction of any Claims or defaults, whether monetary or nonmonetary, including defaults of provisions restricting the change in control or ownership interest composition or other bankruptcy-related defaults, arising under any assumed Executory Contract or Unexpired Lease at any time prior to the effective date of assumption. Any Proof of Claim filed with respect to an Executory Contract or Unexpired Lease that has been assumed shall be deemed disallowed and expunged, without further notice to or action, order, or approval of the Bankruptcy Court.

 

  (d)

Insurance Policies.

Each of the Debtors’ insurance policies and any agreements, documents, or instruments relating thereto, are treated as Executory Contracts under the Plan. On the Effective Date, the Debtors shall be deemed to have assumed all insurance policies and any agreements, documents, and instruments relating to coverage of all insured Claims. Except as set forth in Article V.F of the Plan, nothing in the Plan, the Plan Supplement, the Disclosure Statement, the Confirmation Order, or any other order of the Bankruptcy Court (including any other provision that purports to be preemptory or supervening), (1) alters, modifies, or otherwise amends the terms and conditions of (or the coverage provided by) any of such insurance policies or (2) alters or modifies the duty, if any, that the insurers or third party administrators pay claims covered by such insurance policies and their right to seek payment or reimbursement from the Debtors (or after the Effective Date, the Reorganized Debtors) or draw on any collateral or security therefor. For the avoidance of doubt, insurers and third party administrators shall not need to nor be required to file or serve a cure objection or a request, application, claim, Proof of Claim, or motion for payment and shall not be subject to any claims bar date or similar deadline governing cure amounts or Claims.

 

38

  (e)

Indemnification Provisions.

On and as of the Effective Date, the Indemnification Provisions will be assumed and irrevocable and will survive the effectiveness of the Plan, and the Reorganized Debtors’ New Corporate Governance Documents will provide for the indemnification, defense, reimbursement, exculpation, and/or limitation of liability of, and advancement of fees and expenses to the Debtors’ and the Reorganized Debtors’ current and former directors, officers, employees and agents to the fullest extent permitted by law and at least to the same extent as the organizational documents of each of the respective Debtors on the Petition Date, against any claims or Causes of Action whether direct or derivative, liquidated or unliquidated, fixed or contingent, disputed or undisputed, matured or unmatured, known or unknown, foreseen or unforeseen, asserted or unasserted occurring before the Effective Date. None of the Debtors, or the Reorganized Debtors, as applicable, will amend and/or restate their respective governance documents before or after the Effective Date to amend, augment, terminate, or adversely affect any of the Debtors’ or the Reorganized Debtors’ obligations to provide such indemnification rights or such directors’, officers’, employees’, equityholders’ or agents’ indemnification rights.

On and as of the Effective Date, any of the Debtors’ indemnification obligations with respect to any contract or agreement that is the subject of or related to any litigation against the Debtors or Reorganized Debtors, as applicable, shall be assumed by the Reorganized Debtors and otherwise remain unaffected by the Chapter 11 Cases.

 

  (f)

Director, Officer, Manager, and Employee Liability Insurance.

On the Effective Date, pursuant to section 365(a) of the Bankruptcy Code, the Debtors shall be deemed to have assumed all of the D&O Liability Insurance Policies (including, if applicable, any “tail policy”) and any agreements, documents, or instruments relating thereto. Entry of the Confirmation Order will constitute the Bankruptcy Court’s approval of the Reorganized Debtors’ assumption of all such policies (including, if applicable, any “tail policy”).

After the Effective Date, none of the Debtors or the Reorganized Debtors shall terminate or otherwise reduce the coverage under any such policies (including, if applicable, any “tail policy”) with respect to conduct occurring as of the Effective Date, and all officers, directors, managers, and employees of the Debtors who served in such capacity at any time before the Effective Date shall be entitled to the full benefits of any such policies regardless of whether such officers, directors, managers, or employees remain in such positions after the Effective Date. Directors and officers shall be exculpated and indemnified by the Debtors and Reorganized Debtors to the extent of such insurance.

On and after the Effective Date, each of the Reorganized Debtors shall be authorized to purchase a directors’ and officers’ liability insurance policy for the benefit of their respective directors, members, trustees, officers, and managers in the ordinary course of business.

 

  (g)

Employee and Retiree Benefits.

Except as otherwise provided in the Plan, on and after the Effective Date, subject to any Final Order and, without limiting any authority provided to the Reorganized Chaparral Parent Board under the Debtors’ respective formation and constituent documents, the Reorganized Debtors shall: (1) amend, adopt, assume, and/or honor in the ordinary course of business any contracts, agreements, policies, programs, and plans, in accordance with their respective terms, for, among other things, compensation, including any incentive plans (but not equity or equity based compensation plans), retention plans, health care benefits, disability benefits, deferred compensation benefits, savings, severance benefits, retirement benefits, welfare benefits, workers’ compensation insurance, and accidental death and dismemberment insurance for the directors, officers, and employees of any of the Debtors who served in such capacity from and after the Petition Date and (2) honor, in the ordinary course of business, Claims of employees employed as of the Effective Date for accrued vacation time arising prior to the Petition Date and not otherwise paid pursuant to a Bankruptcy Court order. Pursuant to section 1129(a)(13) of the Bankruptcy Code, from and after the Effective Date, all retiree benefits (as such term is defined in section 1114 of the Bankruptcy Code), if any, shall continue to be paid in accordance with applicable law.

 

39

  (h)

Modifications, Amendments, Supplements, Restatements, or Other Agreements.

Unless otherwise provided in the Plan, each Executory Contract or Unexpired Lease that is assumed shall include all modifications, amendments, supplements, restatements, or other agreements that in any manner affect such Executory Contract or Unexpired Lease, and Executory Contracts and Unexpired Leases related thereto, if any, including easements, licenses, permits, rights, privileges, immunities, options, rights of first refusal, and any other interests, unless any of the foregoing agreements has been previously rejected or repudiated or is rejected or repudiated under the Plan.

Modifications, amendments, supplements, and restatements to prepetition Executory Contracts and Unexpired Leases that have been executed by the Debtors during the Chapter 11 Cases shall not be deemed to alter the prepetition nature of the Executory Contract or Unexpired Lease, or the validity, priority, or amount of any Claims that may arise in connection therewith.

 

  (i)

Reservation of Rights.

Neither the exclusion nor inclusion of any Executory Contract or Unexpired Lease on the Rejected Executory Contract and Unexpired Lease List, nor anything contained in the Plan or Plan Supplement shall constitute an admission by the Debtors that any such contract or lease is in fact an Executory Contract or Unexpired Lease or that any Reorganized Debtor has any liability thereunder.

If there is a dispute regarding whether a contract or lease is or was executory or unexpired at the time of assumption, the Debtors or the Reorganized Debtors, as applicable, shall have thirty calendar days following entry of a Final Order resolving such dispute to alter their treatment of such contract or lease, including by rejecting such contract or lease nunc pro tunc to the Confirmation Date. The deemed assumption provided for herein shall not apply to any such contract or lease, and any such contract or lease shall be assumed or rejected only upon motion of the Debtor following the Bankruptcy Court’s determination that the contract is executory or the lease is unexpired.

 

  (j)

Nonoccurrence of Effective Date.

In the event that the Effective Date does not occur, the Bankruptcy Court shall retain jurisdiction with respect to any request to extend the deadline for assuming or rejecting Unexpired Leases pursuant to section 365(d)(4) of the Bankruptcy Code, unless such deadline(s) have expired.

 

  (k)

Contracts and Leases Entered Into After the Petition Date.

Contracts and leases entered into after the Petition Date by any Debtor and any Executory Contracts and Unexpired Leases assumed by any Debtor may be performed by the applicable Reorganized Debtor in the ordinary course of business.    

 

  18.

Procedures for Resolving Disputed Claims and Interests.

 

  (a)

Disputed Claims and Interests Process

Holders of Claims and Interests need not file a Proof of Claim or Proof of Interest, as applicable, with the Bankruptcy Court and shall be subject to the Bankruptcy Court process only to the extent provided in the Plan, except to the extent a Claim arises on account of rejection of an Executory Contract or Unexpired Lease in accordance with Article V.B of the Plan On and after the Effective Date, except as otherwise provided in the Plan, all Allowed Claims shall be paid pursuant to the Plan in the ordinary course of business of the Reorganized Debtors and shall survive the Effective Date as if the Chapter 11 Cases had not been commenced. Other than Claims arising from the rejection of an Executory Contract or Unexpired Lease or any Prior Bankruptcy Equity Interests, if the Debtors or the Reorganized Debtors dispute any Claim or Interest, such dispute shall be determined, resolved, or adjudicated, as the case may be, in a manner as if the Chapter 11 Cases had not been commenced and shall survive the Effective Date as if the Chapter 11 Cases had not been commenced. Solely to the extent that an Entity is required to file a Proof of Claim and the Debtors or the Reorganized Debtors, as applicable, do not determine, and without the need for notice to or action, order, or approval of the Bankruptcy Court, that the Claim subject to such Proof of Claim is Allowed, such Claim shall be Disputed unless Allowed or disallowed by a Final Order or as otherwise set forth in Article VII of the Plan.

 

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Consistent with the terms of the Prior Bankruptcy Plan, to the extent any Prior Bankruptcy Claim becomes fixed, liquidated, and allowed in in the Prior Bankruptcy Cases, the Holder thereof shall be deemed to have an Allowed Prior Bankruptcy Equity Interest against the Debtors in a share total equal to the amount of the allowed Prior Bankruptcy Claim divided by $31.418. If any Prior Bankruptcy Claim is not fixed, liquidated, and allowed as of the Effective Date, the Holder thereof shall be deemed to have a Disputed Prior Bankruptcy Equity Interest as of the Effective Date until the Prior Bankruptcy Claim becomes fixed, liquidated, and allowed in the Prior Bankruptcy Case.

For the avoidance of doubt, there is no requirement to file a Proof of Claim or Proof of Interest (or move the Court for allowance) to be an Allowed Claim or Allowed Interest, as applicable, under the Plan. Notwithstanding the foregoing, Entities must file Cure Amount objections as set forth in Article V.C hereof to the extent such Entity disputes the Debtors’ proposed Cure Amount. All Proofs of Claim required to be filed by the Plan that are filed after the date that they are required to be filed pursuant to the Plan shall be disallowed and forever barred, estopped, and enjoined from assertion, and shall not be enforceable against any Reorganized Debtor, without the need for any objection by the Reorganized Debtors or any further notice to or action, order, or approval of the Bankruptcy Court.

 

  (b)

Claims Administration Responsibilities.

Except as otherwise specifically provided in the Plan, after the Effective Date, the Reorganized Debtors shall have the sole authority to: (1) file, withdraw, or litigate to judgment, objections to Claims or Interests; (2) settle or compromise any Disputed Claim or Interest without any further notice to or action, order, or approval by the Bankruptcy Court; and (3) administer and adjust the Claims Register to reflect any such settlements or compromises without any further notice to or action, order, or approval by the Bankruptcy Court. For the avoidance of doubt, except as otherwise provided in the Plan, from and after the Effective Date, each Reorganized Debtor shall have and retain any and all rights and defenses such Debtor had immediately prior to the Effective Date with respect to any Disputed Claim or Interest, including the Causes of Action retained pursuant to Article IV.P of the Plan.

 

  (c)

Estimation of Claims and Interests.

Before or after the Effective Date, the Debtors or the Reorganized Debtors, as applicable, may (but are not required to) at any time request that the Bankruptcy Court estimate any Disputed Claim or Interest that is contingent or unliquidated pursuant to section 502(c) of the Bankruptcy Code for any reason (including, for the avoidance of doubt, any Royalty Class Action Claim if the Royalty Class Action Settlement is not implemented), regardless of whether any party in interest previously has objected to such Claim or Interest or whether the Bankruptcy Court has ruled on any such objection, and the Bankruptcy Court shall retain jurisdiction to estimate any such Claim or Interest, including during the litigation of any objection to any Claim or Interest or during the appeal relating to such objection. Notwithstanding any provision otherwise in the Plan, a Claim that has been expunged from the Claims Register, but that either is subject to appeal or has not been the subject of a Final Order, shall be deemed to be estimated at zero dollars, unless otherwise ordered by the Bankruptcy Court. In the event that the Bankruptcy Court estimates any contingent or unliquidated Claim or Interest, that estimated amount shall constitute a maximum limitation on such Claim or Interest for all purposes under the Plan (including for purposes of distributions), and the relevant Reorganized Debtor may elect to pursue any supplemental proceedings to object to any ultimate distribution on such Claim or Interest.

 

  (d)

No Distributions Pending Allowance.

Notwithstanding any other provision of the Plan, if any portion of a Claim or Interest is a Disputed Claim or Interest, as applicable, no payment or distribution provided hereunder shall be made on account of such Claim or Interest unless and until such Disputed Claim or Interest becomes an Allowed Claim or Interest.

 

41

  (e)

Distributions After Allowance.

To the extent that a Disputed Claim or Interest ultimately becomes an Allowed Claim or Interest, distributions (if any) shall be made to the Holder of such Allowed Claim or Interest in accordance with the provisions of the Plan. As soon as reasonably practicable after the date that the order or judgment of the Bankruptcy Court allowing any Disputed Claim or Interest becomes a Final Order, the Distribution Agent shall provide to the Holder of such Claim or Interest the distribution (if any) to which such Holder is entitled under the Plan as of the Effective Date, without any interest to be paid on account of such Claim or Interest.

 

  (f)

No Interest.

Interest shall not accrue or be paid on any Disputed Claim with respect to the period from the Effective Date to the date a final distribution is made on account of such Disputed Claim, if and when such Disputed Claim becomes an Allowed Claim.

 

D.

Conditions Precedent to Confirmation and Consummation of the Plan.

 

  1.

Conditions Precedent to the Effective Date.

It shall be a condition to the Effective Date that the following conditions shall have been satisfied or waived pursuant to Article IX.B:

 

  •  

the Bankruptcy Court shall have entered an order approving the Disclosure Statement as containing adequate information with respect to the Plan within the meaning of section 1125 of the Bankruptcy Code;

 

  •  

the Bankruptcy Court shall have entered the Confirmation Order in form and substance acceptable to the Debtors, subject to the Creditor Approval Rights;

 

  •  

the Confirmation Order shall have been entered and shall not be subject to a stay nor have been rescinded, vacated or reversed on appeal;

 

  •  

the Debtors shall have obtained all authorizations, consents, regulatory approvals, rulings, or documents that are necessary to implement and effectuate the Plan;

 

  •  

all of the Definitive Documents shall be consistent with the Plan and the Restructuring Support Agreement, and where applicable, have been executed and remain in full force and shall be in form and substance subject to the Creditor Approval Rights;

 

  •  

the conditions under the Backstop Commitment Agreement shall have been satisfied or waived in accordance with its terms and the Backstop Commitment Agreement shall not have been terminated;

 

  •  

the Exit Facility is entered into and all conditions under the Exit Facility shall have been satisfied or waived in accordance with its terms;

 

  •  

the final version of the Plan Supplement and all of the schedules, documents, and exhibits contained therein, and all other schedules, documents, supplements and exhibits to the Plan, shall be consistent with the Plan and the Restructuring Support Agreement, shall be in form and substance subject to the Creditor Approval Rights;

 

  •  

the Plan shall not have been amended, altered or modified from the Plan as confirmed by the Confirmation Order, unless such material amendment, alteration or modification has been made in accordance with Section X.A of the Plan;

 

  •  

the New Corporate Governance Documents and the New Stockholders Agreement shall be in full force and effect (with all conditions precedent thereto having been satisfied or waived), subject to any applicable post-closing execution and delivery requirements;

 

  •  

the Royalty Class Action Settlement shall have been preliminarily approved by the Bankruptcy Court;

 

  •  

the payment in Cash in full of all Restructuring Expenses;

 

42

  •  

the Debtors shall have obtained all material authorizations, consents, regulatory approvals, rulings, or documents that are necessary to implement and effectuate the Plan and each of the other transactions contemplated by the Restructuring Support Agreement, including Bankruptcy Court approval, and such material authorizations, consents, regulatory approvals, rulings, or documents shall not be subject to unfulfilled conditions and shall be in full force and effect, and all applicable regulatory waiting periods will have expired;

 

  •  

the Debtors shall have complied, in all material respects, with the terms of the Plan that are to be performed by the Debtors on or prior to the Effective Date;

 

  •  

the Debtors shall have implemented the Restructuring Transactions in a manner consistent in all material respects with the Plan;

 

  •  

the Restructuring Support Agreement shall have been assumed pursuant to the Confirmation Order; and

 

  •  

all Professional Fee Claims and expenses of retained professionals required to be approved by the Bankruptcy Court shall have been paid in full or amounts sufficient to pay such fees and expenses after the Effective Date shall have been placed in the Professional Fee Escrow Account pending approval by the Bankruptcy Court.

 

  2.

Waiver of Conditions Precedent to Confirmation or the Effective Date.

Each condition to the Effective Date set forth in Article IX.A may be waived in whole or in part at any time by the Debtors, the Required Consenting Noteholders and the RBL Agent, without any notice to any other parties in interest and without any further notice to or action, order, or approval of the Bankruptcy Court, and without any formal action other than a proceeding to confirm the Plan or Consummate the Plan.

 

  3.

Substantial Consummation.

“Substantial Consummation” of the Plan, as defined in section 1101(2) of the Bankruptcy Code, with respect to any of the Debtors, shall be deemed to occur on the Effective Date with respect to such Debtor.

 

  4.

Effect of Non-Occurrence of Conditions to Consummation.

If the Effective Date does not occur with respect to any of the Debtors, the Plan shall be null and void in all respects with respect to such Debtor, and nothing contained in the Plan or the Disclosure Statement shall: (1) constitute a waiver or release of any Claims by or Claims against or Interests in such Debtors; (2) prejudice in any manner the rights of such Debtors, any Holders of a Claim or Interest, or any other Entity; or (3) constitute an admission, acknowledgment, offer, or undertaking by such Debtors, any Holders, or any other Entity in any respect.

 

E.

Settlement, Release, Injunction, and Related Provisions.

 

  1.

Compromise and Settlement of Claims, Interests, and Controversies.

Pursuant to section 1123 of the Bankruptcy Code and, to the extent applicable, Bankruptcy Rule 9019, and in consideration for the distributions and other benefits provided pursuant to the Plan, the provisions of the Plan shall constitute a good-faith compromise and settlement of all Claims, Interests, and controversies relating to the contractual, legal, and subordination rights that a Holder of a Claim or Interest may have with respect to any Allowed Claim or Interest, or any distribution to be made on account of such Allowed Claim or Interest. The entry of the Confirmation Order shall constitute the Bankruptcy Court’s approval of the compromise or settlement of all such Claims, Interests, and controversies, as well as a finding by the Bankruptcy Court that such compromise or settlement is in the best interests of the Debtors, their Estates, and Holders of Claims and Interests and is fair, equitable, and reasonable. In accordance with the provisions of the Plan and, to the extent applicable, pursuant to Bankruptcy Rule 9019, without any further notice to or action, order, or approval of the Bankruptcy Court, after the Effective Date, the Reorganized Debtors may compromise and settle Claims against, and Interests in, the Debtors and their Estates and Causes of Action against other Entities.

 

43

  2.

Discharge of Claims.

Pursuant to section 1141(d) of the Bankruptcy Code, and except as otherwise specifically provided in the Plan (including, with respect to the Contingent RBL Obligations, and the Contingent Senior Notes Obligations, in each case which are not discharged hereunder), or in any contract, instrument, or other agreement or document created or entered into pursuant to the Plan, the distributions, rights, and treatment that are provided in the Plan shall be in complete satisfaction, discharge, and release, effective as of the Effective Date, of Claims (including any Intercompany Claims resolved or compromised after the Effective Date by the Reorganized Debtors), Interests, and Causes of Action of any nature whatsoever, including any interest accrued on Claims or Interests from and after the Petition Date, whether known or unknown, against, liabilities of, Liens on, obligations of, rights against, and Interests in, the Debtors or any of their assets or properties, regardless of whether any property shall have been distributed or retained pursuant to the Plan on account of such Claims and Interests, including demands, liabilities, and Causes of Action that arose before the Effective Date, any liability (including withdrawal liability) to the extent such Claims or Interests relate to services performed by employees of the Debtors prior to the Effective Date and that arise from a termination of employment, any contingent or non-contingent liability on account of representations or warranties issued on or before the Effective Date, and all debts of the kind specified in section 502(g), 502(h), or 502(i) of the Bankruptcy Code, in each case whether or not: (1) a Proof of Claim based upon such debt or right is filed or deemed filed pursuant to section 501 of the Bankruptcy Code; (2) a Claim or Interest based upon such debt, right, or Interest is Allowed pursuant to section 502 of the Bankruptcy Code; or (3) the Holder of such a Claim or Interest has accepted the Plan or voted to reject the Plan. The Confirmation Order shall be a judicial determination of the discharge of all Claims and Interests subject to the occurrence of the Effective Date, except as otherwise specifically provided in the Plan or in any contract, instrument, or other agreement or document created or entered into pursuant to the Plan (including, with respect to the Contingent RBL Obligations and the Contingent Senior Notes Obligations, in each case which are not discharged hereunder).

 

  3.

Release of Liens.

Except (1) with respect to the Liens securing (a) the RBL Credit Facility, which Liens shall be retained by the Exit Facility Agent to secure the Exit Facility, (b) the New Convertible Notes, and (c) the Other Secured Claims that are Reinstated pursuant to the Plan, or (2) as otherwise provided in the Plan or in any contract, instrument, release, or other agreement or document created or entered into pursuant to the Plan, on the Effective Date, all mortgages, deeds of trust, Liens, pledges, or other security interests against any property of the Estates and, subject to the consummation of the applicable distributions contemplated in the Plan, shall be fully released and discharged, at the sole cost of and expense of the Reorganized Debtors, and the Holders of such mortgages, deeds of trust, Liens, pledges, or other security interests shall execute such documents as may be reasonably requested by the Debtors or the Reorganized Debtors, as applicable, to reflect or effectuate such releases, and all of the right, title, and interest of any Holders of such mortgages, deeds of trust, Liens, pledges, or other security interests shall revert to the applicable Reorganized Debtor and its successors and assigns.

 

  4.

Debtor Release.

Notwithstanding anything contained in the Plan to the contrary, effective as of the Effective Date, pursuant to section 1123(b) of the Bankruptcy Code, for good and valuable consideration provided by each of the Released Parties, the adequacy of which is hereby confirmed, on and after the Effective Date, each Released Party is deemed released and discharged by each and all of the Debtors, the Reorganized Debtors, and their Estates, in each case on behalf of themselves and their respective successors, assigns, and representatives, and any and all other entities who may purport to assert any Cause of Action, directly or derivatively, by, through, for, or because of the foregoing entities, from any and all Causes of Action, whether known or unknown, foreseen or unforeseen, existing or hereinafter arising, whether in law, equity or otherwise, including any derivative claims, asserted or assertable on behalf of any of the Debtors, that the Debtors, the Reorganized Debtors, or their Estates would have been legally entitled to assert in their own right (whether individually or collectively) or on behalf of the Holder of any Claim against, or Interest in, a Debtor or other Entity, based on or relating to, or in any manner arising from, in whole or in part, the Debtors (including the management, ownership, or operation thereof), the purchase, sale, or rescission of any security of the Debtors or the Reorganized Debtors, the subject matter of, or the transactions or events giving rise to, any Claim or Interest that is treated in the Plan, the business or contractual arrangements between any Debtor and any Released Party, the Debtors’ in- or out-of-court restructuring efforts, intercompany transactions, the Cash Collateral

 

44

Order, the RBL Credit Facility, the Senior Notes, the Chapter 11 Cases, the Restructuring Support Agreement, the formulation, preparation, dissemination, negotiation, entry into, or filing of, as applicable, the Restructuring Support Agreement and related prepetition transactions, any Definitive Document, the Disclosure Statement, the New Corporate Governance Documents, the Plan, the Rights Offering Documents, the Exit Facility, the Exit Facility Documents, the New Convertible Notes, the New Convertible Notes Indenture, the New Common Stock, the New Warrants, the New Warrants Agreements, or any Restructuring Transaction, contract, instrument, release, or other agreement or document created or entered into in connection with the Restructuring Support Agreement, the Disclosure Statement, the New Corporate Governance Documents, the New Stockholders Agreement, the Rights Offering, the Exit Facility, the New Convertible Notes, the New Common Stock, the New Warrants, or the Plan, the filing of the Chapter 11 Cases, the pursuit of Confirmation, the pursuit of Consummation, the administration and implementation of the Plan, including the issuance or distribution of Securities pursuant to the Plan, or the distribution of property under the Plan or any other related agreement, or upon any other act, or omission, transaction, agreement, event, or other occurrence taking place on or before the Effective Date. Notwithstanding anything to the contrary in the foregoing, the releases set forth above do not release any post-Effective Date obligations of any party or Entity under the Plan, any Restructuring Transaction, the Exit Facility, the New Convertible Notes, or any document, instrument, or agreement (including those set forth in the Plan Supplement, the Exit Facility, and the New Convertible Notes) executed to implement the Plan, including the assumption of the Indemnification Provisions as set forth in the Plan.

 

  5.

Third-Party Release.

Notwithstanding anything contained in the Plan to the contrary, effective as of the Effective Date, each Releasing Party, in each case on behalf of itself and its respective successors, assigns, and representatives, and any and all other entities who may purport to assert any Cause of Action, directly or derivatively, by, through, for, or because of the foregoing entities, is deemed to have released and discharged each Debtor, Reorganized Debtor, and Released Party from any and all Causes of Action, whether known or unknown, foreseen or unforeseen, existing or hereinafter arising, whether in law, equity or otherwise, including any derivative claims, asserted or assertable on behalf of any of the Debtors, that such Entity would have been legally entitled to assert (whether individually or collectively), based on or relating to, or in any manner arising from, in whole or in part, the Debtors (including the management, ownership, or operation thereof), the purchase, sale, or rescission of any security of the Debtors or the Reorganized Debtors, the subject matter of, or the transactions or events giving rise to, any Claim or Interest that is treated in the Plan, the business or contractual arrangements between any Debtor and any Released Party, the Debtors’ in- or out-of-court restructuring efforts, intercompany transactions, the Cash Collateral Order, the RBL Credit Facility, the Senior Notes, the Chapter 11 Cases, the Restructuring Support Agreement, the formulation, preparation, dissemination, negotiation, entry into, or filing of, as applicable, the Restructuring Support Agreement and related prepetition transactions, any Definitive Document, the Disclosure Statement, the New Corporate Governance Documents, the Plan, the Rights Offering Documents, the Exit Facility, the Exit Facility Documents, the New Convertible Notes, the New Convertible Notes Indenture, the New Common Stock, the New Warrants, the New Warrants Agreements, or any Restructuring Transaction, contract, instrument, release, or other agreement or document created or entered into in connection with the Restructuring Support Agreement, the Disclosure Statement, the New Corporate Governance Documents, the New Stockholders Agreement, the Rights Offering, the Exit Facility, the New Convertible Notes, the New Common Stock, the New Warrants, or the Plan (including, for the avoidance of doubt, providing any legal opinion requested by any Entity regarding any transaction, contract, instrument, document, or other agreement contemplated by the Plan or the reliance by any Released Party on the Plan or the Confirmation Order in lieu of such legal opinion), the filing of the Chapter 11 Cases, the pursuit of Confirmation, the pursuit of Consummation, the administration and implementation of the Plan, including the issuance or distribution of Securities pursuant to the Plan, or the distribution of property under the Plan or any other related agreement, or upon any other related act, or omission, transaction, agreement, event, or other occurrence taking place on or before the Effective Date. Notwithstanding anything to the contrary in the foregoing, the releases set forth above do not release any post-Effective Date obligations of any party or Entity under the Plan, any Restructuring Transaction, the Exit Facility, or any document, instrument, or agreement (including those set forth in the Plan Supplement) executed to implement the Plan, including the assumption of the Indemnification Provisions as set forth in the Plan.

 

45

  6.

Exculpation.

Notwithstanding anything contained herein to the contrary, effective as of the Effective Date, to the fullest extent permissible under applicable law and without affecting or limiting either the Debtor Release or the Third-Party Release, and except as otherwise specifically provided in the Plan, no Exculpated Party shall have or incur, and each Exculpated Party is released and exculpated from any Cause of Action for any claim related to any act or omission in connection with, relating to, or arising out of, the formulation, preparation, dissemination, negotiation, entry into, or filing of, as applicable, the Restructuring Support Agreement and related prepetition transactions, any Definitive Document, the Chapter 11 Cases, the Disclosure Statement, the New Corporate Governance Documents, the New Stockholders Agreement, the Plan, the Rights Offering Documents, the Exit Facility, the Exit Facility Documents, the New Convertible Notes Indenture, the New Common Stock, the New Warrants, or any Restructuring Transaction, contract, instrument, release, or other agreement or document created or entered into in connection with the Disclosure Statement or the Plan, the Rights Offering Documents, the filing of the Chapter 11 Cases, the pursuit of Confirmation, the pursuit of Consummation, the entry into the Exit Facility the administration and implementation of the Plan, including the issuance of Securities pursuant to the Plan, or the distribution of property under the Plan or any other related agreement (including, for the avoidance of doubt, providing any legal opinion requested by any Entity regarding any transaction, contract, instrument, document, or other agreement contemplated by the Plan or the reliance by any Exculpated Party on the Plan or the Confirmation Order in lieu of such legal opinion), except for claims related to any act or omission that is determined in a Final Order of a court of competent jurisdiction to have constituted actual fraud, willful misconduct, or gross negligence, but in all respects such Entities shall be entitled to reasonably rely upon the advice of counsel with respect to their duties and responsibilities pursuant to the Plan. The Exculpated Parties have, and upon completion of the Plan shall be deemed to have, participated in good faith and in compliance with the applicable laws with regard to the solicitation of votes and distribution of consideration pursuant to the Plan and, therefore, are not, and on account of such distributions shall not be, liable at any time for the violation of any applicable law, rule, or regulation governing the solicitation of acceptances or rejections of the Plan or such distributions made pursuant to the Plan. Notwithstanding anything to the contrary in the foregoing, the exculpation set forth above does not release any post Effective Date obligations of any party or Entity under the Plan, any Restructuring Transaction, the Exit Facility, the New Convertible Notes, or any document, instrument, or agreement (including those set forth in the Plan Supplement) executed to implement the Plan.

 

  7.

Injunction.

Effective as of the Effective Date, pursuant to section 524(a) of the Bankruptcy Code, to the fullest extent permissible under applicable law, and except as otherwise expressly provided in the Plan or for obligations issued or required to be paid pursuant to the Plan or the Confirmation Order and any post-Effective Date obligations of any party or Entity under the Plan, any Restructuring Transaction, the Exit Facility, or any document, instrument, or agreement (including those set forth in the Plan Supplement) executed to implement the Plan, all Entities that have held, hold, or may hold claims or interests that have been released, discharged, or are subject to exculpation are permanently enjoined, from and after the Effective Date, from taking any of the following actions against, as applicable, the Debtors, the Reorganized Debtors, the Exculpated Parties, or the Released Parties: (1) commencing or continuing in any manner any action or other proceeding of any kind on account of or in connection with or with respect to any such claims or interests; (2) enforcing, attaching, collecting, or recovering by any manner or means any judgment, award, decree, or order against such Entities on account of or in connection with or with respect to any such claims or interests; (3) creating, perfecting, or enforcing any encumbrance of any kind against such Entities or the property or the estates of such Entities on account of or in connection with or with respect to any such claims or interests; (4) asserting any right of setoff, subrogation, or recoupment of any kind against any obligation due from such Entities or against the property of such Entities on account of or in connection with or with respect to any such claims or interests unless such Holder has filed a motion requesting the right to perform such setoff on or before the Effective Date, and notwithstanding an indication of a claim or interest or otherwise that such Holder asserts, has, or intends to preserve any right of setoff pursuant to applicable law or otherwise; and (5) commencing or continuing in any manner any action or other proceeding of any kind on account of or in connection with or with respect to any such claims or interests released or settled pursuant to the Plan.

 

46

  8.

Protection Against Discriminatory Treatment.

In accordance with section 525 of the Bankruptcy Code, and consistent with paragraph 2 of Article VI of the United States Constitution, no Governmental Unit shall discriminate against any Reorganized Debtor, or any Entity with which a Reorganized Debtor has been or is associated, or deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, the Reorganized Debtors, or another Entity with whom the Reorganized Debtors have been associated, solely because such Reorganized Debtor was a Debtor under chapter 11, may have been insolvent before the commencement of the Chapter 11 Cases (or during the Chapter 11 Cases but before such Debtor was granted or denied a discharge), or has not paid a debt that is dischargeable in the Chapter 11 Cases.

 

  9.

Recoupment.

Except with respect to the Exit Facility or the New Convertible Notes, in no event shall any Holder of Claims or Interests be entitled to recoup any Claim or Interest against any claim, right, or Cause of Action of the Debtors or the Reorganized Debtors, as applicable, unless such Holder actually has performed such recoupment and provided notice thereof in writing to the Debtors on or before the Confirmation Date, notwithstanding any indication in any Proof of Claim or Interest or otherwise that such Holder asserts, has, or intends to preserve any right of recoupment.

 

  10.

Reimbursement or Contribution.

If the Bankruptcy Court disallows a Claim for reimbursement or contribution of an Entity pursuant to section 502(e)(1)(B) of the Bankruptcy Code, then to the extent that such Claim is contingent as of the Effective Date, such Claim shall be forever disallowed notwithstanding section 502(j) of the Bankruptcy Code, unless prior to the Effective Date (1) such Claim has been adjudicated as noncontingent, or (2) the relevant Holder of a Claim has filed a noncontingent Proof of Claim on account of such Claim and a Final Order has been entered determining such Claim as no longer contingent.

 

  11.

Term of Injunctions or Stays.

Unless otherwise provided in the Plan or in the Confirmation Order, all injunctions or stays in effect in the Chapter 11 Cases (pursuant to section 105 or 362 of the Bankruptcy Code or any order of the Bankruptcy Court) and existing on the Confirmation Date (excluding any injunctions or stays contained in the Plan or the Confirmation Order) shall remain in full force and effect until the Effective Date. All injunctions or stays contained in the Plan or the Confirmation Order shall remain in full force and effect in accordance with their terms.

 

  12.

Document Retention.

On and after the Effective Date, the Reorganized Debtors may maintain documents in accordance with their standard document retention policy, as may be altered, amended, modified, or supplemented by the Reorganized Debtors.

 

F.

Modification, Revocation, or Withdrawal of the Plan; Reservation of Rights.

 

  1.

Amendment and Modification of the Plan

Subject to the Creditor Approval Rights, the Debtors reserve the right to modify the Plan prior to Confirmation and seek Confirmation consistent with the Bankruptcy Code and, as appropriate, not resolicit votes on such modified Plan. Subject to certain restrictions and requirements set forth in section 1127 of the Bankruptcy Code and Bankruptcy Rule 3019 and subject to the reasonable consent of the Required Backstop Parties, the Required Consenting Noteholders, and the RBL Agent (other than with respect to immaterial amendments or modifications to the Plan), and those restrictions on modifications set forth in the Plan and the Restructuring Support Agreement, the Debtors expressly reserve their rights to alter, amend, or modify materially the Plan, one or more times, after Confirmation, and, to the extent necessary, may initiate proceedings in the Bankruptcy Court to so alter, amend, or modify the Plan, or remedy any defect or omission, or reconcile any inconsistencies in the Plan, the Disclosure Statement, or the Confirmation Order, in such matters as may be necessary to carry out the purposes and intent of the Plan; provided, however, that Article X.A of the Plan or any consent rights herein may be modified only with the consent of the Required Backstop Parties, the Required Consenting Noteholders, and the RBL Agent.

 

47

  2.

Effect of Confirmation on Modifications

Entry of the Confirmation Order shall constitute approval of all modifications to the Plan occurring after the solicitation thereof pursuant to section 1127(a) of the Bankruptcy Code and a finding that such modifications to the Plan do not require additional disclosure or resolicitation under Bankruptcy Rule 3019.

 

  3.

Revocation or Withdrawal of the Plan

The Debtors reserve the right, subject to the terms of the Restructuring Support Agreement, to revoke or withdraw the Plan before the Confirmation Date and to file subsequent chapter 11 plans. If the Debtors revoke or withdraw the Plan, or if the Confirmation Date or the Effective Date does not occur, then: (1) the Plan will be null and void in all respects; (2) any settlement or compromise embodied in the Plan, assumption of Executory Contracts or Unexpired Leases effected by the Plan, and any document or agreement executed pursuant hereto will be null and void in all respects; and (3) nothing contained in the Plan shall (a) constitute a waiver or release of any Claims, Interests, or Causes of Action, (b) prejudice in any manner the rights of any Debtor or any other Entity, or (c) constitute an admission, acknowledgement, offer, or undertaking of any sort by any Debtor or any other Entity.

VI. Confirmation of the Plan

 

A.

The Confirmation Hearing.

At the Confirmation Hearing, the Bankruptcy Court will determine whether to approve the Disclosure Statement and whether the Plan should be confirmed in light of both the affirmative requirements of the Bankruptcy Code and objections, if any, that are timely filed. The Confirmation Hearing may be adjourned from time to time without further notice except for an announcement of the adjourned date made at the Confirmation Hearing or the filing of a notice of such adjournment served in accordance with the order approving the Solicitation Procedures.

 

B.

Deadline to Object to Approval of the Disclosure Statement and Confirmation of the Plan.

Upon commencement of the Chapter 11 Cases and scheduling of the Confirmation Hearing, the Debtors will provide notice of the Confirmation Hearing, and, if approved by the Bankruptcy Court, the notice will provide that objections to the Disclosure Statement and Confirmation of the Plan must be filed and served at or before 4:00 p.m., prevailing Eastern Time, on September 21, 2020. Unless objections to the Disclosure Statement or Confirmation of the Plan are timely served and filed, they may not be considered by the Bankruptcy Court.

 

C.

Requirements for Approval of the Disclosure Statement.

Pursuant to sections 1125(g) and 1126(b) of the Bankruptcy Code, prepetition solicitation of votes to accept or reject a chapter 11 plan must comply with applicable federal or state securities laws and regulations (including the registration and disclosure requirements thereof) or, if such laws and regulations do not apply, provide “adequate information” under section 1125 of the Bankruptcy Code. At the Confirmation Hearing the Debtors will seek a determination from the Bankruptcy Court that the Disclosure Statement satisfies sections 1125(g) and 1126(b) of the Bankruptcy Code.

 

D.

Requirements for Confirmation of the Plan.

 

  1.

Requirements of Section 1129(a) of the Bankruptcy Code.

Among the requirements for Confirmation are the following: (a) the Plan is accepted by all impaired Classes of Claims and Interests or, if the Plan is rejected by an Impaired Class, at least one Impaired Class of Claims or Interests has voted to accept the Plan and a determination that the Plan “does not discriminate unfairly” and is “fair and equitable” as to Holders of Claims in all rejecting Impaired Classes; (b) the Plan is feasible; and (c) the Plan is in the “best interests” of Holders of Impaired Claims and Interests.

 

48

At the Confirmation Hearing, the Bankruptcy Court will determine whether the Plan satisfies the requirements of section 1129 of the Bankruptcy Code. The Debtors believe that the Plan satisfies or will satisfy all of the necessary requirements of chapter 11 of the Bankruptcy Code. Specifically, in addition to other applicable requirements, the Debtors believe that the Plan satisfies or will satisfy the applicable Confirmation requirements of section 1129 of the Bankruptcy Code set forth below.

 

  •  

The Plan complies with the applicable provisions of the Bankruptcy Code.

 

  •  

The Debtors, as the Plan proponents, have complied with the applicable provisions of the Bankruptcy Code.

 

  •  

The Plan has been proposed in good-faith and not by any means forbidden by law.

 

  •  

Any payment made or promised under the Plan for services or for costs and expenses in, or in connection with, the Chapter 11 Cases, or in connection with the Plan and incident to the Chapter 11 Cases, will be disclosed to the Bankruptcy Court, and any such payment: (a) made before Confirmation will be reasonable or (b) will be subject to the approval of the Bankruptcy Court as reasonable, if it is to be fixed after Confirmation.

 

  •  

Either each Holder of an Impaired Claim against or Interest in the Debtors will accept the Plan, or each non-accepting Holder will receive or retain under the Plan on account of such Claim or Interest, property of a value, as of the Effective Date, that is not less than the amount that the Holder would receive or retain if the Debtors were liquidated on that date under chapter 7 of the Bankruptcy Code.

 

  •  

Except to the extent that the Holder of a particular Claim agrees to a different treatment of its Claim, the Plan provides that, to the extent an Allowed Administrative Claim has not already been paid in full or otherwise satisfied during the Chapter 11 Cases, Allowed Administrative Claims and Other Priority Claims will be paid in full on the Effective Date, or as soon thereafter as is reasonably practicable.

 

  •  

At least one Class of Impaired Claims will have accepted the Plan, determined without including any acceptance of the Plan by any insider holding a Claim in that Class.

 

  •  

Confirmation is not likely to be followed by liquidation or the need for further financial reorganization of the Debtors or any successors thereto under the Plan.

 

  •  

All fees of the type described in 28 U.S.C. § 1930, including the fees of the U.S. Trustee, will be paid as of the Effective Date.

Section 1126(c) of the Bankruptcy Code provides that a class of claims has accepted a plan of reorganization if such plan has been accepted by creditors that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class. Section 1126(d) of the Bankruptcy Code provides that a class of interests has accepted a plan of reorganization if such plan has been accepted by holders of such interests that hold at least two-thirds in amount of the allowed interests of such class.

 

  2.

Debtor Release, Third-Party Release, Exculpation, and Injunction Provisions.

Article VIII of the Plan provides for releases of certain claims and Causes of Action the Debtors may hold against the Released Parties. The Released Parties are: (a) each of the Debtors; (b) the Reorganized Debtors; (c) the RBL Agent; (d) the Indenture Trustee; (e) the Ad Hoc Group and each member of the Ad Hoc Group; (f) Consenting Senior Noteholders; (g) each of the Backstop Parties; (h) the Exit Facility Lenders, Exit Facility Agent, New Convertible Notes Indenture Trustee, and holders of the New Convertible Notes; (i) each Holder of an RBL Claim or a Senior Notes Claim; (j) each Holder of a Chaparral Parent Equity Interest; (k) each current and former Affiliate of each Entity in clause (a) through the following clause (l); and (l) each Related Party of each Entity in clause (a) through this clause (l); provided, however, that in each case, an Entity shall not be a Released Party if it affirmatively elects to “opt out” of being a Releasing Party.

 

 

49

Article VIII of the Plan provides for releases of certain claims and Causes of Action that Holders of Claims may hold against the Released Parties in exchange for the good and valuable consideration and the valuable compromises made by the Released Parties (the “Third-Party Release”). The Holders of Claims who are releasing certain claims and Causes of Action against non-Debtors under the Third-Party Release include: (a) each of the Debtors; (b) the Reorganized Debtors; (c) the RBL Agent; (d) the Indenture Trustee; (e) the Ad Hoc Group and each member of the Ad Hoc Group; (f) the Consenting Senior Noteholders; (g) each of the Backstop Parties; (h) the Exit Facility Lenders, Exit Facility Agent, New Convertible Notes Indenture Trustee, and holders of the New Convertible Notes; (i) each Holder of an RBL Claim or a Senior Notes Claim that (i) votes to accept the Plan or (ii) votes to reject the Plan or does not vote to accept or reject the Plan and does not affirmatively elect on a timely submitted ballot to “opt out” of being a Releasing Party; (j) each Holder of a Chaparral Parent Equity Interest that does not affirmatively elect on a timely submitted opt out form to “opt out” of being a Releasing Party; (k) each Holder of a Claim or Interest (other than a Chaparral Parent Equity Interest) that is presumed to accept the Plan or deemed to reject the Plan and does not affirmatively elect to “opt out” of being a Releasing Party by timely filing with the Bankruptcy Court on the docket of the Chapter 11 Cases an objection to the Third-Party Release (or, in the case of any Claim that is a Royalty Class Action Claim, by affirmatively electing on a timely submitted opt out form to “opt out” of being a Releasing Party); (l) each current and former Affiliate of each Entity in clause (a) through the following clause (m); and (m) each Related Party of each Entity in clause (a) through this clause (m).

Article VIII of the Plan provides for the exculpation of each Exculpated Party for certain acts or omissions taken in connection with the Chapter 11 Cases. The released and exculpated claims are limited to those claims or Causes of Action that may have arisen in connection with, related to, or arising out of the Plan, this Disclosure Statement, or the Chapter 11 Cases. The Exculpated Parties are: (a) each of the Debtors; (b) each of the Reorganized Debtors; (c) any statutory committees appointed in the Chapter 11 Cases and each of their respective members; (d) each current and former Affiliate of each Entity in clause (a) through the following clause (e); and (e) each Related Party of each Entity in clause (a) through this clause (e).

Article VIII of the Plan permanently enjoins Entities who have held, hold, or may hold Claims, Interests, or Liens that have been discharged or released pursuant to the Plan or are subject to exculpation pursuant to the Plan from asserting such Claims, Interests, or Liens against each Debtor, the Reorganized Debtors, and the Released Parties.

Under applicable law, a debtor release of the Released Parties is appropriate where: (a) there is an identity of interest between the debtor and the third-party, such that a suit against the released non-debtor party is, at core, a suit against the debtor or will deplete assets of the estate; (b) there is a substantial contribution by the non-debtor of assets to the reorganization; (c) the injunction is essential to the reorganization; (d) there is overwhelming creditor support for the injunction; and (e) the chapter 11 plan will pay all or substantially all of the claims affected by the injunction. In re Indianapolis Downs, LLC, 486 B.R. 286, 303 (Bankr. D. Del. 2013). Importantly, these factors are “neither exclusive nor are they a list of conjunctive requirements,” but “[i]nstead, they are helpful in weighing the equities of the particular case after a fact-specific review.” Id. Further, a chapter 11 plan may provide for a release of third-party claims against non-debtors, such as the Third-Party Release, where such releases are consensual. Id. at 304–06. In addition, exculpation is appropriate where it applies to estate fiduciaries. Id. at 306. Finally, an injunction is appropriate where it is necessary to the reorganization and fair pursuant to section 105(a) of the Bankruptcy Code. In re W.R. Grace & Co., 475 B.R. 34, 107 (D. Del. 2012). In addition, approval of the releases, exculpations, and injunctions for each of the Released Parties and each Exculpated Party as part of Confirmation of the Plan will be limited to the extent such releases, exculpations, and injunctions are permitted by applicable law.

The Debtors believe that the releases, exculpations, and injunctions set forth in the Plan are appropriate because, among other things, the releases are narrowly tailored to the Debtors’ restructuring proceedings, and the releases and discharges of Claims and Causes of Action described in the Plan, including releases by the Debtors and by holders of Claims, constitute good-faith compromises and settlements of the matters covered thereby and are consensual. Such compromises and settlements are made in exchange for consideration and are in the best interest of Holders of Claims, are fair, equitable, reasonable, and are integral elements of the resolution of the Chapter 11 Cases in accordance with the Plan. Each of the discharge, release, indemnification and exculpation provisions set forth in the Plan (i) is within the jurisdiction of the Bankruptcy Court under sections 1334(a), 1334(b) and 1334(e) of title 28 of the United States Code, (ii) is an essential means of implementing the Plan, (iii) is an integral and non-severable element of the transactions incorporated into the Plan, (iv) confers a material benefit on, and is in the best interests of, the Debtors, their Estates and their Creditors, (v) is important to the overall objectives of the Plan to finally resolve all Claims among or against the parties in interest in the Chapter 11 Cases with respect to the Debtors, (vi) is fair, equitable and reasonable and in exchange for good and valuable consideration and (vii) is consistent with sections 105, 1123, 1129 and other applicable provisions of the Bankruptcy Code.

 

50

In addition, the Debtors believe the Third-Party Release is entirely consensual under the established case law in the United States Bankruptcy Court for the District of Delaware. See In re Indianapolis Downs, LLC, 486 B.R. at 304–06. The Debtors will be prepared to meet their burden to establish the basis for the releases, exculpations, and injunctions for each of the Released Parties and each Exculpated Party as part of Confirmation of the Plan.

 

  3.

Best Interests of Creditors — Liquidation Analysis.

Often called the “best interests” test, section 1129(a)(7) of the Bankruptcy Code requires that a bankruptcy court find, as a condition to confirmation, that a chapter 11 plan provides, with respect to each class, that each holder of a claim or an interest in such class either (a) has accepted the plan, or (b) will receive or retain under the plan property of a value, as of the effective date of the plan, that is not less than the amount that such holder would receive or retain if the debtors liquidated under chapter 7 of the Bankruptcy Code.

To demonstrate compliance with the “best interests” test, the Debtors, with the assistance of their advisors, prepared the Liquidation Analysis, attached hereto as Exhibit F, showing that the value of the distributions provided to Holders of Allowed Claims and Interests under the Plan would be the same or greater than under a hypothetical chapter 7 liquidation. Accordingly, the Debtors believe that the Plan is in the best interests of creditors.

 

  4.

Feasibility/Financial Projections.

Section 1129(a)(11) of the Bankruptcy Code requires that confirmation of a chapter 11 plan of reorganization is not likely to be followed by the liquidation of the reorganized debtor or the need for further financial reorganization of the debtor, or any successor to the debtor (unless such liquidation or reorganization is proposed in the chapter 11 plan). For purposes of determining whether the Plan meets this requirement, the Debtors have analyzed their ability to meet their obligations under the Plan. As part of this analysis, the Debtors have prepared certain unaudited pro forma financial statements with regard to the Reorganized Debtors (the “Financial Projections”), which projections and the assumptions upon which they are based are attached hereto as Exhibit D. Based on these Financial Projections, the Debtors believe the deleveraging contemplated by the Plan meets the financial feasibility requirement. Moreover, the Debtors believe that sufficient funds will exist to make all payments required by the Plan, including any Claims arising from or in connection with the Royalty Class Action Lawsuit. Accordingly, the Debtors believe that the Plan satisfies the feasibility requirement of section 1129(a)(11) of the Bankruptcy Code.

 

  5.

Acceptance by Impaired Classes.

The Bankruptcy Code requires that, except as described in the following section, each impaired class of claims or interests must accept a plan in order for it to be confirmed. A class that is not “impaired” under a plan is deemed to have accepted the plan and, therefore, solicitation of acceptances with respect to the class is not required. A class is “impaired” unless the plan: (a) leaves unaltered the legal, equitable, and contractual rights to which the claim or the interest entitles the holder of the claim or interest; (b) cures any default, reinstates the original terms of such obligation, compensates the holder for certain damages or losses, as applicable, and does not otherwise alter the legal, equitable, or contractual rights to which such claim or interest entitles the holder of such claim or interest; or (c) provides that, on the consummation date, the holder of such claim receives cash equal to the allowed amount of that claim or, with respect to any equity interest, the holder of such interest receives value equal to the greater of (i) any fixed liquidation preference to which the holder of such equity interest is entitled, (ii) the fixed redemption price to which such holder is entitled, or (iii) the value of the interest.

Section 1126(c) of the Bankruptcy Code defines acceptance of a plan by a class of impaired claims as acceptance by holders of at least two-thirds in dollar amount and more than one-half in number of allowed claims in that class, counting only those claims that actually voted to accept or to reject the plan. Thus, a class of claims will have voted to accept the plan only if two-thirds in amount and a majority in number of creditors actually voting cast their ballots in favor of acceptance. For a class of impaired interests to accept a plan, section 1126(d) of the Bankruptcy Code requires acceptance by interest holders that hold at least two-thirds in amount of the allowed interests of such class, counting only those interests that actually voted to accept or reject the plan. Thus, a class of interests will have voted to accept the plan only if two-thirds in amount actually voting cast their ballots in favor of acceptance.

 

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  6.

Confirmation Without Acceptance by All Impaired Classes.

Section 1129(b) of the Bankruptcy Code allows a bankruptcy court to confirm a plan even if not all impaired classes have accepted the plan; provided that the plan has been accepted by at least one impaired class of claims. Pursuant to section 1129(b) of the Bankruptcy Code, notwithstanding an impaired class rejection or deemed rejection of the plan, the plan will be confirmed, at the plan proponent’s request, in a procedure commonly known as “cramdown,” so long as the plan does not “discriminately unfairly” and is “fair and equitable” with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.

If any Impaired Class of Claims or Interests rejects the Plan, including Classes of Claims or Interests deemed to reject the Plan (as is the case for Classes 6, 7, 8, and 9), the Debtors will request Confirmation of the Plan, as it may be modified from time to time, utilizing the “cramdown” provision under section 1129(b) of the Bankruptcy Code. The Debtors reserve the right to modify the Plan in accordance with Article X of the Plan to the extent, if any, that Confirmation pursuant to section 1129(b) of the Bankruptcy Code requires modification, including by modifying the treatment applicable to a Class of Claims to render such Class of Claims Unimpaired to the extent permitted by the Bankruptcy Code and the Bankruptcy Rules or to withdraw the Plan as to such Debtor.

The Debtors believe that the Plan and the treatment of all Classes of Claims and Interests under the Plan satisfy the requirements for cramdown and the Debtors will be prepared to meet their burden to establish that the Plan can be Confirmed pursuant to section 1129(b) of the Bankruptcy Code as part of Confirmation of the Plan.

 

  (a)

No Unfair Discrimination.

The “unfair discrimination” test applies with respect to classes of claim or interests that are of equal priority but are receiving different treatment under a proposed plan. The test does not require that the treatment be the same or equivalent, but that the treatment be “fair.” In general, bankruptcy courts consider whether a plan discriminates unfairly in its treatment of classes of claims of equal rank (e.g., classes of the same legal character). Bankruptcy courts will take into account a number of factors in determining whether a plan discriminates unfairly. Under certain circumstances, a proposed plan may treat two classes of unsecured creditors differently without unfairly discriminating against either class.

With respect to the unfair discrimination requirement, all Classes under the Plan are provided treatment that is substantially equivalent to the treatment that is provided to other Classes that have equal rank. Accordingly, the Debtors believe that the Plan meets the standard to demonstrate that the Plan does not unfairly discriminate and the Debtors will be prepared to meet their burden to establish that there is no unfair discrimination as part of Confirmation of the Plan.

 

  (b)

Fair and Equitable Test.

The “fair and equitable” test applies to classes of different priority and status (e.g., secured versus unsecured) and includes the general requirement that no class of claims receive more than 100% of the amount of the allowed claims in such class. As to each non-accepting class and as set forth below, the test sets different standards depending on the type of claims or interests in such class. The Debtors believe that the Plan satisfies the “fair and equitable” requirement, notwithstanding the fact that certain Classes are deemed to reject the Plan. There is no Class receiving more than a 100% recovery and no junior Class is receiving a distribution under the Plan until all senior Classes have received a 100% recovery or agreed to receive a different treatment under the Plan.

 

  (ii)

Secured Claims.

The condition that a plan be “fair and equitable” to a non-accepting class of secured claims includes the requirements that: (A) the holders of such secured claims retain the liens securing such claims to the extent of the allowed amount of the claims, whether the property subject to the liens is retained by the debtor or transferred to another entity under the plan; and (B) each holder of a secured claim in the class receives deferred cash payments totaling at least the allowed amount of such claim with a value, as of the effective date, at least equivalent to the value of the secured claimant’s interest in the debtor’s property subject to the claimant’s liens.

 

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  (iii)

Unsecured Claims.

The condition that a plan be “fair and equitable” to a non-accepting class of unsecured claims includes the requirement that either: (A) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date, equal to the allowed amount of such claim; or (B) the holder of any claim or any interest that is junior to the claims of such class will not receive or retain any property under the plan on account of such junior claim or junior interest, subject to certain exceptions.

 

  (iv)

Interests.

The condition that a plan be “fair and equitable” to a non-accepting class of interests, includes the requirements that either: (A) the plan provides that each holder of an interest in that class receives or retains under the plan on account of that interest property of a value, as of the effective date, equal to the greater of: (1) the allowed amount of any fixed liquidation preference to which such holder is entitled; (2) any fixed redemption price to which such holder is entitled; or (3) the value of such interest; or (B) the holder of any interest that is junior to the interests of such class will not receive or retain any property under the plan on account of such junior interest.

 

  7.

The Structure of the Rights Offering Is Consistent with the Bankruptcy Code.

The Bankruptcy Code does not require the right to participate in a new investment to be extended to all members of a particular class if certain members of the class are participants. Creditors may receive separate consideration on account of a commitment to provide new money, assuming such consideration is provided in good-faith and on terms generally consistent with the market.

Section 1123(a)(4) of the Bankruptcy Code requires that a plan provide the same treatment for each claim or interest in a particular class unless a holder of a particular claim or interest agrees to less favorable treatment. See 11 U.S.C. § 1123(a)(4). Courts agree that section 1123(a)(4) of the Bankruptcy Code does not require identical treatment for all members of a class. See In re W.R. Grace & Co., 729 F.3d 311, 327 (3d Cir. 2013) (“[T]he ‘same treatment’ standard of section 1123(a)(4) does not require that all claimants within a class receive the same amount of money.”); In re Adelphia Commc’ns Corp., 368 B.R. 140, 249–50 (Bankr. S.D.N.Y. 2007) (“The requirements of section 1123(a)(4) apply only to a plan’s treatment on account of particular claims or interests in a specific class—not the treatment that members of the class may separately receive under a plan on account of the class members’ other rights or contributions.”).

Several courts have applied section 1123(a)(4) in the context of a new money investment and held that it was permissible for a stakeholder to receive additional consideration on account of a new money investment. See e.g., In re Peabody Energy Corp., 933 F.3d 918, 925 (8th Cir. 2019) (holding that the right to participate in the private capital raise was not on account of the creditors’ claim but rather consideration for valuable new commitments to support the plan and backstop the preferred and common stock offering); In re CHC Group Ltd., No. 16-31854, 2017 Bankr. LEXIS 1016, at *53–54 (Bankr. N.D. Tex. Mar. 3, 2017) (overruling a section 1123(a)(4) plan objection and stating that fees paid to plan sponsors in return for their commitment to backstop a rights offering pursuant to the plan was a commitment fee to the backstop parties as consideration to bear the attendant risks and not a payment on account of the backstop parties’ prepetition claims and therefore did not constitute impermissible disparate treatment in violation of section 1123(a)(4) of the Bankruptcy Code).

Here, all Holders of Claims are receiving the same treatment on account of their Claims under the Plan. To the extent that certain Holders receive additional consideration in the form of the Backstop Premium, that consideration is not on account of their Claims. Rather, that consideration is on account of the valuable commitments provided by certain Holders, pursuant to the Restructuring Support Agreement and the Backstop Commitment Agreement, to support and backstop the Rights Offering. Therefore, the Plan complies with section 1123(a)(4) of the Bankruptcy Code.

 

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  8.

Valuation of the Debtors.

The Debtors’ investment bankers, Rothschild and Intrepid, have prepared an independent valuation analysis, which is attached to this Disclosure Statement as Exhibit E (the “Valuation Analysis”). The Valuation Analysis should be considered in conjunction with the Risk Factors discussed in Section VIII of this Disclosure Statement, entitled “Risk Factors,” and the Financial Projections. The Valuation Analysis is dated as of July 15, 2020, and is based on data and information as of that date. Holders of Claims should carefully review the information in Exhibit E in its entirety. The Debtors believe that the Valuation Analysis demonstrates that the Plan is “fair and equitable” to the non-accepting classes.

VII. Voting Instructions

 

A.

Overview.

Holders of Claims entitled to vote should carefully read the below voting instructions.

 

B.

Solicitation Procedures.

 

  1.

Solicitation Agent.

The Debtors have proposed to retain Kurtzman Carson Consultants LLC to act, among other things, as the Solicitation Agent in connection with the solicitation of votes to accept or reject the Plan. The Solicitation Agent will process and tabulate Ballots for each Class entitled to vote to accept or reject the Plan and will file the Voting Report as soon as practicable after the Voting Deadline.

 

  2.

Solicitation Package.

The following materials constitute the solicitation package (the “Solicitation Package”) distributed to Holders of Claims in the Voting Classes:

 

  •  

the Debtors’ cover letter in support of the Plan;

 

  •  

the appropriate Ballot and applicable voting instructions, together with a pre-addressed, postage prepaid return envelope; and

 

  •  

this Disclosure Statement and all exhibits hereto, including the Plan and all exhibits thereto (which may be distributed in paper or USB-flash drive format).

 

  3.

Voting Deadline.

The period during which Ballots with respect to the Plan will be accepted by the Debtors will terminate at 5:00 p.m. prevailing Eastern Time on September 15, 2020 for Class 3 and Class 4 unless the Debtors extend the date until which Ballots will be accepted. Except to the extent that the Debtors so determine or as permitted by the Bankruptcy Court, Ballots that are received after the Voting Deadline will not be counted or otherwise used by the Debtors in connection with the Debtors’ request for Confirmation of the Plan (or any permitted modification thereof).

Subject to the consent rights of the Consenting Creditors on the terms set forth in the Restructuring Support Agreement, the Debtors reserve the right, at any time or from time to time, to extend the period of time (on a daily basis, if necessary) during which Ballots will be accepted for any reason, including determining whether or not the requisite number of acceptances have been received, by making a public announcement of such extension no later than the first Business Day next succeeding the previously announced Voting Deadline. The Debtors will give notice of any such extension in a manner deemed reasonable to the Debtors in their discretion. There can be no assurance that the Debtors will exercise its right to extend the Voting Deadline.

 

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  4.

Distribution of the Solicitation Package and Plan Supplement.

The Debtors caused the Solicitation Agent to distribute the Solicitation Package to Holders of Claims in the Voting Classes on August 15, 2020, which is 31 days before the Voting Deadline.

The Solicitation Package (except the Ballots) may also be obtained from the Solicitation Agent by (a) calling the Solicitation Agent at (866) 523-2941 (toll-free) or (781) 575-2044 or (b) writing to the following address: Kurtzman Carson Consultants LLC, 222 N. Pacific Coast Highway, Suite 300, El Segundo, California 90245. When the Debtors file the Chapter 11 Cases, you may also obtain copies of any pleadings filed with the Bankruptcy Court for free by visiting the Debtors’ restructuring website, http://www.kccllc.net/chaparral2020 or for a fee at https://ecf.deb.uscourts.gov/.

The Debtors will file the Plan Supplement in accordance with the terms of the Plan. As the Plan Supplement is updated or otherwise modified, such modified or updated documents will be made available on the Debtors’ restructuring website. The Debtors will not serve paper or CD-ROM copies of the Plan Supplement.    However, parties may obtain a copy of the Plan Supplement at no cost from the Solicitation Agent by: (a) calling the Solicitation Agent at one of the telephone numbers set forth above or (b) visiting the Debtors’ restructuring website, http://www.kccllc.net/chaparral2020.

 

C.

Voting Procedures.

August 11, 2020 (the “Voting Record Date”) is the date that was used for determining which Holders of Claims are entitled to vote to accept or reject the Plan and receive the Solicitation Package in accordance with the solicitation procedures. Except as otherwise set forth herein, the Voting Record Date and all of the Debtors’ solicitation and voting procedures shall apply to all of the Debtors’ creditors and other parties in interest.

In order for the Holder of a Claim in the Voting Classes to have such Holder’s Ballot counted as a vote to accept or reject the Plan, such Holder’s Ballot must be properly completed, executed, and delivered by (a) using the enclosed prepaid, pre-addressed return envelope; (b) via first-class mail, overnight courier, or hand delivery to the Solicitation Agent at Chaparral 2020 Ballot Processing c/o Kurtzman Carson Consultants LLC, 222 N. Pacific Coast Highway, Suite 300, El Segundo, California 90245; (c) solely for holders of Class 3 RBL Claims, via email to Chaparral2020Info@kccllc.com so that such Holder’s Ballot is actually received by the Solicitation Agent before the Voting Deadline; or (d) solely for holders of Class 4 Senior Notes Claims, in a return envelope addressed to your Nominee or via email to your Nominee, in accordance with the instructions provided by your Nominee, and, in any event, with sufficient time to permit your Nominee to deliver your vote(s) on a completed Master Ballot so that it is actually received by the Solicitation Agent by the Voting Deadline.

The Debtors are providing the Solicitation Package to Holders of Class 3 RBL Claims and Class 4 Senior Notes Claims. If a Holder of a Claim in a Voting Class transfers all of such Claim to one or more parties on or after the Voting Record Date and before the Holder has cast its vote on the Plan, such Claim is automatically deemed to have provided a voting proxy to the purchaser(s) of the Holder’s Claim and such purchaser(s) shall be deemed to be the Holder(s) thereof as of the Voting Record Date for purposes of voting on the Plan, provided that the transfer complies with the applicable requirements under the Restructuring Support Agreement, if applicable.

IF A BALLOT IS RECEIVED AFTER THE VOTING DEADLINE, IT WILL NOT BE COUNTED UNLESS THE DEBTORS DETERMINE OTHERWISE.

ANY BALLOT THAT IS PROPERLY EXECUTED BY THE HOLDER OF A CLAIM BUT THAT DOES NOT CLEARLY INDICATE AN ACCEPTANCE OR REJECTION OF THE PLAN OR ANY BALLOT THAT INDICATES BOTH AN ACCEPTANCE AND A REJECTION OF THE PLAN WILL NOT BE COUNTED FOR PURPOSES OF ACCEPTING OR REJECTING THE PLAN.

EACH HOLDER OF A CLAIM MUST VOTE ALL OF ITS CLAIMS WITHIN A PARTICULAR CLASS EITHER TO ACCEPT OR REJECT THE PLAN AND MAY NOT SPLIT SUCH VOTES. BY SIGNING AND RETURNING A BALLOT, EACH HOLDER OF A CLAIM WILL CERTIFY TO THE BANKRUPTCY COURT AND THE DEBTORS THAT NO OTHER BALLOTS WITH RESPECT TO SUCH CLAIM HAVE BEEN CAST OR, IF ANY OTHER BALLOTS HAVE BEEN CAST WITH RESPECT TO SUCH CLASS OF CLAIMS, SUCH OTHER BALLOTS INDICATED THE SAME VOTE TO ACCEPT OR REJECT THE PLAN. IF A HOLDER CASTS MULTIPLE BALLOTS WITH RESPECT TO THE SAME CLASS OF CLAIMS AND THOSE BALLOTS ARE IN CONFLICT WITH EACH OTHER, SUCH BALLOTS WILL NOT BE COUNTED FOR PURPOSES OF ACCEPTING OR REJECTING THE PLAN.

 

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IT IS IMPORTANT THAT THE HOLDER OF A CLAIM IN THE VOTING CLASSES FOLLOWS THE SPECIFIC INSTRUCTIONS PROVIDED ON SUCH HOLDER’S BALLOT.

 

D.

Voting Tabulation.

A Ballot does not constitute, and shall not be deemed to be, a Proof of Claim or an assertion or admission of a Claim. Only Holders of Claims in the Voting Classes shall be entitled to vote with regard to such Claims.

Unless the Debtors decide otherwise, Ballots received after the Voting Deadline may not be counted. A Ballot shall be deemed delivered only when the Solicitation Agent actually receives the executed Ballot as instructed in the applicable voting instructions. No Ballot should be sent to the Debtors, the Debtors’ agents (other than the Solicitation Agent) or the Debtors’ financial or legal advisors.

The Bankruptcy Code may require the Debtors to disseminate additional solicitation materials if the Debtors make material changes to the terms of the Plan or if the Debtors waive a material condition to confirmation of the Plan. In that event, the solicitation will be extended to the extent directed by the Bankruptcy Court.

To the extent there are multiple Claims within Voting Classes, the Debtors may, in their discretion, and to the extent possible, aggregate the Claims of any particular Holder within a Voting Class for the purpose of counting votes.

In the event a designation of lack of good-faith is requested by a party in interest under section 1126(e) of the Bankruptcy Code, the Bankruptcy Court will determine whether any vote to accept and/or reject the Plan cast with respect to that Claim will be counted for purposes of determining whether the Plan has been accepted and/or rejected.

The following Ballots will not be counted in determining the acceptance or rejection of the Plan: (a) any Ballot that is illegible or contains insufficient information to permit the identification of the Holder; (b) any Ballot cast by a person or entity that does not hold a Claim that is entitled to vote on the Plan; (c) any unsigned Ballot; (d) any Ballot not marked to accept or reject the Plan, or marked both to accept and reject the Plan; (e) any Ballot received after the Voting Deadline, unless otherwise determined by the Debtors; and (f) any Ballot submitted by a party not entitled to cast a vote with respect to the Plan.

As soon as practicable after the Voting Deadline, the Solicitation Agent will file the Voting Report with the Bankruptcy Court. The Voting Report shall, among other things, delineate every Ballot that does not conform to the voting instructions or that contains any form of irregularity (each an “Irregular Ballot”), including those Ballots that are late or (in whole or in material part) illegible, unidentifiable, lacking signatures or lacking necessary information, or damaged. The Solicitation Agent will attempt to reconcile the amount of any Claim reported on a Ballot with the Debtors’ records, but in the event such amount cannot be timely reconciled without undue effort on the part of the Solicitation Agent, the amount shown in the Debtors’ records shall govern. The Voting Report also shall indicate the Debtors’ intentions with regard to such Irregular Ballots. Neither the Debtors nor any other Person or Entity will be under any duty to provide notification of defects or irregularities with respect to delivered Ballots other than as provided in the Voting Report, nor will any of them incur any liability for failure to provide such notification.

VIII.     Risk Factors

BEFORE TAKING ANY ACTION WITH RESPECT TO THE PLAN, HOLDERS OF CLAIMS AGAINST THE DEBTORS WHO ARE ENTITLED TO VOTE TO ACCEPT OR REJECT THE PLAN SHOULD READ AND CONSIDER CAREFULLY THE RISK FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS DISCLOSURE STATEMENT, THE PLAN, AND THE DOCUMENTS DELIVERED TOGETHER HEREWITH, REFERRED TO, OR INCORPORATED BY REFERENCE INTO THIS DISCLOSURE STATEMENT, INCLUDING OTHER DOCUMENTS FILED WITH THE BANKRUPTCY COURT IN THE CHAPTER 11 CASES. THE RISK FACTORS SHOULD NOT BE REGARDED AS CONSTITUTING THE ONLY RISKS PRESENT IN CONNECTION WITH THE DEBTORS’ BUSINESSES OR THE RESTRUCTURING AND CONSUMMATION OF THE PLAN. EACH OF THE RISK FACTORS DISCUSSED IN THIS DISCLOSURE STATEMENT MAY APPLY EQUALLY TO THE DEBTORS AND THE REORGANIZED DEBTORS, AS APPLICABLE AND AS CONTEXT REQUIRES.

 

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A.

Risks Related to the Restructuring.

 

  1.

The Debtors Will Consider All Available Restructuring Alternatives If the Restructuring Transactions Are Not Implemented, and Such Alternatives May Result in Lower Recoveries for Holders of Claims Against the Debtors.

Subject to the terms of the Restructuring Support Agreement, if the Restructuring Transactions are not consummated, the Debtors thereafter will consider all available restructuring alternatives, including filing an alternative chapter 11 plan, converting to a chapter 7 plan, commencing section 363 sales of the Debtors’ assets and any other transaction that would maximize the value of the Debtors’ estates. The terms of any alternative restructuring proposal may be less favorable to Holders of Claims against the Debtors than the terms of the Plan as described in this Disclosure Statement. Any material delay in the confirmation of the Plan, the Chapter 11 Cases, or the threat of rejection of the Plan by the Bankruptcy Court, would add substantial expense and uncertainty to the process.

The uncertainty surrounding a prolonged restructuring would have other adverse effects on the Debtors. For example, it would adversely affect (i) the Debtors’ ability to raise additional capital, (ii) the Debtors’ liquidity, (iii) how the Debtors’ business is viewed by investors, lenders, and credit ratings agencies, (iv) the Debtors’ enterprise value, and (v) the Debtors’ business relationships.

 

  2.

Even If the Restructuring Transactions Are Successful, the Debtors Will Continue to Face Risks.

The Restructuring Transactions are generally designed to reduce the Debtors’ cash interest expense, improve the Debtors’ liquidity and provide the Debtors’ greater flexibility. Even if the Restructuring Transactions are implemented, the Debtors will continue to face a number of risks, including certain risks that are beyond the Debtors’ control, such as changes in economic conditions, the potential persistence of the COVID-19 pandemic and its direct and indirect effects on the global economy, changes in the Debtors’ industry and changes in commodity prices. As a result of these risks, there is no guarantee that the Restructuring Transactions will achieve the Debtors’ stated goals.

 

  3.

Risks Related to the Exit Facility, the New Convertible Notes, New Common Stock, and New Warrants.

The following are some of the risks that apply to Holders of Claims against the Debtors or other parties who become Holders of the Exit Facility Loans, the New Convertible Notes, the New Common Stock, or New Warrants pursuant to the Plan. There are additional risk factors related to the Exit Facility, the New Convertible Notes, New Common Stock, and New Warrants that Holders of Claims against the Debtors should consider before deciding to vote to accept or reject the Plan.

  (a)

The Consideration Under the Plan Does Not Reflect any Independent Valuation of Claims against or Interests in the Debtors.

The Debtors have not obtained or requested an opinion from any bank or other firm as to the fairness of the consideration under the Plan.

 

  (b)

The Terms of the Exit Facility Documents, the New Convertible Notes, New Common Stock, and New Warrants Are Subject to Change Based on Negotiation and the Approval of the Bankruptcy Court.

 

57

The terms of the Exit Facility Documents, the New Convertible Notes Indenture, the New Common Stock, and the New Warrants are subject to change based on negotiations between the Debtors and the Required Consenting Creditors. Holders of Claims that are not the Required Consenting Creditors will not participate in these negotiations and the results of such negotiations may alter the terms of the Exit Facility Documents, the New Convertible Notes Indenture, the New Common Stock, or the New Warrants in a material manner. As a result, the final terms of the Exit Facility Documents, the New Convertible Notes Indenture, the New Common Stock, and New Warrants may be less favorable to Holders of certain Claims (provided that such final terms would be consistent with the Plan and the requirements of the Bankruptcy Code).

 

  (c)

Certain Significant Holders of New Interests May Have Substantial Influence over the Reorganized Debtors Following the Effective Date. Assuming that the Effective Date occurs, holders of Claims who receive distributions representing a substantial percentage of the outstanding shares of the New Common Stock may be in a position to influence matters requiring approval by the holders of shares of new common shares, including, among other things, the election of directors and the approval of a change of control of the Reorganized Debtors.

 

  (d)

Holders of the New Common Stock May Experience Dilution of Their Ownership Interests.

Holders of the New Common Stock will be subject to dilution of their ownership interests in connection with any equity that may be issued post-emergence, including through the Management Incentive Plan and the conversion of any options, warrants, convertible securities, exercisable securities, or other securities post-emergence, including the New Convertible Notes and the New Warrants.

 

  (e)

The Interests of Holders of the New Common Stock Will be Subordinated to Reorganized Chaparral’s Indebtedness.

In any subsequent liquidation, dissolution, or winding up of the Reorganized Debtors, the New Common Stock would rank below all debt claims against the Reorganized Debtors. As a result, Holders of the New Common Stock will not be entitled to receive any payment or other distribution of assets upon the liquidation, dissolution, or winding up of the Reorganized Debtors until after all applicable Holders of debt have been paid in full.

 

  (f)

Reorganized Chaparral May Not Pay Dividends on the New Common Stock.

Reorganized Chaparral may not pay any dividends on the New Common Stock. In such circumstances, the success of an investment in the Reorganized Debtors will depend entirely upon any future appreciation in the value of the New Common Stock. There is, however, no guarantee that the New Common Stock will appreciate in value or even maintain its initial implied valuation.

 

  (g)

The Exit RBL Credit Facility Will Be Secured Only to the Extent of the Value of the Assets Granted as Security for the Exit RBL Credit Facility. The Fair Market Value of the Reorganized Debtors Upon Any Foreclosure May Not Be Sufficient to Repay the Holders of the Exit Revolving Loans and/or Second Out Term Loans in Full.

The Exit Facility Loans will be secured by a first-priority lien on substantially the same assets as the RBL Credit Facility (the “Exit Facility Collateral”). The fair market value of the Exit Facility Collateral may not be sufficient to repay the Exit Facility Loans and all of the Holders of other debt holding a security interest in the Exit Facility Collateral, if any, upon any foreclosure. The fair market value of the Exit Facility Collateral is subject to fluctuations based on factors that include, among other things, a decline in revenue in the Debtors’ businesses. The amount to be received by creditors upon a sale of any Exit Facility Collateral would be dependent on numerous factors, including the value obtainable by selling the Exit Facility Collateral at the time, general market and economic conditions, and the timing and the manner of sale.

In the event that a subsequent bankruptcy or similar proceeding is commenced by or against the Reorganized Debtors, Holders of the Exit Revolving Loans or Second Out Term Loans may be deemed to have an unsecured claim if the Exit Revolving Loans or Second Out Term Loans exceed the value of the Exit Facility Collateral. Upon a finding by a bankruptcy court that the Exit Revolving Loans or Second Out Term Loans are undersecured, the Claims in the bankruptcy proceeding with respect to such debt instruments, absent an election by the Holders of the obligations under the Exit Credit Facility pursuant to section 1111(b) of the Bankruptcy Code, would be bifurcated between a Secured Claim and an Unsecured Claim, and the Unsecured Claim would not be entitled to the benefits of security in the Exit Facility Collateral. Additionally, some or all accrued but unpaid interest may be disallowed in any bankruptcy proceeding.

 

 

58

The security interests granted in favor of the administrative agent under the Exit Facility Documents (the “Exit Facility Agent”) are subject to practical problems generally associated with the realization of security interests in collateral. For example, the Exit Facility Agent may need to obtain the consent of a third-party to obtain or enforce a security interest in a contract, and the Debtors cannot assure Holders of the Exit Facility Loans that the Exit Facility Agent will be able to obtain any such consent. The consents of any third parties may not be given when required to facilitate a foreclosure on any particular assets. Accordingly, the Exit Facility Agent may not have the ability to foreclose upon such assets, and the value of the Exit Facility Collateral may significantly decrease.

The Reorganized Debtors’ ability to make scheduled payments on their debt obligations depends on their financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business, and other factors beyond the Reorganized Debtors’ control. The Reorganized Debtors may not be able to maintain a level of cash flow sufficient to permit them to pay the principal, premium, if any, and interest on their debt, including the Exit Facility Loans.

If cash flows and capital resources are insufficient to fund the Reorganized Debtors’ debt obligations, they could face substantial liquidity problems and might be forced to reduce or delay investments and capital expenditures, or to dispose of assets or operations, seek additional capital or restructure or refinance debt, including the Exit Credit Facility. These alternative measures may not be successful, may not be completed on economically attractive terms, or may not be adequate to satisfy their debt obligations when due.

Further, if the Reorganized Debtors suffer or appear to suffer from a lack of available liquidity, the evaluation of their creditworthiness by counterparties and rating agencies and the willingness of third parties to do business with them could be adversely affected.

 

  (h)

The New Convertible Notes Will Be Secured Only to the Extent of the Value of the Assets Granted as Security for the New Convertible Notes. The Fair Market Value of the Reorganized Debtors Upon Any Foreclosure May Not Be Sufficient to Repay the Holders of the New Convertible Notes in Full.

The New Convertible Notes will be secured by a second-priority lien on substantially the same assets as the Exit Facility (the “New Convertible Notes Collateral”). The fair market value of the New Convertible Notes Collateral may not be sufficient to repay the New Convertible Notes and all of the Holders of other debt holding a security interest in the New Convertible Notes Collateral, if any, upon any foreclosure. The fair market value of the New Convertible Notes Collateral is subject to fluctuations based on factors that include, among other things, a decline in revenue in the Debtors’ businesses. The amount to be received by creditors upon a sale of any New Convertible Notes Collateral would be dependent on numerous factors, including the value obtainable by selling the New Convertible Notes Collateral at the time, general market and economic conditions, and the timing and the manner of sale.

In the event that a subsequent bankruptcy or similar proceeding is commenced by or against the Reorganized Debtors, Holders of the New Convertible Notes may be deemed to have an unsecured claim if the New Convertible Notes exceed the value of the New Convertible Notes Collateral. Upon a finding by a bankruptcy court that the New Convertible Notes are undersecured, the Claims in the bankruptcy proceeding with respect to such debt instrument, absent an election by the Holders of the New Convertible Notes pursuant to section 1111(b) of the Bankruptcy Code, would be bifurcated between a Secured Claim and an Unsecured Claim, and the Unsecured Claim would not be entitled to the benefits of security in the New Convertible Notes Collateral. Additionally, some or all accrued but unpaid interest may be disallowed in any bankruptcy proceeding.

The security interests granted in favor of the indenture trustee under the New Convertible Notes Indenture (the “New Convertible Notes Indenture Trustee”) are subject to practical problems generally associated with the realization of security interests in collateral. For example, the New Convertible Notes Indenture Trustee may need to obtain the consent of a third-party to obtain or enforce a security interest in a contract, and the Debtors cannot assure Holders of the New Convertible Notes that the New Convertible Notes Indenture Trustee will be able to obtain any such consent. The consents of any third parties may not be given when required to facilitate a foreclosure on any particular assets. Accordingly, the New Convertible Notes Indenture Trustee may not have the ability to foreclose upon such assets, and the value of the New Convertible Notes Collateral may significantly decrease.

 

59

The Reorganized Debtors’ ability to make scheduled payments on their debt obligations depends on their financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business, and other factors beyond the Reorganized Debtors’ control. The Reorganized Debtors may not be able to maintain a level of cash flow sufficient to permit them to pay the principal, premium, if any, and interest on their debt, including the New Convertible Notes.

If cash flows and capital resources are insufficient to fund the Reorganized Debtors’ debt obligations, they could face substantial liquidity problems and might be forced to reduce or delay investments and capital expenditures, or to dispose of assets or operations, seek additional capital or restructure or refinance debt, including the New Convertible Notes. These alternative measures may not be successful, may not be completed on economically attractive terms, or may not be adequate to satisfy their debt obligations when due.

Further, if the Reorganized Debtors suffer or appear to suffer from a lack of available liquidity, the evaluation of their creditworthiness by counterparties and rating agencies and the willingness of third parties to do business with them could be adversely affected.

 

  4.

Risk of Recharacterization of New Convertible Notes.

Recharacterization of a debt obligation as a capital contribution is an equitable remedy a bankruptcy court may direct if it determines, upon an objection raised by a party in interest, a purported debt obligation is more properly characterized as a capital contribution. In making such a determination, bankruptcy courts consider, among other things, whether the parties intended to create a debt obligation and the nature of the instrument evidencing the obligation. Although the Debtors believe, and intend, the New Convertible Notes to be a bona fide debt obligation, there can be no assurance a bankruptcy court would agree with the Debtors’ interpretation.

 

  5.

The New Convertible Notes May Not Be Rated or May Receive a Lower Rating than Anticipated.

It is not expected that the Reorganized Debtors will seek a rating on the New Convertible Notes. If, however, one or more rating agencies rates the New Convertible Notes and assigns them a rating lower than the rating expected by investors, or reduces its rating in the future, the market price of the New Convertible Notes, and/or the New Equity could be reduced.

 

  6.

A Decline in the Reorganized Debtors’ Credit Ratings Could Negatively Affect the Debtors’ Ability to Access the Capital Markets in the Future.

The Debtors’ or the Reorganized Debtors’ credit ratings could be lowered, suspended, or withdrawn entirely, at any time, by the rating agencies, if, in each rating agency’s judgment, circumstances warrant, including as a result of exposure to the credit risk and the business and financial condition of the Debtors or the Reorganized Debtors, as applicable. Downgrades in the Reorganized Debtors’ long-term debt ratings may make it more difficult to refinance their debt and increase the cost of any debt that they may incur in the future.

 

  7.

Risks Related to Confirmation and Consummation of the Plan.

 

  (a)

The Restructuring Support Agreement May Be Terminated.

To the extent that events giving rise to termination of the Restructuring Support Agreement occur, the Restructuring Support Agreement may terminate prior to the Confirmation or Consummation of the Plan, which could result in the loss of support for the Plan by important creditor constituencies and could result in the loss of use of cash collateral by the Debtors under certain circumstances. Any such loss of support could adversely affect the Debtors’ ability to confirm and consummate the Plan.

 

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  (b)

The Exit Facility Commitments and/or Backstop Commitments May Be Terminated.

To the extent that events giving rise to termination of the Exit Facility commitments or the Backstop Commitment Agreement occur, the Exit Facility commitments or backstop commitments, as appropriate, may terminate prior to Confirmation or Consummation of the Plan, which could adversely affect the Debtors’ ability to confirm and consummate the Plan.

 

  (c)

Conditions Precedent to Confirmation May Not Occur.

As more fully set forth in Article IX of the Plan, the occurrence of Confirmation and the Effective Date are each subject to a number of conditions precedent. If each condition precedent to Confirmation is not met or waived, the Plan will not be confirmed, and if each condition precedent to Consummation is not met or waived, the Effective Date will not take place. In the event that the Plan is not confirmed or is not consummated, the Debtors may seek Confirmation of a new plan. Pursuit of a new plan would be subject to limitations in the Cash Collateral Order and may require consents or concessions from the RBL Lenders. The Debtors can provide no assurances that such consents or concessions would be obtained. If the Debtors do not secure sufficient working capital to continue their operations or if the new plan is not confirmed, however, the Debtors may be forced to liquidate their assets.

 

  (d)

The Debtors May Not Be Able to Satisfy Vote Requirements.

Pursuant to section 1126(c) of the Bankruptcy Code, section 1129(a)(7)(A)(i) of the Bankruptcy Code will be satisfied with respect to Class 3 and Class 4 if Holders of at least two-thirds in amount and more than one-half in number of the Allowed Claims in each Class that vote on the Plan cast votes to accept the Plan. There is no guarantee that the Debtors will receive the necessary acceptances from Holders of Claims in the Voting Classes.

 

  (d)

The Debtors May Not Be Able to Secure Confirmation.

Section 1129 of the Bankruptcy Code sets forth the requirements for confirmation of a chapter 11 plan, and requires, among other things, a finding by the bankruptcy court that: (i) the plan “does not unfairly discriminate” and is “fair and equitable” with respect to any non-accepting Classes; (ii) the plan is not likely to be followed by a liquidation or a need for further financial reorganization unless liquidation or reorganization is contemplated by the plan; and (iii) the value of distributions to non-accepting Holders of Claims within a particular Class under the plan will not be less than the value of distributions such Holders would receive if the debtor were liquidated under chapter 7 of the Bankruptcy Code.

There can be no assurance that the requisite acceptances to confirm the Plan will be received. Even if the requisite acceptances are received, there can be no assurance that the Bankruptcy Court will confirm the Plan. A dissenting Holder of an Allowed Claim or Interest might challenge either the adequacy of this Disclosure Statement or whether the voting results satisfy the requirements of the Bankruptcy Code or Bankruptcy Rules. Even if the Bankruptcy Court determines that this Disclosure Statement and the voting results are appropriate, the Bankruptcy Court can decline to confirm the Plan if it finds that any of the statutory requirements for Confirmation have not been met, including the requirements described above.

If the Plan is not confirmed, it is unclear what distributions, if any, Holders of Allowed Claims and Interests will receive with respect to their Allowed Claims and Interests, as applicable.

Subject to the limitations contained in the Plan and the consent rights of the Consenting Creditors on the terms set forth in the Restructuring Support Agreement, the Debtors reserve the right to modify the Plan and seek Confirmation consistent with the Bankruptcy Code and, as appropriate, not resolicit votes on such modified Plan. Any modifications could result in a less favorable treatment of any Class than the treatment currently provided in the Plan, such as a distribution of property to the Class affected by the modification of a lesser value than currently provided in the Plan.

 

  (e)

Parties in Interest May Object to the Plan’s Classification of Claims and Interests.

Section 1122 of the Bankruptcy Code provides that a plan may place a claim or an equity interest in a particular class only if such claim or equity interest is substantially similar to the other claims or equity interests in such class. The Debtors believe that the classification of the Claims and Interests under the Plan complies with the requirements set forth in the Bankruptcy Code because the Debtors created Classes of Claims and Interests each encompassing Claims or Interests, as applicable, that are substantially similar to the other Claims or Interests, as applicable, in each such Class. Nevertheless, there can be no assurance that the Bankruptcy Court will reach the same conclusion.

 

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  (f)

Parties in Interest May Object to the Releases Contained in the Plan.

Confirmation is also subject to the Bankruptcy Court’s approval of the settlement, release, injunction, and related provisions described in Article VIII of the Plan. Certain parties in interest may assert that the Debtors cannot demonstrate that they meet the standards for approval of releases, exculpations, and injunctions established by the United States Court of Appeals for the Third Circuit.

 

  (g)

The Debtors May Not Be Able to Pursue Nonconsensual Confirmation Over Certain Impaired Non-Accepting Classes.

Generally, a bankruptcy court may confirm a plan under the Bankruptcy Code’s “cramdown” provisions over the objection of an impaired non-accepting class of claims or interests if at least one impaired class of claims has accepted the plan (with acceptance being determined without including the vote of any “insider” in that accepting class), and, as to each impaired class that has not accepted the plan, the bankruptcy court determines that the plan “does not discriminate unfairly” and is “fair and equitable” with respect to the rejecting impaired classes.

As to Classes 3 and 4 (RBL Claims and Senior Notes Claims, respectively), the Debtors believe they have secured Plan support from the Holders of Claims in excess of the requisite two-thirds in amount of the Allowed Class 3 RBL Claims and Allowed Class 4 Senior Notes Claims pursuant to the Restructuring Support Agreement and the Debtors believe that they will secure Plan support from Holders of Claims in excess of the requisite one-half in number of the Allowed Class 3 RBL Claims and Allowed Class 4 Senior Notes Claims—the amounts required for an accepting Class of Claims pursuant to section 1126(c) of the Bankruptcy Code. However, there is no guarantee that the Consenting Creditors will vote their Claims favor of the Plan and no guarantee that Holders of Allowed Class 3 RBL Claims and Allowed Class 4 Senior Notes Claims in excess of the requisite one-half in number will vote in favor of the Plan. There can be no assurances that the Debtors will confirm a chapter 11 plan and emerge as a reorganized company in that event, and it is unclear what distributions, if any, Holders of Allowed Claims and Interests will receive with respect to their Allowed Claims and Interests in that instance. In addition, the pursuit of an alternative restructuring proposal may result in, among other things, increased expenses relating to Professional Fee Claims.

Finally, to the extent that a Voting Class votes to reject the Plan, the Debtors will not be able to seek to “cramdown” such Voting Class under section 1129(b) of the Bankruptcy Code if there is no other impaired Class of Claims entitled to vote under the Plan.

 

  (h)

The Debtors May Object to the Amount or Classification of a Claim or Interest.

Except as otherwise provided in the Plan, the Debtors reserve the right to object to the amount or classification of any Claim or Interest under the Plan. The estimates set forth in this Disclosure Statement cannot be relied upon by any Holder of a Claim or Interest where such Claim or Interest is subject to an objection or dispute. Any Holder of a Claim or Interest that is subject to an objection or dispute may not receive its expected share of the estimated distributions described in this Disclosure Statement.

 

  (i)

The Effective Date May Not Occur.

Although the Debtors believe that the Effective Date may occur quickly after the Confirmation Date, there can be no assurance as to such timing or as to whether the Effective Date will, in fact, occur.

 

B.

Risks Related to Recoveries Under the Plan.

 

  1.

The Debtors’ Historical Financial Information May Not Be Comparable to the Financial Information of the Reorganized Debtors.

As a result of Consummation and the transactions contemplated thereby, the financial condition and results of operations of the Reorganized Debtors from and after the Effective Date may not be comparable to the financial condition or results of operations reflected in the Debtors’ historical financial statements.

 

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  2.

The Debtors May Not Be Able to Achieve Their Projected Financial Results or Meet Their Post-Restructuring Debt Obligations.

The Financial Projections represent management’s best estimate of the future financial performance of the Debtors or the Reorganized Debtors, as applicable, based on currently known facts and assumptions about future operations of the Debtors or the Reorganized Debtors, as applicable, as well as the U.S. and world economy in general and the relevant industry in which the Debtors operate. There is no guarantee that the Financial Projections will be realized, and actual financial results may differ significantly from the Financial Projections. To the extent the Reorganized Debtors do not meet their projected financial results or achieve projected revenues and cash flows, the Reorganized Debtors may lack sufficient liquidity to continue operating as planned after the Effective Date, may be unable to service their debt obligations as they come due, or may not be able to meet their operational needs, all of which may negatively affect the value of the Exit Facility Loans, the New Convertible Notes, and the New Common Stock. Further, a failure of the Reorganized Debtors to meet their projected financial results could lead to cash flow and working capital constraints, which may require the Debtors to seek additional working capital. The Reorganized Debtors may be unable to obtain such working capital when required, or may only be able to obtain such capital on unreasonable or cost prohibitive terms. For example, the Reorganized Debtors may be required to take on additional debt, the interest costs of which could adversely affect the results of the operations and financial condition of the Reorganized Debtors, and also have a negative effect on the value of the Exit Facility Loans, the New Convertible Notes, and the New Common Stock. In addition, if any such required capital is obtained in the form of equity, the New Common Stock to be issued to Holders of Allowed Class 4 Senior Notes Claims under the Plan could be diluted.

 

  3.

Estimated Valuations of the Debtors, the Exit Facility Loans, the New Common Stock, the New Convertible Notes, and the New Warrants and Estimated Recoveries to Holders of Allowed Claims and Interests Are Not Intended to Represent Potential Market Values.

The Debtors’ estimated recoveries to Holders of Allowed Claims and Allowed Interests are not intended to represent the market value of the Debtors’ Securities. The estimated recoveries are based on numerous assumptions (the realization of many of which will be beyond the control of the Debtors), including: (a) the successful reorganization of the Debtors; (b) an assumed date for the occurrence of the Effective Date; (c) the Debtors’ ability to achieve the operating and financial results included in the Financial Projections; (d) the Debtors’ ability to maintain adequate liquidity to fund operations; and (e) the assumption that capital and equity markets remain consistent with current conditions.

 

  4.

Certain Tax Implications of the Debtors’ Bankruptcy and Reorganization May Increase the Tax Liability of the Reorganized Debtors.

Holders of Allowed Claims should carefully review Section X of this Disclosure Statement, entitled “Certain U.S. Federal Tax Consequences of the Plan,” to determine how the tax implications of the Plan and the Chapter 11 Cases may adversely affect the Debtors.

 

C.

Risks Related to the Offer and Issuance of Securities Under the Plan.

 

  1.

The Debtors Do Not Intend to Offer to Register or to Exchange the New Common Stock, the New Convertible Notes, or the New Warrants in a Registered Exchange Offer.

The New Common Stock, the New Convertible Notes, and the New Warrants will not be registered under the Securities Act or any state securities laws and, subject to the discussion of Section 1145 of the Bankruptcy Code in Section V.C.5 above, the discussion below and the discussion in Section IX of this Disclosure Statement, entitled “Important Securities Laws Disclosures” unless so registered, may not be re-offered or re-sold except pursuant to an exemption from the registration requirements of the Securities Act and applicable state securities laws. The Debtors intend to take all steps necessary to de-list all securities from all security exchanges and de-register under the Securities Exchange Act. In addition, upon emergence from bankruptcy the Debtors intend to suspend any continuing reporting obligations under the Securities Exchange Act as promptly as possible. Accordingly, Chaparral Energy, Inc. will cease to be subject to the reporting requirements of the Securities Exchange Act, and Holders of the New Common Stock, the New Convertible Notes, and the New Warrants will not be entitled to any information except as expressly required by the New Stockholders Agreement.

 

 

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To the extent that any New Common Stock, the New Convertible Notes, and New Warrants issued under the Plan is covered by section 1145 of the Bankruptcy Code, it may be resold by the Holders thereof without registration under the Securities Act unless the Holder is an “underwriter,” as defined in section 1145(b) of the Bankruptcy Code with respect to such securities; provided, however, shares of such securities will not be freely tradable if, at the time of transfer, the Holder is an “affiliate” of the Reorganized Chaparral as defined in Rule 144(a)(1) under the Securities Act and has not been such an “affiliate” within ninety days of such transfer. Such affiliate Holders would only be permitted to sell such securities without registration if they are able to comply with an applicable exemption from registration, including Rule 144 under the Securities Act. Resales by Persons who receive New Common Stock, the New Convertible Notes, or New Warrants pursuant to the Plan that are deemed to be “underwriters” would not be exempted by section 1145 of the Bankruptcy Code from registration under the Securities Act or applicable law. Such Persons would only be permitted to sell such securities without registration if they are able to comply with an applicable exemption from registration, including Rule 144 under the Securities Act.

The information which the Debtors are required to provide in order to issue the New Common Stock, the New Convertible Notes, or the New Warrants may be less than the Debtors would be required to provide if the New Common Stock, the New Convertible Notes, or New Warrants were registered. Among other things, the Debtors may not be required to provide: (a) separate financial information for any subsidiary; (b) selected historical consolidated financial data of Chaparral; (c) selected quarterly financial data of Chaparral; (d) certain information about the Debtors’ disclosure controls and procedures and their internal controls over financial reporting; and (e) certain information regarding the Debtors’ executive compensation policies and practices and historical compensation information for their executive officers. This lack of information could impair your ability to evaluate your ownership and the marketability of the New Common Stock, the New Convertible Notes, or the New Warrants.

 

  2.

There Is No Established Market for the New Common Stock, the New Convertible Notes, or the New Warrants.

The New Common Stock, the New Convertible Notes, and the New Warrants will be new issuances of securities, and there is no established trading market for those securities. You may not be able to sell your New Common Stock, the New Convertible Notes, or the New Warrants at a particular time or at favorable prices. As a result, the Debtors cannot assure you as to the liquidity of any trading market for the New Common Stock, the New Convertible Notes, or the New Warrants. Accordingly, you may be required to bear the financial risk of your ownership of the New Common Stock, the New Convertible Notes, and the New Warrants indefinitely. If a trading market were to develop, future trading prices of the New Common Stock, the New Convertible Notes, or the New Warrants may be volatile and will depend on many factors, including: (a) the Debtors’ operating performance and financial condition; (b) the interest of securities dealers in making a market for them; and (c) the market for similar securities.

The Debtors do not intend to apply for the New Common Stock, the New Convertible Notes, or the New Warrants to be listed on any securities exchange or to arrange for quotation on any automated dealer quotation system and the New Warrants and the New Convertible Notes may not be transferred or resold except in a transaction exempt from or not subject to the registration requirements of the Securities Act and the applicable state securities laws.

 

  3.

Pending Lawsuits May Affect the Value of Securities to Be Issued Under the Plan and Recoveries Under the Plan.

The Debtors are subject to Claims in various legal proceedings, including the Royalties Class Action Lawsuit, and the Debtors or the Reorganized Debtors may become subject to other legal proceedings in the future. The ultimate outcome of each of these matters cannot presently be determined, nor can the liability that may potentially result from a negative outcome be reasonably estimated. The liability the Debtors may ultimately incur with respect to any one of these matters in the event of a negative outcome may potentially be material to the Debtors’ or the Reorganized Debtors’ business, financial condition, or operations and may ultimately affect the value of the Reorganized Debtors’ securities to be issued under the Plan and recoveries under the Plan, including by diluting the value of the New Common Stock being issued pursuant to the Plan. Even if the Debtors are ultimately successful, if any Claim related to a pending lawsuit is not resolved quickly, the Debtors may be required to reserve shares until such Claim is formally Disallowed, which may also, at least temporarily, affect the value of the Reorganized Debtors’ securities to be issued under the Plan.

 

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  4.

The Settlement of the Royalty Class Action Lawsuit May Not be Consummated.

The effectiveness of the settlement of the Royalty Class Action Lawsuit is subject to a number of conditions precedent, including the approval of the settlement by the Bankruptcy Court under Rule 9019 of the Federal Rules of Bankruptcy Procedure and Rule 23 of the Federal Rules of Civil Procedure. In addition, the Settlement Agreement may be terminated if members of the settlement class who have claims that, in the aggregate, exceed ten percent of the settlement proceeds elect to opt out of the settlement. If conditions precedent is not met, or the Settlement Agreement is terminated, the settlement will not become effective and the Debtors will not have obtained a consensual release from the Royalty Class Action Claims. In the event that the settlement is not approved by the Bankruptcy Court or the Settlement Agreement is terminated, the plaintiffs to the Settlement Class Action Lawsuit are expected to continue to pursue their alleged claims in the Bankruptcy Court, the Prior Bankruptcy Court, or the Oklahoma District Court. Pursuit of a revised settlement may require additional concessions from the Debtors.

 

  5.

The Debtors Could Modify the Rights Offering Procedures.

The Debtors may modify the Rights Offering Procedures to among other things, include additional procedures, as needed, to administer the Rights Offering and comply with applicable law. Such modifications may adversely affect the rights of Rights Offering Participants.

 

  6.

The Restructuring Support Agreement May Be Terminated and Thus Terminate the Rights Offering.

As stated above, as set forth in Section 10 of the Restructuring Support Agreement, the Restructuring Support Agreement may be terminated upon the occurrence of certain events. Termination of the Restructuring Support Agreement will result in termination of the Rights Offering and the Backstop Commitment Agreement. Additionally, the Rights Offering is subject to approval by the Bankruptcy Court, and there is no guarantee that the Bankruptcy Court will grant its approval.

 

D.

Risk Factors Related to the Business Operations of the Debtors and Reorganized Debtors.

 

  1.

The Debtors May Not Be Able to Generate Sufficient Cash to Service All of Their Indebtedness.

The Debtors’ ability to make scheduled payments on or refinance their debt obligations depends on the Debtors’ financial condition and operating performance, which are subject to prevailing economic, industry, and competitive conditions and to certain financial, business, legislative, regulatory, and other factors beyond the Debtors’ control. The Debtors may be unable to maintain a level of cash flow from operating activities sufficient to permit the Debtors to pay the principal, premium, if any, and interest on their indebtedness, including potential borrowings under the Exit Facility upon emergence.

 

  2.

The Debtors Will File Voluntary Petitions for Relief Under Chapter 11 of the Bankruptcy Code and Will Be Subject to the Risks and Uncertainties Associated With Any Chapter 11 Restructuring.

For the duration of the Chapter 11 Cases, the Debtors’ operations and the Debtors’ ability to execute their business strategy will be subject to the risks and uncertainties associated with bankruptcy. These risks include, among other things:

 

  •  

the Debtors’ ability to obtain approval of the Bankruptcy Court with respect to pleadings and motion papers filed in the Chapter 11 Cases from time to time;

 

  •  

the Debtors’ ability to obtain creditor and Bankruptcy Court approval for, and then to Consummate, the Plan to emerge from bankruptcy;

 

  •  

the occurrence of any event, change, or other circumstance that could give rise to the termination of the Restructuring Support Agreement;

 

65

  •  

the Debtors’ ability to obtain and maintain normal trade terms with service providers and maintain contracts that are critical to their operations;

 

  •  

the Debtors’ ability to attract, motivate, and retain key employees; and

 

  •  

the Debtors’ ability to fund and execute their business plan.

The Debtors will also be subject to risks and uncertainties with respect to the actions and decisions of creditors and other third parties who have interests in the Chapter 11 Cases that may be inconsistent with the Plan.

These risks and uncertainties could affect the Debtors’ businesses and operations in various ways. For example, negative events or publicity associated with the Chapter 11 Cases could adversely affect the Debtors’ relationships with their suppliers and employees, which, in turn, could adversely affect the Debtors’ operations and financial condition. Also, pursuant to the Bankruptcy Code, the Debtors need Bankruptcy Court approval for transactions outside the ordinary course of business, which may limit their ability to timely respond to certain events or take advantage of certain opportunities. Because of the risks and uncertainties associated with the Chapter 11 Cases, the Debtors cannot predict or quantify the ultimate effect that events occurring during the Chapter 11 Cases will have on their businesses, financial condition, and results of operations.

As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors in possession, and subject to approval of the Bankruptcy Court, or otherwise as permitted in the normal course of business or Bankruptcy Court order, the Debtors may sell or otherwise dispose of assets and liquidate or settle liabilities. Further, the Plan could materially change the amounts and classifications of assets and liabilities reported in the historical consolidated financial statements. The historical consolidated financial statements do not include any adjustments to the reported amounts of assets or liabilities that might be necessary as a result of Confirmation.

 

  3.

Operating in Bankruptcy for a Long Period of Time May Harm the Debtors’ Businesses.

The Debtors’ future results will be dependent upon the successful confirmation and implementation of the Plan or alternative restructuring transaction. A long period in chapter 11 could have a material adverse effect on the Debtors’ businesses, financial condition, results of operations, and liquidity. For example, senior management will be required to spend a significant amount of resources on the Debtors’ reorganization efforts instead of exclusively on operations if the cases continue for a prolonged period. In addition, the longer the chapter 11 cases, the more likely it is that suppliers will lose confidence in the Debtors’ ability to reorganize successfully and will seek to establish alternative commercial relationships. Moreover, a longer case means that the Debtors will be required to incur additional professional and administrative fees and expenses, which could require additional debtor-in-possession financing to fund those costs as well as operations. If the Debtors are unable to obtain such financing on favorable terms or at all, the chances of successfully reorganizing may be seriously jeopardized, the likelihood that the Debtors will need to liquidate may be enhanced. This could impair creditor recoveries significantly. Ultimately, the Debtors cannot predict the outcome of their restructuring process but believe that their proposed path forward is the most efficient way to reorganize their business.

 

  4.

The Debtors May Not Be Able to Achieve Their Projected Financial Results.

The Financial Projections set forth in this Disclosure Statement represent the best estimate of the future financial performances of the Debtors based on currently known facts and assumptions about future operations as well as the United States and world economies in general and, specifically, the oil and gas industry. The actual financial results may differ significantly from the projections. If the Debtors do not achieve their projected financial results, then the value of the Debtors debt or equity issued pursuant to the Plan may experience a decline, and the Debtors may lack sufficient liquidity to continue operating as planned after the Effective Date. There are numerous factors and assumptions inherent in determining the Debtors financial results, many of which are beyond the Debtors’ control, including the following:

 

  •  

future capital expenditures (or funding thereof) and working capital;

 

66

  •  

worldwide supply of and demand for oil and natural gas, including to the extent affected by the COVID-19 pandemic and the recovery therefrom;

 

  •  

volatility and declines in oil and natural gas prices, including to the extent affected by the COVID-19 pandemic and the recovery therefrom;

 

  •  

geopolitical events affecting oil and natural gas prices;

 

  •  

the Debtors’ inability to retain and attract key personnel and the impact of COVID-19 on the health of key personnel;

 

  •  

risks related to the geographic concentration of the Debtors’ assets;

 

  •  

the Debtors’ ability to develop, explore for, acquire, and replace oil and natural gas reserves and sustain production;

 

  •  

drilling plans (including scheduled and budgeted wells);

 

  •  

the extent to which the Debtors are able to continue to reduce LOE and G&A costs;

 

  •  

geologic and reservoir complexity and variability;

 

  •  

uncertainties in estimating the Debtors’ oil and gas reserves and the present values of those reserves;

 

  •  

the number, timing or results of any wells;

 

  •  

changes in wells operated and in reserve estimates;

 

  •  

activities on properties the Debtors do not operate;

 

  •  

availability and cost of drilling and production equipment, facilities, field service providers, gathering, processing ,and transportation;

 

  •  

takeaway constraints and storage capacity for oil and natural gas;

 

  •  

competition in the oil and natural gas industry;

 

  •  

outcome, effects or timing of legal proceedings (including environmental litigation);

 

  •  

the Debtors’ ability to make acquisitions and to integrate acquisitions;

 

  •  

effectiveness and extent of the Debtors’ risk management activities;

 

  •  

weather, including its impact on oil and natural gas demand and weather-related delays on operations;

 

  •  

integration of existing and new technologies into operations;

 

  •  

the effects of government regulation and permitting and other legal requirements;

 

  •  

the impact of legislative, tax and regulatory initiatives, including in response to the COVID-19 pandemic; and

 

  •  

future growth and expansion and future exploration.

 

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  5.

Oil and Gas Price Volatility May Continue to Adversely Affect the Debtors’ and the Reorganized Debtors’ Financial Condition, Financial Results, Cash Flows, Access to Capital, and Ability to Grow.

The Debtors’ and Reorganized Debtors’ future financial condition, revenues, results of operations, rate of growth, and the carrying value of their oil and natural gas properties depend primarily upon the prices the Company receives for its oil and natural gas production. Oil and natural gas prices historically have been volatile and are likely to continue to be volatile in the future, especially given current geopolitical conditions. This price volatility also affects the cash flow the Company will have available for capital expenditures as well as its ability to borrow money or raise additional capital. The prices for oil and natural gas are subject to a variety of factors that are beyond the Company’s control. These factors include, but are not limited to, the following:

 

  •  

the level of consumer demand for oil and natural gas;

 

  •  

the domestic and foreign supply of oil, natural gas liquids (“NGLs”) and natural gas;

 

  •  

commodity processing, gathering and transportation availability, and the availability of refining capacity;

 

  •  

the price and level of foreign imports and exports of oil, NGLs and natural gas;

 

  •  

the ability of the members of OPEC to agree to and maintain oil price and production controls;

 

  •  

domestic and foreign governmental regulations and taxes;

 

  •  

the supply of other inputs necessary to the Company’s production;

 

  •  

the price and availability of alternative fuel sources;

 

  •  

technological advances affecting energy consumption and supply;

 

  •  

weather conditions, seasonal trends and natural disasters and other extraordinary events;

 

  •  

financial and commercial market uncertainty;

 

  •  

energy conservation and environmental measures;

 

  •  

political conditions or hostilities in oil and natural gas producing regions, including the Middle East, Russia, and South America;

 

  •  

worldwide economic conditions; and

 

  •  

global or national health concerns, including the outbreak of pandemic or contagious disease, such as the coronavirus.

These factors and the volatility of the energy markets generally make it extremely difficult to predict future oil and gas price movements with any certainty. During the past three years, the posted price for West Texas Intermediate light sweet crude oil, referred to as WTI, has ranged from a high of $77.41 per Bbl12 in June 2018 to a low of minus $40.32 per Bbl in April 2020. The Henry Hub spot market price of natural gas has ranged from a high of $6.24 per MMBtu13 in January 2018 to a low of $1.52 per MMBtu in April 2020. If the prices of oil and natural gas remain at current levels or decline further, the Debtors’ and Reorganized Debtors’ operations, financial condition and level of expenditures for the development of their oil and natural gas reserves may be materially and adversely affected.

 

12 

Bbl means one stock tank barrel of 42 U.S. gallons liquid volume used herein in reference to crude oil, condensate, or natural gas liquids.

13 

MMbtu means one million British thermal units.

 

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Extended periods of lower oil and natural gas prices will reduce the Debtors’ and Reorganized Debtors’ revenue but also will reduce the amount of oil and natural gas the Debtors and Reorganized Debtors can produce economically, and as a result, would have a material adverse effect on their financial condition, results of operations, and reserves. During periods of low commodity prices, the Debtors or Reorganized Debtors may shut-in or curtail production from additional wells and defer drilling new wells, challenging their ability to produce at commercially paying quantities required to hold the Company’s leases. A reduction in production could result in a shortfall in the Debtors’ or Reorganized Debtors’ expected cash flows and require reducing the Company’s capital spending or borrow funds to cover any such shortfall. Any of these factors could negatively impact the Company’s ability to replace its production and future rate of growth.

 

  6.

Global Oil Prices May Not Return to pre-COVID-19 Levels for Several Months or Years, If Ever.

There can be no assurance that demand for oil and gas will return to pre-COVID-19 levels or, if it does, that it will return to those levels at any time in the foreseeable future. In addition, even if that demand increases, the significant amount of oil currently in storage, combined with the stated oil price strategy of Saudi Arabia and Russia, could result in the continuation of low commodity prices for a significant period of time. In addition, the COVID-19 pandemic has increased volatility and caused negative pressure in the capital and credit markets. As a result, the Company does not expect to have access in the current environment to the capital markets or financing on terms we would find favorable, if at all. The continuation of the current price environment for a sustained period would have a significant negative impact on the Company and its operations.

 

  7.

The Actual Quantities and Present Value of the Company’s Proved Reserves May Be Lower Than the Company Has Estimated.

Estimating quantities of proved oil and natural gas reserves is a complex process. The quantities and values of the Company’s proved reserves in the projections are only estimates and subject to numerous uncertainties. The accuracy of any reserves estimate is a function of the quality of available data and of engineering and geological interpretation. These estimates depend on assumptions regarding quantities and production rates of recoverable oil and natural gas reserves, future prices for oil and natural gas, timing and amounts of development expenditures and operating expenses, all of which will vary from those assumed in the Company’s estimates. If the variances in these assumptions are significant, many of which are based upon extrinsic events the Company cannot control, they could significantly affect these estimates, which in turn could have a negative effect on the value of the Company’s assets. Any significant variance from the assumptions used could result in the actual amounts of oil and natural gas ultimately recovered and future net cash flows being materially different from the estimates in the Company’s reserves reports. In addition, results of drilling, testing, production, and changes in prices after the date of the estimates of the Company’s reserves may result in substantial downward revisions. These estimates may not accurately predict the present value of future net cash flows from the Company’s oil and natural gas reserves. In addition, from time to time in the future, the Company will adjust estimates of proved reserves, potentially in material amounts, to reflect production history, results of exploration and development, changes in oil and natural gas prices, and other factors, many of which are beyond the Company’s control.

 

  8.

The Predictability of the Company’s Operating Results and the Company’s Future Development Plans May Be Affected by the Results of Multi-Well Pad Drilling.

The Company drills multi-well spacing test patterns in the STACK play. These projects, which are capital intensive, involve horizontal multi-well pad drilling, tighter drill spacing and completions techniques that evolve over time as lessons learned are captured and applied. The use of this technique may increase the risk of unintentional communication with other adjacent wells and the potential to reduce total recoverable reserves from the reservoir. Problems affecting a single well could adversely affect production from all of the wells on the pad or in the entire project. Furthermore, additional time is required to drill and complete multiple wells before any such wells begin producing. As a result, multi-well pad drilling and project development can cause delays in the scheduled commencement of production or interruptions in ongoing production. These delays or interruptions may cause declines or volatility in the Company’s operating results due to timing. Any of these factors could reduce the Company’s revenues and could result in a material adverse effect on the Company’s financial condition or results of operations.

 

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Further, the Company may, after consolidating lessons learned regarding the variability and complexity of relevant geology as well as spacing within a reservoir, elect to sacrifice a portion of the Company’s drilling locations to both mitigate near term operational risk and address financial goals. For example, the Company may not co-develop certain locations within a drilling unit at the same time other locations are drilled because those we are forgoing do not meet the Company’s return on investment criteria in today’s pricing environment. Locations not simultaneously developed within the same drilling unit may not be economic to drill in the future absent significant improvement in commodity prices. In this regard, it is important to note that oil and NGL prices have a direct impact on which wells we drill and which locations we target at any given time.

 

  9.

If the Company Is Not Able to Replace Reserves, It May Not Be Able to Sustain Production.

The Company’s future success depends largely upon the Company’s ability to efficiently develop and exploit the Company’s current estimated reserves and find or acquire additional oil and natural gas reserves that are economically recoverable. Unless the Company replaces the reserves it produces through successful development, exploration or acquisition activities, the Company’s proved reserves and production will decline over time. Recovery of proved undeveloped reserves will require significant capital expenditures and successful drilling operations. The Company’s December 31, 2019, reserve estimates reflect that the Company’s production rate on current proved developed producing reserve properties will decline at annual rates of approximately 29%, 18%, and 14% for the next three years. Thus, the Company’s future oil and natural gas reserves and production and, therefore, the Company’s financial condition, results of operations, and cash flows are highly dependent on the Company’s success in efficiently developing the Company’s current reserves and economically discovering or acquiring additional recoverable reserves.

 

  10.

Development, Acquisition, and Exploration Operations Require Substantial Capital and the Debtors May Be Unable to Obtain Needed Capital or Financing on Satisfactory Terms or at All, Which Could Lead to a Loss of Properties and a Decline in the Debtors’ Oil and Natural Gas Reserves.

To increase reserves and production, the Debtors undertake development, exploration and other replacement activities or use third parties to accomplish these activities. The Debtors have made and expect to make in the future substantial capital expenditures in the Company’s business and operations for the development, production, exploration and acquisition of oil and natural gas reserves.

Historically, the Debtors have financed capital expenditures primarily with cash flow from operations, the issuance of securities and borrowings under its bank and other credit facilities. The Debtors’ cash flow from operations and access to capital are subject to a number of variables, including the Debtors’ proved reserves, the volume of oil and natural gas the Debtors are able to produce from existing wells, the prices at which oil and natural gas are sold, the Debtors’ ability to acquire, locate and produce economically new reserves, and the Debtors’ ability to borrow under its credit facility.

The Debtors cannot assure you that their operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. In the event the Company’s capital expenditure requirements at any time are greater than the amount of capital the Debtors have available, the Debtors could be required to seek additional sources of capital, which may include traditional reserve base borrowings, debt financing, joint venture partnerships, production payment financings, sales of assets, offerings of debt or equity securities or other means. The Debtors cannot assure you that they will be able to obtain debt or equity financing on terms favorable to them, or at all.

If the Debtors are unable to fund its capital requirements, they may be required to curtail operations relating to the exploration and development of their prospects, which in turn could lead to a possible loss of properties and a decline in their oil and natural gas reserves, or they may be otherwise unable to implement the Company’s development plan, complete acquisitions or take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on the Debtors’ production, revenues and results of operations.

 

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  11.

The Company Cannot Control the Activities on Properties It Does Not Operate and Is Unable to Ensure the Proper Operation, Profitability, or Other Impacts of These Non-Operated properties.

The Company does not operate all of the properties in which it has an interest. For example, as of December 31, 2019, properties representing approximately 26% of the Company’s proved developed reserves are operated by third parties. As a result, the Company has limited ability to exercise influence over, and control the risks associated with, the operation of these properties. The success and timing of drilling and development activities on the Company’s partially owned properties operated by others therefore will depend upon a number of factors outside of the Company’s control, including the operator’s:

 

  •  

timing and amount of capital expenditures;

 

  •  

expertise and diligence in adequately performing operations and complying with applicable agreements;

 

  •  

financial resources;

 

  •  

inclusion of other participants in drilling wells; and

 

  •  

use of technology.

Further, it is possible that an operator of a nearby property may perform stimulation operations that negatively affect properties in which the Company has an interest. As a result of any of the above or an operator’s failure to act in ways that are in the Company’s best interest, the Company’s allocated production revenues and results of operations could be adversely affected.

 

  12.

The Company’s Producing Properties Are Predominantly Located in Oklahoma Where the Company’s Development Opportunities, Consisting of the Company’s Inventory of Drilling Locations, Are Geographically Concentrated in the STACK Play in Oklahoma. The Company Is Therefore Vulnerable to Risks Associated With Operating in a Single Geographic Area. In Addition, the Company Owns a Large Amount of Proved Reserves Attributable to a Small Number of Producing Horizons Within This Area.

At December 31, 2019, 82% of the Company’s proved reserves and 82% of the Company’s total equivalent production for 2019 were attributable to properties located in the STACK. As a result of this concentration, the Company may be disproportionately exposed to the risk and impact of regional supply and demand factors, state and local political forces and governmental regulation, processing or transportation capacity constraints, market limitations, severe weather events or other natural disasters, water shortages or other conditions or interruption of the processing or transportation of oil, natural gas or NGLs in the region. These factors could have a significantly greater impact on the Company’s financial condition, results of operations and cash flows than if the Company’s properties were more diversified.

In addition to the geographic concentration of the Company’s producing properties described above, as of December 31, 2019, 70% of all of the Company’s proved reserves were attributable to the Meramec and Osage formations in the STACK. This concentration of assets within a small number of producing horizons exposes the Company to additional risks, such as changes in field-wide rules and regulations that could cause the Company to permanently or temporarily shut-in all of its wells within a field.

 

  13.

Costs of Environmental Liabilities Could Exceed the Company’s Estimates and Adversely Affect the Company’s Operating Results.

The Company’s operations are subject to numerous environmental laws and regulations, which obligate it to install and maintain pollution controls and to clean up various sites at which regulated materials may have been disposed of or released. It is not possible for the Company to estimate reliably the amount and timing of all future expenditures related to environmental matters because of:

 

71

  •  

the uncertainties in estimating cleanup costs;

 

  •  

the discovery of additional contamination or contamination more widespread than previously thought;

 

  •  

the uncertainty in quantifying liability under environmental laws that impose joint and several liability on all;

 

  •  

potentially responsible parties;

 

  •  

new listing of species as “threatened” or “endangered”;

 

  •  

changes in interpretation and enforcement of existing environmental laws and regulations; and

 

  •  

future changes to environmental laws and regulations and their enforcement.

Although the Company believes that it has established appropriate reserves for known liabilities, including cleanup costs, the Company could be required to set aside additional reserves in the future due to these uncertainties, incur material cleanup costs, other liabilities, and/or expend significant sums to defend the Company against litigation related to legacy environmental issues, which could have an adverse impact on the Company’s financial condition, results of operations, and growth prospects.

 

  14.

Oil and Natural Gas Drilling and Production Operations Can Be Hazardous and May Expose the Company to Uninsurable Losses or Other Liabilities.

Oil and natural gas operations are subject to many risks, including well blowouts, cratering, explosions, pipe failure, fires, formations with abnormal pressures, uncontrollable flows of oil, natural gas, brine or well fluids, hydraulic fracturing fluids, toxic gas or other pollutants, and other environmental and safety hazards and risks. The Company’s drilling operations involve risks from high pressures and from mechanical difficulties such as stuck pipes, collapsed casings, and separated cables. If any of these events occur, the Company could sustain substantial losses as a result of:

 

  •  

injury or loss of life;

 

  •  

severe damage to or destruction of property, natural resources and equipment;

 

  •  

pollution or other environmental damage;

 

  •  

remediation and cleanup responsibilities;

 

  •  

regulatory investigations and administrative, civil and criminal penalties;

 

  •  

damage to our reputation; and

 

  •  

injunctions or other proceedings that suspend, limit or prohibit operations.

The Company’s liability for environmental hazards sometimes includes those created on properties prior to the date the Company acquired or leased them. While the Company maintains insurance against some, but not all, of the risks described above, the Company’s insurance may not be adequate to cover any or all resulting losses or liabilities. Moreover, if the Company experiences more insurable events, the Company’s annual premiums may increase further or it may not be able to obtain any such insurance on commercially reasonable terms. The Company may elect not to obtain insurance if it believes that the cost of available insurance is excessive relative to the risks presented. In addition, certain risks may not be fully insurable. The occurrence of, or failure or inability by the Company to obtain or maintain adequate insurance coverage for, any of the events listed above could have a material adverse effect on the Company’s financial condition and results of operations, as well as the Company’s growth, exploration, and employee recruitment activities.

 

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  15.

Potential for the Loss of Key Members of the Executive Management Team and Employee and Labor Risks.

If the Debtors were to lose key members of their senior management team on account of the Chapter 11 Cases or otherwise, the Debtors’ business, financial condition, liquidity, and results of operations could be adversely affected. Further, the success of the Debtors’ business depends, in part, on their ability to attract and retain experienced professional personnel. The loss of any key executives or other key personnel could have a material adverse effect on their operations. The Debtors or Reorganized Debtors may need to enter into retention or other arrangements that could be costly to maintain. If executives, managers or other key personnel resign, retire or are terminated, or their service is otherwise interrupted, the Company may not be able to replace them in a timely manner and the Company could experience significant declines in productivity.

 

E.

Miscellaneous Risk Factors and Disclaimers.

 

  1.

The Financial Information Is Based on the Debtors’ Books and Records and, Unless Otherwise Stated, No Audit Was Performed.

In preparing this Disclosure Statement, the Debtors relied on financial data derived from their books and records that was available at the time of such preparation. Although the Debtors have used their reasonable business judgment to assure the accuracy of the financial information provided in this Disclosure Statement, and while the Debtors believe that such financial information fairly reflects their financial condition, the Debtors are unable to warrant or represent that the financial information contained in this Disclosure Statement (or any information in any of the exhibits to the Disclosure Statement) is without inaccuracies.

 

  2.

No Legal or Tax Advice Is Provided by This Disclosure Statement.

This Disclosure Statement is not legal advice to any person or Entity. The contents of this Disclosure Statement should not be construed as legal, business, or tax advice. Each reader should consult its own legal counsel and accountant with regard to any legal, tax, and other matters concerning its Claim. This Disclosure Statement may not be relied upon for any purpose other than to determine how to vote to accept or reject the Plan or whether to object to Confirmation.

 

  3.

No Admissions Made.

The information and statements contained in this Disclosure Statement will neither (a) constitute an admission of any fact or liability by any Entity (including the Debtors) nor (b) be deemed evidence of the tax or other legal effects of the Plan on the Debtors, the Reorganized Debtors, Holders of Allowed Claims or Interests, or any other parties in interest.

 

  4.

Failure to Identify Litigation Claims or Projected Objections.

No reliance should be placed on the fact that a particular litigation claim or projected objection to a particular Claim is, or is not, identified in this Disclosure Statement. The Debtors may seek to investigate, file, and prosecute Claims and may object to Claims after Confirmation and Consummation of the Plan, irrespective of whether this Disclosure Statement identifies such Claims or objections to Claims.

 

  5.

Information Was Provided by the Debtors and Was Relied Upon by the Debtors’ Advisors.

Counsel to and other advisors retained by the Debtors have relied upon information provided by the Debtors in connection with the preparation of this Disclosure Statement. Although counsel to and other advisors retained by the Debtors have performed certain limited due diligence in connection with the preparation of this Disclosure Statement and the exhibits to the Disclosure Statement, they have not independently verified the information contained in this Disclosure Statement or the information in the exhibits to the Disclosure Statement.

 

  6.

No Representations Outside This Disclosure Statement Are Authorized.

 

73

No representations concerning or relating to the Debtors, the Chapter 11 Cases, or the Plan are authorized by the Bankruptcy Court or the Bankruptcy Code, other than as set forth in this Disclosure Statement. Any representations or inducements made to secure voting Holders’ acceptance or rejection of the Plan that are other than as contained in, or included with, this Disclosure Statement, should not be relied upon by voting Holders in arriving at their decision. Voting Holders should promptly report unauthorized representations or inducements to counsel to the Debtors and the Office of the United States Trustee for the District of Delaware.

 

  IX.

Important Securities Laws Disclosures

 

A.

Plan Consideration.

In accordance with the Plan and the Restructuring Support Agreement, the Debtors and/or Reorganized Debtors, as applicable, will distribute 100% of the New Common Stock and the Subscription Rights to Holders of Allowed Class 4 Senior Notes Claims and will distribute the New Warrants to certain Holders of Allowed Class 9 Chaparral Parent Equity Interests as set forth in the Plan. The Debtors believe that the New Common Stock, the New Warrants, and the options or other equity awards (and any New Common Stock underlying such awards) to be issued pursuant to the Management Incentive Plan will be “securities,” as defined in section 2(a)(1) of the Securities Act, section 101 of the Bankruptcy Code, and any applicable state Blue Sky Laws.

 

B.

Exemption From Registration Requirements; Issuance and Resale of New Common Stock and New Warrants; Definition of “Underwriter” Under Section 1145(b) of the Bankruptcy Code.

 

  1.

Exemption From Registration Requirements; Issuance and Resale of New Common Stock and New Warrants.

Section 1145 of the Bankruptcy Code provides that the registration requirements of section 5 of the Securities Act (and any applicable state Blue Sky Laws) shall not apply to the offer or sale of stock, options, warrants, or other securities by a debtor if: (a) the offer or sale occurs under a plan of reorganization; (b) the recipients of the securities hold a claim against, an interest in, or claim for administrative expense against, the debtor; and (c) the securities are issued in exchange for a claim against or interest in a debtor or are issued principally in such exchange and partly for cash and property. In reliance upon these exemptions, the offer, issuance and distribution of (i) the New Common Stock in respect of Senior Notes Claims as contemplated by the Plan and (ii) the New Warrants (and the New Common Stock issuable upon exercise thereof) in respect of Interests as contemplated by the Plan will not be registered under the Securities Act or any applicable state Blue Sky Laws.

The Debtors believe that the issuance of (i) the New Common Stock in respect of Senior Notes Claims as contemplated by the Plan, and (ii) the New Warrants (and the New Common Stock issuable upon exercise thereof) as contemplated by the Plan is covered by section 1145 of the Bankruptcy Code. Accordingly, the Debtors believe that such New Common Stock and New Warrants (and the New Common Stock issuable upon exercise thereof) may be resold without registration under the Securities Act or other federal securities laws, unless the Holder is an “underwriter” (as discussed in Section IX.B.2 below) with respect to such securities, as that term is defined in section 1145(b) of the Bankruptcy Code, or an affiliate of the Reorganized Debtors (or has been such an “affiliate” within ninety days of such transfer). The Debtors will seek to obtain, as part of the Confirmation Order, a provision confirming such exemption. In addition, such New Common Stock and New Warrants (and the New Common Stock issuable upon exercise thereof) generally may be able to be resold without registration under applicable state Blue Sky Laws by a Holder that is not an underwriter or an affiliate of the Reorganized Debtors pursuant to various exemptions provided by the respective Blue Sky Laws of those states. However, the availability of such exemptions cannot be known unless individual state Blue Sky Laws are examined.

Recipients of (i) the New Common Stock to be issued to holders of Senior Notes Claims as contemplated by the Plan, and (ii) the New Warrants to be issued to certain Holders of Interests as contemplated by the Plan are advised to consult with their own legal advisors as to the availability and applicability of section 1145 of the Bankruptcy Code to such New Common Stock and New Warrants and any other potential exemption from registration under the Securities Act or applicable state Blue Sky Laws in any given instance and as to any applicable requirements or conditions to such availability.

Notwithstanding anything to the contrary in the Plan, no Entity (including, for the avoidance of doubt, DTC) may require a legal opinion regarding the validity of any transaction contemplated by the Plan, including, for the avoidance of doubt, whether the New Common Stock is exempt from registration and/or eligible for DTC book-entry delivery, settlement, and depository services. For the avoidance of doubt, all of the New Common Stock shall be subject to the terms of the New Stockholders Agreement.

 

 

74

The Debtors do not have any contract, arrangement, or understanding relating to, and will not, directly or indirectly, pay any commission or other remuneration to any broker, dealer, salesperson, agent, or any other person for soliciting votes to accept or reject the Plan. The Debtors have received assurances that no person will provide any information to Holders of Senior Notes Claims and Holders of Chaparral Parent Equity Interests relating to the solicitation of votes on the Plan other than to refer such Holders to the information contained in this Disclosure Statement. In addition, no broker, dealer, salesperson, agent, or any other person, is engaged or authorized to express any statement, opinion, recommendation, or judgment with respect to the relative merits and risks of the Plan. Thus, no person will receive any commission or other remuneration, directly or indirectly, for soliciting votes to accept or reject the Plan or in connection with the offer of any Securities that may be the deemed to occur in connection with voting on the Plan.

 

  2.

Definition of “Underwriter” Under Section 1145(b) of the Bankruptcy Code; Implications for Resale of New Common Stock.

Section 1145(b)(1) of the Bankruptcy Code defines an “underwriter” as one who, except with respect to “ordinary trading transactions of an entity that is not an issuer”: (a) purchases a claim against, interest in, or claim for an administrative expense in the case concerning, the debtor, if such purchase is with a view to distribution of any security received or to be received in exchange for such claim or interest; (b) offers to sell securities offered or sold under a plan for the holders of such securities; (c) offers to buy securities offered or sold under a plan from the holders of such securities, if such offer to buy is (i) with a view to distribution of such securities and (ii) under an agreement made in connection with the plan, with the consummation of the plan, or with the offer or sale of securities under the plan; or (d) is an issuer of the securities within the meaning of section 2(a)(11) of the Securities Act. In addition, a Person who receives a fee in exchange for purchasing an issuer’s securities could also be considered an underwriter within the meaning of section 2(a)(11) of the Securities Act.

The definition of an “issuer,” for purposes of whether a Person is an underwriter under section 1145(b)(1)(D) of the Bankruptcy Code, by reference to section 2(a)(11) of the Securities Act, includes as “statutory underwriters” all persons who, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with, an issuer of securities. The reference to “issuer,” as used in the definition of “underwriter” contained in section 2(a)(11) of the Securities Act, is intended to cover “controlling persons” of the issuer of the securities. “Control,” as defined in Rule 405 of the Securities Act, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. Accordingly, an officer or director of a reorganized debtor or its successor under a plan of reorganization may be deemed to be a “controlling Person” of such debtor or successor, particularly if the management position or directorship is coupled with ownership of a significant percentage of the reorganized debtor’s or its successor’s voting securities. In addition, the legislative history of section 1145 of the Bankruptcy Code may suggest that a creditor who owns 10% or more of a class of voting securities of a reorganized debtor may be presumed to be a “controlling Person” and, therefore, an underwriter.

Whether any particular Person would be deemed to be an “underwriter” (including whether such Person is a “controlling Person”) with respect to (i) the New Common Stock to be issued in respect of Claims as contemplated by the Plan, and (ii) the New Warrants to be issued in respect of Interests as contemplated by the Plan would depend upon various facts and circumstances applicable to that Person. Accordingly, the Debtors express no view as to whether any Person would be deemed an “underwriter” with respect to (i) the New Common Stock to be issued in respect of Claims and Interests as contemplated by the Plan, and (ii) the New Warrants to be issued in respect of Interests as contemplated by the Plan and, in turn, whether any Person may freely resell such New Common Stock or New Warrants. The Debtors recommend that potential recipients of such New Common Stock and New Warrants consult their own counsel concerning their ability to freely trade such securities without registration under the federal and applicable state Blue Sky Laws.

Under certain circumstances, Holders of (i) the New Common Stock to be issued in respect of Senior Notes Claims as contemplated by the Plan, and (ii) the New Warrants to be issued in respect of Interests as contemplated by the Plan who are deemed to be “underwriters” may be entitled to resell their New Common Stock and New Warrants, as applicable, pursuant to the limited safe harbor resale provisions of Rule 144 of the Securities Act. Generally, Rule 144 of the Securities Act would permit the public sale of securities received by such person after a specified holding period if current information regarding the issuer is publicly available and certain other conditions are met, and, if such seller is an affiliate of the issuer, if volume limitations and manner of sale requirements are met.

 

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C.

Rights to Purchase New Convertible Notes in the Rights Offering

The rights to purchase New Convertible Notes in the Rights Offering will not be listed or quoted on any public or over-the-counter exchange or quotation system.

The rights to purchase New Convertible Notes issuable upon the Effective Date will be distributed and issued only to Eligible Holders (as defined in the Rights Offering Procedures) who are “accredited investors” within the meaning of Rule 501(a) of the Securities Act or “qualified institutional buyers” as defined in Rule 144A under the Securities Act or not “U.S. Persons” as defined in Regulation S under the Securities Act. A number of the Eligible Holders are parties to the Restructuring Support Agreement.

 

D.

Private Placement Securities

 

  1.

Issuance

Section 4(a)(2) of the Securities Act provides that the issuance of securities by an issuer in transactions not involving a public offering are exempt from registration under the Securities Act.

The Debtors believe that New Convertible Notes issued in connection with the exercise of the Subscription Rights and the New Common Stock issued as the Backstop Premium (together, the “4(a)(2) Securities”) are issuable without registration under the Securities Act in reliance upon the exemption from registration provided under section 4(a)(2) of the Securities Act. The 4(a)(2) Securities will be subject to resale restrictions and may be resold, exchanged, assigned or otherwise transferred only pursuant to registration, or an applicable exemption from registration, under the Securities Act and other applicable law, as described below.

 

  2.

Subsequent Transfers

The 4(a)(2) Securities will be deemed “restricted securities” (as defined by Rule 144 of the Securities Act) that may not be offered, sold, exchanged, assigned or otherwise transferred unless they are registered under the Securities Act, or an exemption from registration under the Securities Act is available.

Rule 144 provides a limited safe harbor for the public resale of restricted securities if certain conditions are met. These conditions vary depending on whether the holder of the restricted securities is an “affiliate” of the issuer. Rule 144 defines an affiliate as “a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer.”

A non-affiliate of an issuer that is not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act and who has not been an affiliate of the issuer during the ninety (90) days preceding such sale may resell restricted securities after a one-year holding period whether or not there is current public information regarding the issuer.

An affiliate of an issuer that is not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act may resell restricted securities after the one-year holding period if at the time of the sale certain current public information regarding the issuer is available. An affiliate must also comply with the volume, manner of sale and notice requirements of Rule 144. First, the rule limits the number of restricted securities (plus any unrestricted securities) sold for the account of an affiliate (and related persons) in any three-month period to the greater of 1% of the outstanding securities of the same class being sold, or, if the class is listed on a stock exchange, the average weekly reported volume of trading in such securities during the four weeks preceding the filing of a notice of proposed sale on Form 144 or if no notice is required, the date of receipt of the order to execute the transaction by the broker or the date of execution of the transaction directly with a market maker. Second, the manner of sale requirement provides that the restricted securities must be sold in a broker’s transaction, directly with a market maker or in a riskless principal transaction (as defined in Rule 144). Third, if the amount of securities sold under Rule 144 in any three month period exceeds 5,000 shares or has an aggregate sale price greater than $50,000, an affiliate must file or cause to be filed with the SEC three copies of a notice of proposed sale on Form 144, and provide a copy to any exchange on which the securities are traded.

 

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The Debtors believe that the Rule 144 exemption will not be available with respect to any 4(a)(2) Securities (whether held by non-affiliates or affiliates) until at least one year after the Effective Date. Accordingly, unless transferred pursuant to an effective registration statement or another available exemption from the registration requirements of the Securities Act, non-affiliate Holders of 4(a)(2) Securities will be required to hold their 4(a)(2) Securities for at least one year and, thereafter, to sell them only in accordance with the applicable requirements of Rule 144, pursuant to the an effective registration statement or pursuant to another available exemption from the registration requirements of applicable securities laws.

The New Convertible Notes issued upon exercise of Subscription Rights, and any certificate issued in exchange for or upon the transfer, sale or assignment of any such New Convertible Note, shall be subject to and, in the case of any certificate, stamped or otherwise imprinted with a legend in substantially the following form:

THIS SECURITY AND THE COMMON STOCK, IF ANY, ISSUABLE UPON CONVERSION OF THIS SECURITY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE ACQUIRER:

(1) REPRESENTS THAT IT AND ANY ACCOUNT FOR WHICH IT IS ACTING IS [A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT)][AN “ACCREDITED INVESTOR” AS SUCH TERM IS DEFINED IN RULE 501 UNDER THE SECURITIES ACT][IS NOT A “U.S. PERSON” AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT] AND THAT IT EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT, AND

(2) AGREES FOR THE BENEFIT OF CHAPARRAL ENERGY, INC. (THE “COMPANY”) THAT IT WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN PRIOR TO THE APPLICABLE RESALE RESTRICTION TERMINATION DATE, EXCEPT:

(A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, OR

(B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BECOME EFFECTIVE UNDER THE SECURITIES ACT, OR

(C) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, OR

(D) IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT

(E) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT OR ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH CLAUSE (2)(D) ABOVE, THE COMPANY AND THE TRUSTEE RESERVE THE RIGHT TO REQUIRE THE DELIVERY OF SUCH LEGAL OPINIONS, CERTIFICATIONS OR OTHER EVIDENCE AS MAY REASONABLY BE REQUIRED IN ORDER TO DETERMINE THAT THE PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. NO REPRESENTATION IS MADE AS TO THE AVAILABILITY OF ANY EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

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Reorganized Chaparral Parent reserves the right to require certification, legal opinions or other evidence of compliance with Rule 144 as a condition to the removal of such legend or to any resale of the 4(a)(2) Securities. Reorganized Chaparral Parent also reserves the right to stop the transfer of any 4(a)(2) Securities if such transfer is not in compliance with Rule 144, pursuant to an effective registration statement or pursuant to another available exemption from the registration requirements of applicable securities laws. All persons who receive 4(a)(2) Securities will be required to acknowledge and agree that (a) they will not offer, sell or otherwise transfer any 4(a)(2) Securities except in accordance with an exemption from registration, including under Rule 144 under the Securities Act, if and when available, or pursuant to an effective registration statement, and (b) the 4(a)(2) Securities will be subject to the other restrictions described above.

Any Persons receiving restricted securities under the Plan should consult with their own counsel concerning the availability of an exemption from registration for resale of these securities under the Securities Act and other applicable law.

****

BECAUSE OF THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A PARTICULAR PERSON MAY BE AN UNDERWRITER OR AN AFFILIATE AND THE HIGHLY FACT SPECIFIC NATURE OF THE AVAILABILITY OF EXEMPTIONS FROM REGISTRATION UNDER THE SECURITIES ACT, INCLUDING THE EXEMPTIONS AVAILABLE UNDER SECTION 1145 OF THE BANKRUPTCY CODE AND RULE 144 UNDER THE SECURITIES ACT, NONE OF THE DEBTORS OR THE REORGANIZED DEBTORS MAKE ANY REPRESENTATION CONCERNING THE ABILITY OF ANY PERSON TO DISPOSE OF THE SECURITIES TO BE DISTRIBUTED UNDER THE PLAN. THE DEBTORS RECOMMEND THAT POTENTIAL RECIPIENTS OF THE SECURITIES TO BE ISSUED UNDER THE PLAN CONSULT THEIR OWN COUNSEL CONCERNING WHETHER THEY MAY FREELY TRADE SUCH SECURITIES AND THE CIRCUMSTANCES UNDER WHICH THEY MAY RESELL SUCH SECURITIES.

 

  X.

Certain U.S. Federal Income Tax Consequences of the Plan

 

  A.

Introduction.

The following discussion summarizes certain U.S. federal income tax consequences of the implementation of the Plan to the Debtors, the Reorganized Debtors and certain Holders (which, solely for purposes of this discussion, means the beneficial owners for U.S. federal income tax purposes) of certain Claims. This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), the U.S. Treasury Regulations promulgated thereunder (the “Treasury Regulations”), judicial decisions and published administrative rules, and pronouncements of the Internal Revenue Service (the “IRS”), all as in effect on the date hereof (collectively, “Applicable Tax Law”). Changes in the rules or new interpretations of the rules may have retroactive effect and could significantly affect the U.S. federal income tax consequences described below. Due to the lack of definitive judicial and administrative authority in a number of areas, substantial uncertainty may exist with respect to some of the tax consequences described below. The Debtors have not requested, and do not intend to request, any ruling or determination from the IRS or any other taxing authority with respect to the tax consequences discussed herein, and the discussion below is not binding upon the IRS or the courts. No assurance can be given that the IRS would not assert, or that a court would not sustain, a different position than any position discussed herein.

This summary does not address foreign, state, local, gift, or estate tax consequences of the Plan, nor does it purport to address all aspects of U.S. federal income taxation that may be relevant to a Holder in light of its individual circumstances or to a Holder that may be subject to special tax rules (such as Persons who are related to the Debtors within the meaning of the Code, broker-dealers, banks, mutual funds, insurance companies, financial institutions, small business investment companies, regulated investment companies, tax exempt organizations, pass-through entities, beneficial owners of pass-through entities, trusts, governmental authorities or agencies, dealers and traders in securities, subchapter S corporations, Persons who hold Claims or who will hold the New Common Stock, the Subscription Rights or the Exit Facility Loans as part of a straddle, hedge, conversion transaction or other integrated investment, persons using a mark-to-market method of accounting, and Holders of Claims who are themselves in bankruptcy). Furthermore, this summary assumes that a Holder of a Claim holds only Claims in a single Class and holds a Claim only as a “capital asset” (within the meaning of section 1221 of the Code). This summary also assumes

 

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that the various debt and other arrangements to which any of the Debtors are a party will be respected for U.S. federal income tax purposes in accordance with their form, and that the Claims constitute interests in the Debtors “solely as a creditor” for purposes of section 897 of the Code. This summary does not discuss differences in tax consequences to Holders of Claims that act or receive consideration in a capacity other than any other Holder of a Claim of the same Class or Classes, and the tax consequences to such Holders may differ materially from those described below. This summary does not address the U.S. federal income tax consequences to Holders (a) whose Claims are Unimpaired or otherwise entitled to payment in full in Cash under the Plan or (b) that are deemed to reject the Plan.

For purposes of this discussion, a “U.S. Holder” is a Holder of a Claim that is: (a) an individual citizen or resident of the U.S. for U.S. federal income tax purposes; (b) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the U.S., any state thereof or the District of Columbia; (c) an estate the income of which is subject to U.S. federal income taxation regardless of the source of such income; or (d) a trust (i) if a court within the U.S. is able to exercise primary jurisdiction over the trust’s administration and one or more “United States persons” (within the meaning of section 7701(a)(30) of the Code) have authority to control all substantial decisions of the trust or (ii) that has a valid election in effect under applicable Treasury Regulations to be treated as a “United States person” (within the meaning of section 7701(a)(30) of the Code). For purposes of this discussion, a “Non-U.S. Holder” is any Holder of a Claim that is not a U.S. Holder other than any partnership (or other entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes).

If a partnership (or other entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes) is a Holder of a Claim, the tax treatment of a partner (or other beneficial owner) generally will depend upon the status of the partner (or other beneficial owner) and the activities of the partner (or other beneficial owner) and the entity. Partners (or other beneficial owners) of partnerships (or other pass-through entities) that are Holders of Claims should consult their tax advisors regarding the U.S. federal income tax consequences of the Plan.

ACCORDINGLY, THE FOLLOWING SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING AND ADVICE BASED ON THE INDIVIDUAL CIRCUMSTANCES PERTAINING TO A HOLDER. ALL HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE FEDERAL, STATE, LOCAL, AND NON-U.S. INCOME, ESTATE, AND OTHER TAX CONSEQUENCES OF THE PLAN.

 

  B.

Certain U.S. Federal Income Tax Consequences to Debtors and Reorganized Debtors.

 

  1.

Effects of Restructuring on Tax Attributes of Debtors.

Chaparral is the parent of a consolidated U.S. federal income tax group that includes those Debtors that are treated as corporations for U.S. federal income tax purposes (the “Tax Group”). The Tax Group has significant net operating loss (“NOL”) carryforwards as of December 31, 2019, and certain other favorable tax attributes, including interest expense carryforwards. A portion of these NOLs and certain other attributes is allocable to periods prior to the effective date of the Prior Cases and, accordingly, such NOLs and other attributes are subject to current limitations under section 382 of the Code due to a prior ownership change that occurred in connection with the Prior Cases (the “Existing 382 Limitations”). The Debtors expect to generate additional tax losses in the current year, which will ultimately increase the Debtors’ NOLs. As discussed below, the amount of the Tax Group’s NOLs (including certain NOLs incurred after the Effective Date) and other tax attributes may be significantly reduced or otherwise subject to limitations in connection with the implementation of the Plan.

 

  2.

Cancellation of Debt and Reduction of Tax Attributes.

In general, absent an exception, the Debtors will realize and recognize cancelation of debt income (“COD Income”) upon satisfaction of their outstanding indebtedness for total consideration less than the amount of such indebtedness. The amount of COD Income, in general, is the excess of (a) the adjusted issue price of the indebtedness satisfied over (b) the sum of (i) the fair market value of the New Common Stock, (ii) the issue price of the Exit Facility Loans, (iii) the amount of the Cash and (iv) the fair market value, if any, of the Subscription Rights, in each case, given in satisfaction of such satisfied indebtedness at the time of the exchange.

 

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Under section 108 of the Code, the Debtors will not, however, be required to include any amount of COD Income in gross income if the Debtors are under the jurisdiction of a court in a case under chapter 11 of the Bankruptcy Code and the discharge of debt occurs pursuant to that proceeding. Instead, as a consequence of such exclusion, the Debtors must reduce their tax attributes by the amount of COD Income that they excluded from gross income pursuant to section 108 of the Code. Such reduction in tax attributes occurs only after the tax for the year of the debt discharge has been determined. In general, tax attributes will be reduced in the following order: (a) NOLs and NOL carryforwards; (b) general business credit carryovers; (c) minimum tax credit carryovers; (d) capital loss carryovers; (e) tax basis in assets (but not below the amount of liabilities to which the Reorganized Debtors will remain subject immediately after the discharge); (f) passive activity loss and credit carryovers; and (g) foreign tax credit carryovers. Alternatively, the Debtors may elect first to reduce the basis of their depreciable assets pursuant to section 108(b)(5) of the Code, in which case such reduction would not be subject to the limitation described in clause (e) of the previous sentence. The Debtors do not intend to make such an election. The reductions described above with respect to NOLs and NOL carryforwards or with respect to capital loss carryovers are made first in the loss for the taxable year of the discharge and then in the carryovers to such taxable year in the order of the taxable years from which each such carryover arose. Carryover of disallowed interest expense would not be a tax attribute subject to such reduction unless future Treasury Regulations provide to the contrary. Any excess COD Income over the amount of available tax attributes will generally not give rise to U.S. federal income tax and will generally have no other U.S. federal income tax impact.

In connection with the Restructuring Transactions, the Debtors expect to realize significant COD Income. The exact amount of any COD Income that will be realized by the Debtors will not be determinable until the consummation of the Plan. The Debtors expect that the amount of such COD Income will substantially reduce the Debtors’ NOLs.

 

  (a)

Limitation on NOLs and Other Tax Attributes.

After giving effect to the reduction in tax attributes pursuant to excluded COD Income described above, the Reorganized Debtors’ ability to use any remaining tax attributes post-emergence will be subject to certain limitations under sections 382 and 383 of the Code.

Under sections 382 and 383 of the Code, if the Debtors undergo an “ownership change,” the amount of any remaining NOLs, tax credit carryforwards, net unrealized built-in losses, interest expense carryforwards and possibly certain other attributes of the Debtors allocable to periods prior to the Effective Date (collectively, “Pre-Change Losses”) that may be utilized to offset future taxable income generally are subject to an annual limitation. For this purpose, if a corporation (or consolidated group) has a “net unrealized built-in loss” at the time of an ownership change (taking into account most assets and items of built-in gain and deductions), then, generally, built-in losses (including amortization or depreciation deductions attributable to such built-in losses) recognized during the following five years (up to the amount of the original net unrealized built-in loss) will be treated as Pre-Change Losses and similarly will be subject to the annual limitation. In general, a corporation’s (or consolidated group’s) net unrealized built-in loss will be deemed to be zero unless it is greater than the lesser of (a) $10,000,000 or (b) 15 percent of the fair market value of its assets (with certain adjustments) before the ownership change. The Debtors expect to have a net unrealized built-in loss on the Effective Date.

The rules of section 382 of the Code are complicated, but as a general matter, subject to the additional discussion of section 382 below, the Debtors anticipate that the issuance of New Common Stock pursuant to the Plan will result in an “ownership change” of the Debtors for these purposes, and that the Reorganized Debtors’ use of the Pre-Change Losses will be subject to limitation unless an exception to the general rules of section 382 of the Code applies.

Where a corporation is subject to a prior annual limitation(s), the new limitation also applies, effectively subjecting any Pre-Change Losses that pre-date the prior ownership change(s) to the more restrictive of the limitations. Accordingly, any limitations imposed pursuant to the ownership change as result of the Plan will apply in addition to the Existing 382 Limitations. Moreover, any other ownership change (i.e., any ownership change in addition to the prior ownership change that occurred in connection with the Prior Cases and the expected ownership change pursuant to the Plan) would result in an annual limitation on the Debtors’ use of the Tax Group’s consolidated NOLs (and possibly other tax attributes) attributable to the period prior to such date. It is likely that any ownership change prior to the Effective Date would result in a significant portion of the Tax Group’s existing NOLs (and possibly other tax attributes) being unusable in periods after such ownership change. The Debtors do not believe that such an ownership change has occurred to date and do not expect one to occur prior to the Effective Date but there can be no assurances in this regard. The remainder of this discussion assumes that no such ownership change has occurred or will occur prior to the Effective Date.

 

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  i.

General Section 382 Annual Limitation.

In general, the amount of the annual limitation to which a corporation that undergoes an “ownership change” would be subject is equal to the product of (a) the fair market value of the stock of the corporation immediately before the ownership change (with certain adjustments) and (b) the “long-term tax-exempt rate” (which is the highest of the adjusted federal long-term rates in effect for any month in the 3-calendar-month period ending with the calendar month in which the ownership change occurs, or 0.89% percent for August 2020). Section 383 of the Code applies a similar limitation to capital loss carryforwards and tax credits. Any unused limitation may be carried forward, thereby increasing the annual limitation in the subsequent taxable year. As discussed below, however, special rules may apply in the case of a corporation that experiences an ownership change as the result of a bankruptcy proceeding.

 

  ii.

Special Bankruptcy Exception.

An elective exception is available with respect to the foregoing rules (the “382(l)(6) Exception”). Under the 382(l)(6) Exception, the annual limitation will be calculated by reference to the lesser of (a) the value of the New Common Stock immediately after the ownership change (subject to certain adjustments) or (b) the value of the Debtors’ assets (determined without regard to liabilities) immediately before the ownership change. This differs from the ordinary rule that requires the fair market value of a debtor corporation that undergoes an “ownership change” to be determined before the events giving rise to the change. The resulting limitation would be determined under the regular rules for ownership changes.

 

  C.

Certain U.S. Federal Income Tax Consequences to U.S. Holders of Certain Claims.

The following discussion assumes that the Debtors will structure the Restructuring Transactions as currently contemplated by the Plan (i.e., as a recapitalization of the existing Chaparral). Holders of Claims are urged to consult their tax advisors regarding the tax consequences of the Restructuring Transactions.

The U.S. federal income tax consequences to U.S. Holders of certain Claims will depend on whether the Claims surrendered constitute “securities” for U.S. federal income tax purposes. Neither the Code nor the Treasury Regulations promulgated pursuant thereto define the term “security.” Whether a debt instrument constitutes a “security” for U.S. federal income tax purposes is determined based on all the relevant facts and circumstances, but most authorities have held that the length of the term of a debt instrument at initial issuance is an important factor in determining whether such instrument is a security for U.S. federal income tax purposes. These authorities have indicated that a term of less than five years is evidence that the instrument is not a security, whereas a term of ten years or more is evidence that it is a security. There are numerous other factors that could be taken into account in determining whether a debt instrument is a security, including the security for payment, the creditworthiness of the obligor, the subordination or lack thereof with respect to other creditors, the right to vote or otherwise participate in the management of the obligor, convertibility of the instrument into an equity interest of the obligor, whether payments of interest are fixed, variable or contingent, and whether such payments are made on a current basis or accrued.

The Senior Notes had a term to maturity of approximately five years when issued. Accordingly, a U.S. Holder of the Senior Notes should consult their own tax advisor to determine whether the Senior Notes should be treated as securities for U.S. federal income tax purposes.

The Exit Facility Loans are secured obligations with a term of less than five years and, accordingly, the remainder of this discussion assumes that the Exit Facility Loans do not qualify as securities for U.S. federal income tax purposes.

 

  1.

Consequences to U.S. Holders of RBL Claims (Class 3).

Pursuant to the Plan, in exchange for full and final satisfaction, compromise, settlement, release and discharge of the RBL Claims, each Holder thereof will receive as consideration (a) its pro rata share of the All Lender Portion (in cash) and (b) (i) if such Holder elects to participate in the Exit Revolving Facility, (x) such Holder’s pro rata share of the Exit Facility Revolving Lender Portion and (y) Exit Facility Revolving Loans with a principal amount equal to the amount of such Holder’s Allowed RBL Claim (after application of the All Lender Portion and the Exit Facility Revolving Lender Portion to such Holder’s Allowed RBL Claim) or (ii) if such Holder does not elect to participate in the Exit Revolving Facility, Second Out Term Loans with a principal amount equal to the amount of such Holder’s RBL Claim (after application of the All Lender Portion to such Holder’s Allowed RBL Claim) (the “RBL Claims Exchange”).

 

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The Debtors expect, and the discussion below assumes, that the RBL Claims Exchange will be treated as a taxable exchange of the RBL Claims for (i) cash (the All Lender Portion and, if applicable, the Exit Facility Revolving Lender Portion) and (ii) the applicable Exit Facility Loans (i.e., the Exit Facility Revolving Loans or the Second Out Term Loans).

 

  (a)

Taxable Exchange.

Each U.S. Holder of an RBL Claim should recognize gain or loss equal to the difference between (x) the sum of (i) the U.S. Holder’s pro rata share of the All Lender Portion and, if such Holder elects to participate in the Exit Revolving Facility, U.S. Holder’s pro rata share of the Exit Facility Revolving Lender Portion and (ii) the issue price of the Exit Facility Loans (as further discussed below) received in the RBL Claims Exchange, and (y) the U.S. Holder’s adjusted tax basis in its RBL Claims. The character of such gain or loss as capital gain or loss or ordinary income or loss will be determined by a number of factors, including the tax status of the U.S. Holder, the nature of the RBL Claim in such U.S. Holder’s hands, whether the Claim was purchased at a discount, and whether and to what extent the U.S. Holder previously has claimed a bad debt deduction with respect to such RBL Claim. If recognized gain is capital gain, it generally would be long-term capital gain if the U.S. Holder held its RBL Claim for more than one year at the time of the exchange. The deductibility of capital losses is subject to certain limitations, as discussed below. To the extent that a portion of the consideration received in exchange for its RBL Claim is allocable to accrued but untaxed interest, the U.S. Holder may recognize ordinary income. A U.S. Holder’s tax basis in the Exit Facility Loans should be equal to the issue price of the Exit Facility Loans (as further discussed below). A U.S. Holder’s holding period for the Exit Facility Loans received on the Effective Date should begin on the day following the Effective Date.

 

  (b)

Issue Price.

The issue price of the applicable Exit Facility Loan would be determined based on whether the applicable Exit Facility Loan or the RBL Claims are considered to be traded on an “established market” for U.S. federal income tax purposes (“publicly traded”). A debt instrument is not treated as publicly traded if the stated principal amount of an issue that includes the debt instrument does not exceed $100 million (the “Small Issue Exception”). The Second Out Term Loans are expected to have a stated principal amount of less than $100 million and, therefore, are not expected to be considered to be publicly traded based on the Small Issue Exception. The Exit Facility Revolving Loans is expected to have a stated principal amount in excess of $100 million.

In general, a debt instrument will be treated as traded on an established securities market if, at any time during the 31-day period ending 15 days after the issue date, (a) a “sales price” for an executed purchase of the debt instrument appears on a medium that is made available to issuers of debt instruments, persons that regularly purchase or sell debt instruments, or persons that broker purchases or sales of debt instruments, (b) a “firm” price quote for the debt instrument is available from at least one broker, dealer or pricing service for property, and the quoted price is substantially the same as the price for which the person receiving the quoted price could purchase or sell the property, or (c) there are one or more “indicative” quotes available from at least one broker, dealer or pricing service for property. Whether the RBL Claims or the Exit Facility Revolving Loans are considered “publicly traded” may not be known until after the Effective Date.

The Debtors do not expect the RBL Claims or the Exit Facility Loans to be publicly traded. Assuming that neither the RBL Claims nor the Exit Facility Loans are publicly traded, the issue price of the Exit Facility Loans should be the stated principal amount of the Exit Facility Loans because the interest rate of each Exit Facility Loan is expected to exceed the applicable federal rate published by the IRS. However, the rules regarding the issue price determination are complex and highly detailed, and U.S. Holders of the RBL Claims are urged to consult their tax advisors regarding the determination of the issue price of the Exit Facility Loans.

 

  2.

Consequences to U.S. Holders of Senior Notes Claims (Class 4).

Pursuant to the Plan, in exchange for full and final satisfaction, compromise, settlement, release and discharge of the Senior Notes Claims, each Holder thereof will receive as consideration its Pro Rata share of (i) New Common Stock and (ii) the Subscription Rights.

 

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The Debtors currently expect, and this discussion assumes, that the receipt of the Subscription Rights by U.S. Holders of the Senior Notes Claims will be treated as a separate exchange transaction that is distinct from, and occurs immediately prior to, the exercise of the Subscription Rights by such U.S. Holders electing to acquire the New Convertible Notes. However, there can be no assurance that the IRS will agree with this treatment, and the IRS may assert that the initial exchange and the exercise of Subscription Rights pursuant to the Rights Offering should be combined as a single transaction. U.S. Holders of the Senior Notes Claims are urged to consult their tax advisors regarding the treatment of the receipt of the Subscription Rights and the subsequent exercise of any Subscription Rights.

The U.S. federal income tax consequences to U.S. Holders of the Senior Notes Claims will also depend on whether the New Convertible Notes are treated as debt or equity interest for U.S. federal income tax purposes. The determination of whether an obligation represents a debt or equity interest is based on all the relevant facts and circumstances at the time the obligation is issued. The Debtors will not request any ruling from the IRS regarding the treatment of the New Convertible Notes for U.S. federal income tax purposes and the IRS or a court may conclude that the New Convertible Notes should be treated as equity for U.S. federal income tax purposes. U.S. Holders of the Senior Notes Claims should consult their tax advisors as to the proper characterization of the New Convertible Notes for U.S. federal income tax purposes. The remainder of the discussion in this disclosure assumes that the New Convertible Notes will be treated as debt for U.S. federal income tax purposes.

 

  (a)

Treatment if Senior Notes Claims Are Not Treated as Securities.

To the extent that a U.S. Holder’s Senior Notes Claim is not treated as a security, such U.S. Holder would be treated as exchanging its Claim for the New Common Stock and Subscription Rights in a fully taxable exchange under section 1001 of the Code. A U.S. Holder of a Senior Note Claim who is subject to this treatment should recognize gain or loss equal to the difference between (i) the total fair market value of the New Common Stock and Subscription Rights received in exchange for its Senior Notes Claim and (ii) the U.S. Holder’s adjusted tax basis in its Senior Notes Claims. The character of such gain or loss as capital gain or loss or as ordinary income or loss will be determined by a number of factors, including the tax status of the U.S. Holder, the nature of the Claim in such U.S. Holder’s hands, whether the Claim was purchased at a discount, and whether and to what extent the U.S. Holder previously has claimed a bad debt deduction with respect to its Claim. If recognized gain is capital gain, it generally would be long-term capital gain if the U.S. Holder held its Senior Notes Claim for more than one year at the time of the exchange. The deductibility of capital losses is subject to certain limitations, as discussed below. To the extent that a portion of the consideration received in exchange for its Senior Notes Claim is allocable to accrued but untaxed interest, the U.S. Holder may recognize ordinary income. A U.S. Holder’s tax basis in the New Common Stock and Subscription Rights should be equal to their respective fair market values. A U.S. Holder’s holding period for each items of consideration received on the Effective Date should begin on the day following the Effective Date.

 

  (b)

Treatment if Senior Notes Claims Are Treated as Securities.

If the Senior Notes Claims are treated as securities, then the exchange of such Claims should be treated as a “recapitalization” within the meaning of section 368(a)(1)(E) of the Code (the “Recapitalization”). Subject to the rules relating to accrued but unpaid interest (or OID) or market discount, if the exchange is treated as a Recapitalization, a U.S. Holder of a Senior Note Claim will not recognize loss upon such exchange, but may recognize gain (calculated as described under “—Treatment if Senior Notes Claims Are Not Treated as Securities” above, if any, to the extent of the fair market value, if any, of the Subscription Rights received in satisfaction of its Claim. The character of such gain would also be determined in accordance with the principles discussed under “—Certain U.S. Federal Income Tax Consequences to U.S. Holders of Certain Claims” above.

A U.S. Holder’s aggregate tax basis in any New Common Stock received in satisfaction of its Senior Notes Claim will equal the U.S. Holder’s aggregate adjusted tax basis in its Senior Notes Claim decreased by the fair market value of any Subscription Rights taken into account in determining the amount recognized by such U.S. Holder and increased by any gain recognized by such U.S. Holder in the exchange. In general, the U.S. Holder’s holding period for the New Common Stock received will include the U.S. Holder’s holding period for the Senior Note Claim except to the extent issued in respect of a Senior Note Claim for accrued but unpaid interest. A U.S. Holder’s tax basis in any Subscription Rights received will equal the fair market value, if any, of such Subscription Rights. For the treatment of the exchange to the extent a portion of the consideration received is allocable to accrued but unpaid interest, OID or market discount, see the sections entitled “Accrued Interest and OID” and “Market Discount” below.

 

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  3.

Treatment of Subscription Rights.

U.S. Holders who elect not to exercise their Subscription Rights may be entitled to claim a (likely short-term capital) loss equal to the amount of tax basis allocated to the unexercised Subscription Rights they receive. Such U.S. Holders are urged to consult with their own tax advisors as to the tax consequences of electing not to exercise the Subscription Rights they receive. For U.S. Holders electing to exercise their Subscription Rights, such a U.S. Holder will be treated as purchasing, in exchange for its applicable Subscription Rights and the amount of Cash funded by the U.S. Holder to exercise its applicable Subscription Rights, the New Convertible Notes it is entitled to pursuant to the terms of the exercised Subscription Rights. Any such purchase generally will be treated as the exercise of an option under general tax principles, and as such a U.S. Holder should not recognize income, gain, or loss for U.S. federal income tax purposes on the exercise. A U.S. Holder’s tax basis in the New Convertible Notes received pursuant to the exercise will equal the sum of the amount of Cash paid by the U.S. Holder to exercise its Subscription Rights plus such U.S. Holder’s tax basis in its Subscription Rights immediately before the exercise (which, as described above, should be equal the fair market value, if any, of such Subscription Rights). A U.S. Holder’s. holding period for the New Convertible Notes received on the Effective Date pursuant to the exercise of a Subscription Right should begin on the day following the Effective Date.

 

  4.

Accrued Interest and OID.

To the extent that any amount received by a U.S. Holder of an exchanged Claim is attributable to accrued but unpaid interest (or original issue discount (“OID”) on the debt instruments constituting the exchanged Claim, the receipt of such amount should be recognized by the U.S. Holder as ordinary interest income (to the extent not already included in income by the U.S. Holder). Conversely, a U.S. Holder of a Claim may be able to recognize a deductible loss to the extent that any accrued interest previously was recognized by the U.S. Holder but was not paid in full by the Debtors. Such loss may be ordinary, but the tax law is unclear on this point. The tax basis of any non-Cash consideration treated as received in satisfaction of accrued but unpaid interest (or OID) should equal the amount of such accrued but unpaid interest (or OID). The holding period for such non-Cash consideration should begin on the day following the receipt of such consideration.

If the fair market value of the consideration is not sufficient to fully satisfy all principal and interest on a Claim, the extent to which such consideration will be attributable to accrued but unpaid interest is unclear. Certain legislative history indicates that an allocation of consideration as between principal and interest provided in a chapter 11 plan of reorganization is binding for U.S. federal income tax purposes, while certain Treasury Regulations treat payments as allocated first to any accrued but unpaid interest. Under the Plan, except where provided otherwise therein and except to Holders of Allowed RBL Claims, the aggregate consideration to be distributed to U.S. Holders of Claims in each Class will be allocated first to the principal amount of such Claims, with any excess allocated to unpaid interest that accrued on these Claims, if any. However, the IRS could take the position that the consideration received by the U.S. Holder should be allocated in some way other than as provided in the Plan.

U.S. HOLDERS OF CLAIMS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE PROPER ALLOCATION OF THE CONSIDERATION RECEIVED BY THEM UNDER THE PLAN AND THE U.S. FEDERAL INCOME TAX TREATMENT OF ACCRUED BUT UNPAID INTEREST.

 

  5.

Market Discount.

Under the “market discount” provisions of the Code, some or all of any gain realized by a U.S. Holder of a Claim may be treated as ordinary income (instead of capital gain) to the extent of the amount of “market discount” on the debt instruments constituting the exchanged Claim.

In general, a debt instrument is considered to have been acquired with “market discount” if it is acquired other than on original issue and if the U.S. Holder’s adjusted tax basis in the debt instrument is less than (a) in the case of a debt instrument issued without OID, the sum of all remaining payments to be made on the debt instrument, excluding “qualified stated interest” or (b) in the case of a debt instrument issued with OID, its “revised issue price,” in each of the cases of clauses (a)-(b), by at least a de minimis amount (equal to 0.25 percent of the sum of all remaining payments to be made on the debt instrument, excluding qualified stated interest, multiplied by the number of remaining whole years to maturity).

 

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Any gain recognized by a U.S. Holder on the taxable disposition of a Claim that was acquired with market discount should be treated as ordinary income to the extent of the market discount that accrued thereon while the Claim was considered to be held by the U.S. Holder (unless the U.S. Holder elected to include market discount in income as it accrued). To the extent that the Senior Notes Claims that were acquired with market discount are exchanged in a Recapitalization, any market discount that accrued on the Senior Notes Claims (i.e., up to the time of the exchange) but was not recognized by the U.S. Holder is carried over to the property received therefor and any gain recognized on the subsequent sale, exchange, redemption or other disposition of the property is treated as ordinary income to the extent of the accrued, but not recognized, market discount with respect to the exchanged debt instrument.

U.S. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS CONCERNING THE APPLICATION OF THE MARKET DISCOUNT RULES TO THEIR CLAIMS.

 

  6.

Dividends (and Constructive Dividends) on New Common Stock and Constructive Dividends on New Convertible Notes.

Any distributions made on account of New Common Stock will constitute dividends for U.S. federal income tax purposes to the extent of the current or accumulated earnings and profits of Reorganized Chaparral as determined under U.S. federal income tax principles. To the extent that a U.S. Holder receives a total amount of distributions that exceeds such current and accumulated earnings and profits, such distributions (a) will first be treated as a non-taxable return of capital and reduce the U.S. Holder’s basis in its New Common Stock, and (b) next, any portion of such distributions in excess of the U.S. Holder’s basis in its New Common Stock (determined on a share-by-share basis) generally will be treated as capital gain.

Any such dividends on New Common Stock paid to U.S. Holders that are corporations generally will be eligible for the dividends-received deduction so long as the distributing corporation has earnings and profits at least equal to the amount of such dividends prior to the distribution of such dividends. However, the dividends-received deduction is only available if such U.S. Holder satisfies certain holding period requirements with respect to its New Common Stock. Such holding period is reduced for any period during which such U.S. Holder’s risk of loss with respect to the New Common Stock is diminished by reason of the existence of certain options, contracts to sell, short sales or similar transactions. In addition, to the extent that such U.S. Holder’s investment in the New Common Stock on which the dividend is paid is directly attributable to indebtedness incurred, all or a portion of the dividends-received deduction may be disallowed.

Under section 305 of the Code, certain transactions that result in an increase in the proportionate interest of a holder of stock or convertible debt in a corporation’s assets are treated as creating deemed distributions to such holder in respect of such interest. Any deemed distribution will be taxed and reported to the IRS in the same manner as an actual distribution on stock (described above), and thus could potentially be taxable as a dividend (in whole or in part), despite the absence of any actual payment of cash (or property) to the holder in connection with such distribution. In particular, a Holder of a New Convertible Note may be entitled to certain adjustments to the amount of New Common Stock receivable upon conversion of such New Convertible Note. As a result, under certain circumstances, a U.S. Holder of a New Convertible Note may be treated as receiving a constructive distribution for U.S. federal income tax purposes, which would be taxable in a manner similar to an ordinary distribution on stock (as described above). Conversely, if an event occurs that dilutes Holders of New Convertible Notes and the conversion rate is not adjusted (or not adequately adjusted), the resulting increase in the proportionate interests of Holders of New Common Stock could be treated as a constructive taxable stock distribution to U.S. Holders of New Common Stock.

U.S. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS AS TO THE TAX CONSEQUENCES OF HOLDING NEW COMMON STOCK OR NEW CONVERTIBLE NOTES AND OF THE POSSIBILITY THAT HOLDERS WILL BE TREATED AS RECEIVING CONSTRUCTIVE DISTRIBUTIONS WITH RESPECT TO THEIR NEW COMMON STOCK OR NEW CONVERTIBLE NOTES.

 

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  7.

Sale, Redemption or Other Taxable Disposition of New Common Stock.

U.S. Holders generally will recognize capital gain or loss upon the sale, redemption, retirement or other taxable disposition of New Common Stock, unless such disposition occurs pursuant to a reorganization or other tax- free transaction. Such capital gain will be long-term capital gain if at the time of the sale, redemption, retirement or other taxable disposition, the U.S. Holder held the New Common Stock for more than one year. Long-term capital gains of an individual taxpayer generally are taxed at preferential rates. Under the recapture rules of section 108(e)(7) of the Code, a U.S. Holder may be required to treat gain recognized on such dispositions of the New Common Stock as ordinary income if such U.S. Holder took a bad debt deduction with respect to its Claim or recognized an ordinary loss on the exchange of its Claim for New Common Stock.

U.S. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS CONCERNING THE RECOGNITION OF GAIN OR LOSS FOR FEDERAL INCOME TAX PURPOSES ON THE SATISFACTION OF THEIR CLAIMS.

 

  8.

Limitation on Use of Capital Losses.

A U.S. Holder of a Claim who recognizes capital losses as a result of the transactions undertaken pursuant to the Plan will be subject to limits on the use of such capital losses. For a non-corporate U.S. Holder, capital losses may be used to offset any capital gains recognized (without regard to holding periods), and also ordinary income recognized to the extent of the lesser of (a) $3,000 ($1,500 for married individuals filing separate returns) or (b) the excess of such capital losses over such capital gains. A non-corporate U.S. Holder may carry over unused capital losses recognized and apply them against future capital gains recognized and a portion of its ordinary income recognized for an unlimited number of years. For corporate U.S. Holders, capital losses recognized may only be used to offset capital gains recognized. A corporate U.S. Holder that recognizes more capital losses than may be used in a tax year may carry back unused capital losses to the three years preceding the capital loss year or may carry over unused capital losses for the five years following the capital loss year.

 

  9.

Certain Considerations Regarding Exit Facility Loans.

 

  (a)

Acquisition Premium and Bond Premium.

If a U.S. Holder of an RBL Claim receives an initial tax basis in an Exit Facility Loan that is less than or equal to the stated redemption price at maturity of such debt instrument, but greater than the adjusted issue price of such debt instrument, the U.S. Holder should be treated as acquiring such debt instrument with an “acquisition premium.” Unless an election is made, the U.S. Holder generally should reduce the amount of OID otherwise includible in gross income for an accrual period by an amount equal to the amount of OID otherwise includible in gross income multiplied by a fraction, the numerator of which is the excess of the U.S. Holder’s initial tax basis in its interest in such debt instrument over such debt instrument’s adjusted issue price, and the denominator of which is the excess of the sum of all amounts payable on such debt instrument (other than amounts that are “qualified stated interest”) over its adjusted issue price.

If a U.S. Holder of an RBL Claim receives an initial tax basis in an Exit Facility Loan that exceeds the stated redemption price at maturity of such debt instrument, such U.S. Holder will not have to include any OID on the Exit Facility Loans in gross income and should be treated as acquiring such debt instrument with “bond premium.” Such U.S. Holder generally may elect to amortize the bond premium over the term of such debt instrument on a constant-yield method as an offset to interest when includible in income under such U.S. Holder’s regular tax accounting method. If a U.S. Holder does not elect to amortize the premium, that premium may decrease the gain or increase the loss such U.S. Holder would otherwise recognize on disposition of such debt instrument.

 

  (b)

Payments of Qualified Stated Interest and OID.

A debt instrument, such as an Exit Facility Loan, is treated as issued with OID for U.S. federal income tax purposes if its issue price is less than its stated redemption price at maturity by more than a de minimis amount (equal to 0.25 percent of the sum of all remaining payments to be made on the debt instrument, excluding “qualified stated interest,” multiplied by the number of remaining whole years to maturity). A debt instrument’s stated redemption price at maturity includes all principal and interest payable over the term of the debt instrument, other than qualified stated interest. Stated interest payable at a fixed rate is qualified stated interest if it is unconditionally payable in cash at least annually. The terms of the Exit Facility Loans have not yet been determined; to the extent not all the interest on an Exit Facility Loan is unconditionally payable in cash at least annually, such Exit Facility Loan may be considered to be issued with OID. Moreover, an Exit Facility Loans could be treated as issued with OID to the extent the issue price of such Exit Facility Loan is less than its stated principal amount.

 

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A U.S. Holder (whether a cash- or accrual-method taxpayer) generally should be required to include OID in gross income (as ordinary income) as the OID accrues (on a constant-yield-to-maturity basis), in advance of the U.S. Holder’s receipt of cash payments attributable to this OID. In general, the amount of OID includible in the gross income of a U.S. Holder should be equal to a ratable amount of OID with respect to the applicable Exit Facility Loan for each day in an accrual period during the taxable year or portion of the taxable year in which a U.S. Holder held the Exit Facility Loan. An accrual period may be of any length and the accrual periods may vary in length over the term of the Exit Facility Loan, provided that each accrual period is no longer than one year and each scheduled payment of principal or interest occurs either on the final day of an accrual period or on the first day of an accrual period. The amount of OID allocable to any accrual period is an amount equal to the excess, if any, of (a) the product of (i) the adjusted issue price of the Exit Facility Loan at the beginning of such accrual period and (ii) its yield to maturity, determined on the basis of a compounding assumption that reflects the length of the accrual period over (b) the sum of the stated interest payments on the Exit Facility Loan allocable to the accrual period.

If interest other than qualified stated interest is paid in cash on an Exit Facility Loan, a U.S. Holder should not be required to adjust its OID inclusions. Instead, each payment made in cash under the Exit Facility Loan should be treated first as a payment of any accrued OID that has not been allocated to prior payments and then as a payment of principal. A U.S. Holder generally should not be required to include separately in income cash payments received on an Exit Facility Loan to the extent such payments constitute payments of previously accrued OID. The OID rules are complex and U.S. Holders are urged to consult their tax advisors regarding the application of the OID rules to the Exit Facility Loans.

 

  (c)

Sale, Retirement or Other Taxable Disposition.

A U.S. Holder of an Exit Facility Loan will recognize gain or loss upon the sale, redemption, retirement or other taxable disposition of the Exit Facility Loan equal to the difference between the amount realized upon the disposition (less the amount allocable to any accrued interest that has not yet been included in income by the U.S. Holder, which generally will be taxable as ordinary income) and the U.S. Holder’s adjusted tax basis in the Exit Facility Loan. A U.S. Holder’s tax basis in an Exit Facility Loan should be its “issue price” reduced by any principal payments received on the Exit Facility Loan, unless the Exit Facility Loan was issued with OID in excess of the de minimis amount, in which case its tax basis would be its “adjusted issue price” at the time of the disposition. Any gain or loss on the sale, redemption, retirement or other taxable disposition of an Exit Facility Loan generally will be capital gain or loss, and will be long-term capital gain or loss if the U.S. Holder has held the Exit Facility Loan for more than one year as of the date of disposition. U.S. Holders should consult their tax advisors regarding the applicable tax rates and netting rules for capital gains and losses. As discussed above, there are limitations on the deduction of capital losses by both corporate and non-corporate taxpayers.

 

  10.

Certain Considerations Regarding New Convertible Notes.

 

  (a)

Certain Contingencies.

In certain circumstances, the Debtors may be obligated to pay interest on the New Convertible Notes in kind (“PIK Interest”) or to pay amounts in excess of principal on the New Convertible Notes. These obligations may implicate the provisions of the Treasury Regulations relating to “contingent payment debt instruments,” in which case the timing and amount of income inclusions and the character of income recognized by U.S. Holders of the New Convertible Notes may be different from the consequences discussed herein. Under these Treasury Regulations, however, one or more contingencies will not cause a debt instrument to be treated as a contingent payment debt instrument if, as of the issue date, such contingencies, individually or in the aggregate, are considered “remote” or “incidental.” Although the matter is not free from doubt, the Debtors intend to take the position that the foregoing contingencies are remote and/or incidental, individually and in the aggregate, within the meaning of the applicable Treasury Regulations as of the date hereof, and thus do not result in the New Convertible Notes being treated as contingent payment debt instruments under applicable Treasury Regulations.

 

In addition, Reorganized Chaparral has the right to pay interest either (i) in cash at a rate of 9% or (ii) in kind at a rate of 13%, in each case at least annually, unless, as described above, Reorganized Chaparral is obligated to pay interest in kind. This right may also implicate the provisions of the Treasury Regulations relating to contingent payment debt instruments. However, under these Treasury Regulations, an issuer’s “unconditional” right to make payments on a debt instrument under alternative payment schedules will not cause (by itself) a debt instrument to be treated as a contingent payment debt instrument. The applicable Treasury Regulations do not specify whether a right

 

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conditioned on a remote or incidental occurrence is treated as an “unconditional” right for purposes of the relevant Treasury Regulations. As described above, the Debtors intend to take the position that the circumstances obligating the Debtors to pay interest on the New Convertible Notes in kind are remote and/or incidental, individually and in the aggregate, as of the date hereof. Accordingly, although the matter is not free from doubt, the Debtors intend to take the position that the Reorganized Chaparral’s right to pay interest either (i) in cash at a rate of 9% or (ii) in kind at a rate of 13%, is “unconditional,” and thus does not result in the New Convertible Notes being treated as contingent payment debt instruments under applicable Treasury Regulations.

The Debtors’ positions are binding on a U.S. Holder of the New Convertible Notes, unless the U.S. Holder discloses in the proper manner to the IRS on its tax return for the year during which it acquires the New Convertible Notes that it is taking a different position. However, the Debtors’ positions are not binding on, and may be challenged by, the IRS. A successful challenge of this position by the IRS could affect the timing and amount of a U.S. Holder’s income and could cause the gain from the sale or other disposition of a New Convertible Note to be treated as ordinary income rather than capital gain. This disclosure assumes that the New Convertible Notes will not be considered contingent payment debt instruments.

U.S. HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE POTENTIAL APPLICATION TO THE NEW CONVERTIBLE NOTES OF THE CONTINGENT PAYMENT DEBT INSTRUMENT TREASURY REGULATIONS AND THE CONSEQUENCES THEREOF.

 

  (b)

Interest and OID on New Convertible Notes.

Pursuant to the Plan, Reorganized Chaparral has the right to pay interest either (i) in cash at a rate of 9% or (ii) in kind at a rate of 13%, in each case at least annually. Each U.S. Holder of a New Convertible Note will be required to account for the interest payable with respect to the New Convertible Note using the OID rules of the Code. In general, a debt instrument is treated as having OID to the extent its “stated redemption price at maturity” exceeds its “issue price.”

The “stated redemption price at maturity” of a New Convertible Note is generally equal to the sum of all payments to be made under the loan other than “qualified stated interest.” Qualified stated interest is any interest that is unconditionally payable in cash or in property (other than other debt instruments of the issuer) at least annually at a single fixed rate. Because Reorganized Chaparral will have the option to either pay the interest in cash or in kind, interest on the New Convertible Notes is not unconditionally payable at least annually in cash or other property (other than other debt instruments of the issuer). Therefore, none of the interest will be qualified stated interest for purposes of determining whether the New Convertible Notes are issued with OID.

Pursuant to the applicable Treasury Regulations, the “issue price” of each New Convertible Note will be the purchase price that must be paid in order to exercise a Subscription Right to purchase a New Convertible Note pursuant to the Rights Offering.

Since the New Convertible Notes will be treated as issued with OID, each U.S. Holder will be required to accrue the OID in respect of the New Convertible Notes received, and include such amount in its gross income as interest, over the term of such loan based on the constant-yield method. Under the applicable Treasury Regulations, if an issuer has an unconditional right to make payments under a debt instrument under alternative payment schedules, then, for purposes of determining such debt instrument’s yield to maturity, the issuer is deemed to exercise or not exercise such right in a manner that minimizes the yield on the debt instrument. The yield to maturity of the New Convertible Notes, therefore, will initially be determined on the basis that all interest payments will be paid in cash. If, however, Reorganized Chaparral subsequently pays interest in kind, the yield to maturity and the amount of OID of a New Convertible Note for future periods will be re-determined by treating the New Convertible Note as having been retired and reissued for an amount equal to its adjusted issue price at that time. A U.S. Holder’s tax basis in a New Convertible Note will be increased by the amount of any OID included in income and reduced by any cash payments made with respect to such New Convertible Note.

 

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  (c)

Conversion of New Convertible Notes into New Common Stock.

U.S. Holders of New Convertible Notes generally will not recognize gain or loss upon the conversion of the New Convertible Notes solely into shares of New Common Stock, other than with respect to cash received in lieu of fractional shares, which should be treated as described below, and other than amounts attributable to accrued but unpaid interest, which should be taxable as interest to the extent not previously included in income. A U.S. Holder’s tax basis in the New Common Stock received upon such a conversion (including any fractional share deemed received, but excluding any common stock attributable to accrued interest, the tax basis of which would equal its fair market value) will be the same as the U.S. Holder’s adjusted tax basis in the New Convertible Note converted. A U.S. Holder’s holding period for such New Common Stock should include the holding period for the notes that were converted, except with respect to New Common Stock attributable to accrued interest (the holding period of which would begin the day after the New Common Stock is received).

If a U.S. Holder receives solely cash in exchange for a New Convertible Note upon conversion, the U.S. Holder’s gain or loss will be determined in the same manner as if the U.S. Holder disposed of the New Convertible Note in a taxable disposition (as described below under “—Sale, Redemption or Other Taxable Disposition of New Convertible Notes”).

In the event that Reorganized Chaparral delivers New Common Stock and cash upon such a conversion, the U.S. federal income tax treatment of the conversion is uncertain. U.S. Holders should consult their tax advisors regarding the consequences of such a conversion.

 

  (d)

Sale, Redemption or Other Taxable Disposition of New Convertible Notes.

Except as described above under “—Conversion of New Convertible Notes into New Common Stock,” a U.S. Holder generally will recognize gain or loss upon a sale, redemption or other taxable disposition of a New Convertible Note equal to the difference between the amount received and the U.S. Holder’s adjusted tax basis in the New Convertible Note at that time. A U.S. Holder’s adjusted tax basis in a New Convertible Note received on an exercise of a Subscription Right will generally be equal to the sum of the U.S. Holder’s tax basis in the Subscription Right and the amount paid for the New Convertible Note, increased by any OID and market discount that the U.S. Holder previously included in income with respect to the New Convertible Note and reduced by any payments of cash.

Although not free from doubt, the U.S. Holder’s adjusted tax basis and adjusted issued price in a New Convertible Note should be allocated between the New Convertible Note and the additional New Convertible Note received in respect of PIK Interest thereon in proportion to their relative principal amounts. The U.S. Holder’s holding period in the additional New Convertible Note received in respect of PIK Interest would likely be identical to the holding period for the New Convertible Note with respect to which the additional New Convertible Note in respect of PIK Interest was received.

Subject to the treatment of a portion of any gain as ordinary income to the extent of any previously unreported market discount accrued on a New Convertible Note, any gain or loss recognized on the sale, redemption or other taxable disposition of such New Convertible Note generally will be capital gain or loss, and will be long-term capital gain or loss if, at the time of sale, exchange, redemption or other taxable disposition, the U.S. Holder has held the New Convertible Note for more than one year. As discussed below, there are limitations on the deduction of capital losses by both corporate and non-corporate taxpayers.

U.S. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS AS TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF DISPOSING OF, IN SEPARATE TRANSACTIONS, A NEW CONVERTIBLE NOTE AND ANY ADDITIONAL NEW CONVERTIBLE NOTE ISSUED AS PIK INTEREST WITH RESPECT TO SUCH NEW CONVERTIBLE NOTE.

 

  11.

Medicare Tax.

Certain U.S. Holders that are individuals, estates or trusts are required to pay an additional 3.8% tax on, among other things, dividends and gains from the sale or other disposition of capital assets. U.S. Holders that are individuals, estates or trusts should consult their tax advisors regarding the effect, if any, of this tax provision on their ownership and disposition of the New Common Stock, New Convertible Notes and the Exit Facility Loans.

 

  D.

Certain U.S. Federal Income Tax Consequences to Non-U.S. Holders of Certain Claims.

The following discussion assumes that the Debtors will structure the Restructuring Transactions as currently contemplated by the Plan and includes only certain U.S. federal income tax consequences of the Restructuring Transactions to Non-U.S. Holders. The discussion does not include any non-U.S. tax considerations. The rules governing the U.S. federal income tax consequences to Non-U.S. Holders are complex, and each Non-U.S. Holder should consult its tax advisor regarding the U.S. federal, state, and local and the non-U.S. tax consequences of the consummation of the Plan to such Non-U.S. Holder.

 

89

Whether a Non-U.S. Holder realizes gain or loss pursuant to the transactions undertaken as part of the Plan and the amount of such gain or loss is determined in the same manner as set forth above in connection with U.S. Holders.

 

  1.

Gain Recognition on Exchange of Claims.

To the extent that the Restructuring Transactions are treated as a taxable exchange or otherwise result in the recognition of taxable gain for U.S. federal income tax purposes, any gain realized by a Non-U.S. Holder on the exchange of its Claim generally will not be subject to U.S. federal income taxation unless (a) the Non-U.S. Holder is an individual who was present in the U.S. for 183 days or more during the taxable year in which the Restructuring Transactions occur and certain other conditions are met, or (b) such gain is effectively connected with the conduct by such Non-U.S. Holder of a trade or business in the U.S. (and if an income tax treaty applies, such gain is attributable to a permanent establishment maintained by such Non-U.S. Holder in the U.S.).

If the first exception applies, to the extent that any gain is taxable, the Non-U.S. Holder generally will be subject to U.S. federal income tax at a rate of 30 percent (or at a reduced rate or exemption from tax under an applicable income tax treaty) on the amount by which such Non-U.S. Holder’s capital gains allocable to U.S. sources exceed capital losses allocable to U.S. sources during the taxable year of the exchange. If the second exception applies, the Non-U.S. Holder generally will be subject to U.S. federal income tax with respect to any gain realized on the exchange in the same manner as a U.S. Holder. To claim an exemption from withholding tax, such Non-U.S. Holder will be required to provide a properly executed IRS Form W-8ECI (or such successor form as the IRS designates). In addition, if such Non-U.S. Holder is a corporation, it may be subject to a branch profits tax equal to 30 percent (or such lower rate provided by an applicable treaty) of its effectively connected earnings and profits for the taxable year, subject to certain adjustments.

 

  2.

Interest Payments; Accrued Interest (and OID).

As described under “—Certain U.S. Federal Income Tax Consequences to U.S. Holders of Certain Claims—Consequences to U.S. Holders of Senior Notes Claims (Class 4)” above, the treatment of the New Convertible Notes for U.S. federal income tax purposes is uncertain. This discussion assumes that the New Convertible Notes will be treated as debt for U.S. federal income tax purposes, but Non-U.S. Holders should consult their tax advisors regarding the proper characterization of the New Convertible Notes for U.S. federal income tax purposes.

Payments to a Non-U.S. Holder that are attributable to either (a) interest on (or OID accruals with respect to) the Exit Facility Loans and the New Convertible Notes received under the Plan or (b) accrued but unpaid interest on a Non-U.S. Holder’s Claim, in each case generally will not be subject to U.S. federal income or withholding tax, provided that the withholding agent has received or receives, prior to payment, appropriate documentation (generally, IRS Form W-8BEN or W-8BEN-E) establishing that the Non-U.S. Holder is not a U.S. person, unless:

 

  •  

the Non-U.S. Holder actually or constructively owns 10 percent or more of the total combined voting power of all classes of equity of the Debtor obligor on a Claim (in the case of consideration received in respect of accrued but unpaid interest) or Reorganized Chaparral on the debt received under the Plan (in the case of interest payments with respect thereto);

 

  •  

the Non-U.S. Holder is a “controlled foreign corporation” that is a “related person” with respect to the Debtor obligor (each, within the meaning of the Code);

 

  •  

the Non-U.S. Holder is a bank receiving interest described in section 881(c)(3)(A) of the Code; or

 

  •  

such interest (or OID) is effectively connected with the conduct by the Non-U.S. Holder of a trade or business within the U.S. (in which case, provided the Non-U.S. Holder provides a properly executed IRS Form W-8ECI (or successor form) to the withholding agent, the Non-U.S. Holder (x) generally will not be subject to withholding tax but (y) will be subject to U.S. federal income tax in the same manner as a U.S. Holder (unless an applicable income tax treaty provides otherwise), and a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes may also be subject to a branch profits tax with respect to such Non-U.S. Holder’s effectively connected earnings and profits that are attributable to the accrued but unpaid interest at a rate of 30 percent (or at a reduced rate or exemption from tax under an applicable income tax treaty).

 

90

A Non-U.S. Holder that does not qualify for exemption from withholding tax with respect to interest that is not effectively connected income generally will be subject to withholding of U.S. federal income tax at a 30 percent (or at a reduced rate or exemption from tax under an applicable income tax treaty) on (a) interest on debt received under the Plan and (b) payments that are attributable to accrued but unpaid interest on such Non-U.S. Holder’s Claim. For purposes of providing a properly executed IRS Form W-8BEN or W-8BEN-E, special procedures are provided under applicable Treasury Regulations for payments through qualified foreign intermediaries or certain financial institutions that hold customers’ securities in the ordinary course of their trade or business.

 

  3.

Dividends on New Common Stock and Constructive Dividends on New Convertible Notes.

Any distributions made on account of New Common Stock will constitute dividends for U.S. federal income tax purposes to the extent of the current or accumulated earnings and profits of Reorganized Chaparral as determined under U.S. federal income tax principles. Distributions that are treated as return of capital or gain could be subject to withholding tax at a rate of 15% if we are considered a USRPHC (defined below) and certain other conditions are met, as described below under “–Certain U.S. Federal Income Tax Consequences to Non-U.S. Holders of Certain Claims–Sale, Redemption or Other Taxable Disposition of New Common Stock or New Convertible Note.”

Except as described below, any such dividends paid with respect to New Common Stock held by a Non-U.S. Holder that are not effectively connected with the Non-U.S. Holder’s conduct of a U.S. trade or business (or if an income tax treaty applies, are not attributable to a permanent establishment maintained by such Non-U.S. Holder in the U.S.) will be subject to U.S. federal withholding tax at a rate of 30 percent (or lower treaty rate or exemption from tax, if applicable). A Non-U.S. Holder generally will be required to satisfy certain IRS certification requirements in order to claim a reduction of or exemption from withholding under a tax treaty by filing IRS Form W-8BEN or W-8BEN-E (or a successor form) upon which the Non-U.S. Holder certifies, under penalties of perjury, its status as a non-U.S. person and its entitlement to the lower treaty rate or exemption from tax with respect to such payments.

Dividends paid with respect to New Common Stock held by a Non-U.S. Holder that are effectively connected with the Non-U.S. Holder’s conduct of a U.S. trade or business (and if an income tax treaty applies, are attributable to a permanent establishment maintained by such Non-U.S. Holder in the U.S.) generally will be subject to U.S. federal income tax as if the Non-U.S. Holder were a U.S. Holder, and a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes may also be subject to a branch profits tax with respect to such Non-U.S. Holder’s effectively connected earnings and profits that are attributable to the dividends at a rate of 30 percent (or at a reduced rate or exemption from tax under an applicable income tax treaty).

As discussed under “—Certain U.S. Federal Income Tax Consequences to U.S. Holders of Certain Claims—Dividends (and Constructive Dividends) on New Common Stock and Constructive Dividends on New Convertible Notes” above, under certain circumstances, a Holder of a New Convertible Note (or New Common Stock) may be treated as receiving a constructive distribution for U.S. federal income tax purposes, which would generally be taxable in a manner similar to an ordinary distribution on stock (as described above). Non-U.S. Holders should consult their tax advisors as to the tax consequences of receiving constructive dividends. If Reorganized Chaparral is required to pay any withholding taxes in connection with any constructive dividends allocable to a Non-U.S. Holder, Reorganized Chaparral may reduce other payments or amounts owing to the Non-U.S. Holder on account of such payment.

 

  4.

Sale, Redemption or Other Taxable Disposition of New Common Stock or New Convertible Notes.

A Non-U.S. Holder generally will not be subject to U.S. federal income tax with respect to any gain realized on the sale or other taxable disposition (including a cash redemption) of New Common Stock or New Convertible Notes, unless:

 

  •  

such Non-U.S. Holder is an individual who is present in the U.S. for 183 days or more in the taxable year of disposition or who is subject to special rules applicable to former citizens and residents of the U.S.;

 

91

  •  

such gain is effectively connected with such Non-U.S. Holder’s conduct of a U.S. trade or business (and if an income tax treaty applies, such gain is attributable to a permanent establishment maintained by such Non-U.S. Holder in the U.S.); or

 

  •  

in the case of the sale of New Common Stock or New Convertible Notes, Reorganized Chaparral is or has been during a specified testing period a “U.S. real property holding corporation” (a “USRPHC”) for U.S. federal income tax purposes.

If the first exception applies, the Non-U.S. Holder generally will be subject to U.S. federal income tax at a rate of 30 percent (or at a reduced rate or exemption from tax under an applicable income tax treaty) on the amount by which such Non-U.S. Holder’s capital gains allocable to U.S. sources exceed capital losses allocable to U.S. sources during the taxable year of disposition.

If the second exception applies, the Non-U.S. Holder generally will be subject to U.S. federal income tax with respect to such gain in the same manner as a U.S. Holder, and a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes may also be subject to a branch profits tax with respect to earnings and profits effectively connected with a U.S. trade or business that are attributable to such gains at a rate of 30 percent (or at a reduced rate or exemption from tax under an applicable income tax treaty).

With respect to the third exception above, the Debtors believe that Chaparral currently is, and Reorganized Chaparral will be, a USRPHC. Generally, a corporation is a USRPHC if the fair market value of its U.S. real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business.

If Reorganized Chaparral is a USRPHC, and if New Common Stock is in the year of its disposition traded on an “established securities market” (within the meaning of applicable U.S. Treasury regulations):

 

  •  

with respect to a disposition of New Common Stock, if the Non-U.S. Holder has owned, or is deemed to have owned, at any time within the shorter of the five-year period preceding the disposition of New Common Stock or the Non-U.S. Holder’s holding period, more than 5% of New Common Stock, the Non-U.S. Holder generally will be subject to U.S. federal income tax on any gain from the disposition;

 

  •  

with respect to a disposition of New Convertible Notes:

 

  o

if the New Convertible Notes are regularly traded on an established securities market in the year of its disposition and the Non-U.S. Holder has owned, or is deemed to have owned, at any time within the shorter of the five-year period preceding the disposition of the New Convertible Notes (including conversion) or the Non-U.S. Holder’s holding period, more than 5% of the New Convertible Notes outstanding, the Non-U.S. Holder generally will be subject to U.S. federal income tax on any gain from the disposition.

 

  o

if the New Convertible Notes are not regularly traded on an established securities market in the year of its disposition, the Non-U.S. Holder generally will be subject to U.S. federal income tax on the gain from the disposition (including conversion) and the transferee of the New Convertible Notes generally will be required to withhold 15% of the gross proceeds payable to the Non-U.S. Holder if on the date the Non-U.S. Holder acquired the New Convertible Notes they had a fair market value greater than 5% of the fair market value of New Common Stock outstanding. For this purpose, if the Non-U.S. Holder subsequently acquires additional New Convertible Notes, then such New Convertible Notes will be aggregated and valued as of the date of the subsequent acquisition in order to apply the 5% limitation.

If, during the calendar year in which the relevant sale, exchange or other taxable disposition occurs, Reorganized Chaparral is a USRPHC, and if New Common Stock is not regularly traded on an “established securities market” (within the meaning of applicable U.S. Treasury regulations), the Non-U.S. Holder generally will be subject to U.S. federal income tax on any gain from the disposition of the New Convertible Notes or New Common Stock (regardless of the amount of New Convertible Notes or New Common Stock owned), and transferees of the New Convertible Notes or New Common Stock will generally be required to withhold 15% of the gross proceeds payable to the Non-U.S. Holder. The gain from the disposition will be subject to regular U.S. income tax as if the Non-U.S. Holder were a U.S. Holder.

 

92

If the gain from any disposition is subject to tax as described above, it will be taxed as if the Non-U.S. Holder were a U.S. Holder.

NON-U.S. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE FOREGOING RULES TO THEIR OWNERSHIP AND DISPOSITION OF THE NEW CONVERTIBLE NOTES OR NEW COMMON STOCK, AND IN PARTICULAR WITH RESPECT TO THE POTENTIAL CONSEQUENCES OF REORGANIZED CHAPARRAL BEING A USRPHC.

 

  5.

Conversion of New Convertible Notes into New Common Stock.

The conversion of a New Convertible Note solely into shares of New Common Stock and cash in lieu of a fractional share of New Common Stock generally will not be a taxable event, except that (a) the Non-U.S. Holder’s receipt of cash in lieu of a fractional share will be treated as a sale or other taxable disposition of such fractional share as described under “—Sale, Redemption or Other Taxable Disposition of New Common Stock or New Convertible Notes” above and (b) the fair market value of the shares of New Common Stock the Non-U.S. Holder receives with respect to accrued interest will be treated as a payment of interest as described under “—Interest Payments; Accrued Interest (and OID)” above.

Notwithstanding the foregoing, if the New Convertible Notes, but not the shares of New Common Stock into which the New Convertible Notes are convertible, are subject to the special rules governing interests in USRPHCs as described under “—Sale, Redemption or Other Taxable Disposition of New Common Stock or New Convertible Notes” above (which would arise, for example ,if New Common Stock is regularly traded on an established securities market and the Non-U.S. Holder owns New Convertible Notes in amounts exceeding certain thresholds described therein), the conversion of the New Convertible Notes solely into shares of New Common Stock would be a taxable event and the Non-U.S. Holder would be subject to U.S. tax in the same manner as described in that section. If both the New Convertible Notes and shares of New Common Stock into which the New Convertible Notes are convertible are subject to the special rules governing interests in USRPHCs as described above, then, although the conversion of the New Convertible Notes solely into shares of New Common Stock generally would not be taxable, the Non-U.S. Holder may be required to satisfy certain procedural requirements in accordance with the applicable Treasury Regulations.

If the Non-U.S. Holder converts a New Convertible Note and receives only cash or a combination of New Common Stock and cash, all or a part of the transaction may be treated as a sale, exchange or other taxable disposition of the New Convertible Note as described under “—Sale, Redemption or Other Taxable Disposition of New Common Stock or New Convertible Notes” above.

 

  E.

FATCA.

Under the Foreign Account Tax Compliance Act (“FATCA”), foreign financial institutions and certain other foreign entities must report certain information with respect to their U.S. account holders and investors or be subject to withholding at a rate of 30 percent on the receipt of “withholdable payments.” For this purpose, “withholdable payments” are generally U.S.-source payments of fixed or determinable, annual or periodical income (including dividends (and constructive dividends), if any, on the New Common Stock and the New Convertible Notes and interest (including PIK Interest) on the Exit Facility Loans or on the New Convertible Notes), and, subject to the paragraph immediately below, also include gross proceeds from the sale of any property of a type which can produce U.S.-source interest or dividends (which would include the New Common Stock, New Convertible Notes and Exit Facility Loans). FATCA withholding will apply even if the applicable payment would not otherwise be subject to U.S. federal nonresident withholding.

FATCA withholding rules currently only apply to U.S.-source payments of fixed or determinable, annual or periodic income. FATCA withholding rules were previously scheduled to take effect on January 1, 2019 that would have applied to payments of gross proceeds from the sale or other disposition of property of a type that can produce U.S.-source interest or dividends. However, such withholding has effectively been suspended under proposed Treasury Regulations that may be relied on until final regulations become effective. Nonetheless, there can be no assurance that a similar rule will not go into effect in the future. Each Non-U.S. Holder should consult its tax advisor regarding the possible impact of these rules on such Non-U.S. Holder’s ownership of the New Common Stock, New Convertible Notes and Exit Facility Loans.

 

93

  F.

Information Reporting and Backup Withholding.

The Debtors and Reorganized Debtors will withhold all amounts required by law to be withheld from payments of interest and dividends. Under the backup withholding rules, a Holder of a Claim may be subject to backup withholding with respect to distributions or payments made pursuant to the Plan unless, in the case of a U.S. Holder, such U.S. Holder provides a properly executed IRS Form W-9 and, in the case of a Non-U.S. Holder, such Non-U.S. Holder provides a properly executed applicable IRS Form W-8 (or otherwise establishes such Non-U.S. Holder’s eligibility for an exemption). Backup withholding is not an additional tax but is, instead, an advance payment that may entitle the Holder to a refund from the IRS to the extent it results in an overpayment of tax, provided that the required information is timely provided to the IRS.

The Debtors and Reorganized Debtors will comply with all applicable reporting requirements of the Code. In general, information reporting requirements may apply to distributions or payments made to a Holder of a Claim under the Plan. In addition, from an information reporting perspective, the Treasury Regulations generally require disclosure by a taxpayer on its U.S. federal income tax return of certain types of transactions in which the taxpayer participated, including, among other types of transactions, certain transactions that result in the taxpayer’s claiming a loss in excess of specified thresholds. Holders are urged to consult their tax advisors regarding these regulations and whether the transactions contemplated by the Plan would be subject to these regulations and require disclosure on the Holders’ tax returns.

THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN ARE COMPLEX. THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER IN LIGHT OF SUCH HOLDER’S CIRCUMSTANCES AND U.S. FEDERAL INCOME TAX SITUATION. ALL HOLDERS OF CLAIMS SHOULD CONSULT WITH THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE TRANSACTIONS CONTEMPLATED BY THE PLAN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR FOREIGN TAX LAWS, AND OF ANY CHANGE IN APPLICABLE TAX LAWS.

 

94

  XI.

Recommendation of the Debtors

In the opinion of the Debtors, the Plan is preferable to the alternatives described in this Disclosure Statement because it provides for a larger distribution to Holders of Allowed Claims and Interests than would otherwise result in a liquidation under chapter 7 of the Bankruptcy Code. In addition, any alternative other than Confirmation could result in extensive delays and increased administrative expenses resulting in smaller distributions to Holders of Allowed Claims than proposed under the Plan. Accordingly, the Debtors recommend that Holders of Claims entitled to vote to accept or reject the Plan support Confirmation and vote to accept the Plan.

 

Chaparral Energy, Inc.,
on behalf of itself and each of the other Debtors
By:  

/s/ Charles Duginski

Name: Charles Duginski
Title:   Chief Executive Officer

Prepared By:

 

John H. Knight    Damian S. Schaible
Amanda R. Steele    Angela M. Libby
Brendan J. Schlauch    Jacob S. Weiner
RICHARDS, LAYTON & FINGER, P.A.    DAVIS POLK & WARDWELL LLP
One Rodney Square    450 Lexington Avenue
920 North King Street    New York, New York 10017
Wilmington, Delaware 19801    Telephone:(212) 450-4000
Telephone: (302) 651-7700    Facsimile:(212) 701-5800
Facsimile: (302) 651-7701   

Proposed Co-Counsel to the Debtors and

Debtors in Possession

   
Dated: August 15, 2020   

 

95

Exhibit A

Plan of Reorganization

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

 

 

    )   
In re:    )    Chapter 11
   )   
CHAPARRAL ENERGY, INC., et al.,1    )    Case No. 20-_____ (___)
   )   

Debtors.

    )    (Joint Administration Requested)

 

    )   

 

DEBTORS’ JOINT PREPACKAGED CHAPTER 11 PLAN OF REORGANIZATION

 

THIS CHAPTER 11 PLAN IS BEING SOLICITED FOR ACCEPTANCE OR REJECTION IN ACCORDANCE WITH BANKRUPTCY CODE SECTION 1125 AND WITHIN THE MEANING OF BANKRUPTCY CODE SECTION 1126. THIS CHAPTER 11 PLAN WILL BE SUBMITTED TO THE BANKRUPTCY COURT FOR APPROVAL FOLLOWING SOLICITATION AND THE DEBTORS’ FILING FOR CHAPTER 11 BANKRUPTCY.

 

John H. Knight (No. 3848)    Damian S. Schaible
Amanda R. Steele (No. 5530)    Angela M. Libby
Brendan J. Schlauch (No. 6115)    Jacob S. Weiner
RICHARDS, LAYTON & FINGER, P.A.    DAVIS POLK & WARDWELL LLP
One Rodney Square    450 Lexington Avenue
920 North King Street    New York, New York 10017
Wilmington, Delaware 19801    Telephone:(212) 450-4000
Telephone: (302) 651-7700    Facsimile:(212) 701-5800
Facsimile: (302) 651-7701   

Proposed Co-Counsel to the Debtors and

Debtors in Possession

   
Dated: August 15, 2020   

 

 

1

The Debtors in these anticipated cases, along with the last four digits (or five digits, in cases in which multiple Debtors have the same last four digits) of each Debtor’s federal tax identification number, are: CEI Acquisition, L.L.C. (1817); CEI Pipeline, L.L.C. (6877); Chaparral Biofuels, L.L.C. (1066); Chaparral CO2, L.L.C. (1656); Chaparral Energy, Inc. (90941); Chaparral Energy, L.L.C. (20941); Chaparral Exploration, L.L.C. (1968); Chaparral Real Estate, L.L.C. (1655); Chaparral Resources, L.L.C. (1710); Charles Energy, L.L.C. (3750); Chestnut Energy, L.L.C. (9730); Green Country Supply, Inc. (2723); Roadrunner Drilling, L.L.C. (2399); and Trabajo Energy, L.L.C. (9753). The Debtors’ address is 701 Cedar Lake Boulevard, Oklahoma City, OK 73114.

TABLE OF CONTENTS

 

     Page  
INTRODUCTION      1  

ARTICLE I. DEFINED TERMS, RULES OF INTERPRETATION, COMPUTATION OF TIME, GOVERNING LAW, AND OTHER REFERENCES

      1  

A.

   Defined Terms      1  

B.

   Rules of Interpretation      14  

C.

   Computation of Time      14  

D.

   Governing Law      14  

E.

   Reference to Monetary Figures      14  

F.

   Reference to the Debtors or the Reorganized Debtors      14  

G.

   Controlling Documents      14  

H.

   Consent Rights      15  

ARTICLE II. ADMINISTRATIVE AND PRIORITY CLAIMS

      15  

A.

   Administrative Claims      15  

B.

   Professional Fee Claims      16  

C.

   Priority Tax Claims      17  

ARTICLE III. CLASSIFICATION, TREATMENT, AND VOTING OF CLAIMS AND INTERESTS

      17  

A.

   Classification of Claims and Interests      17  

B.

   Treatment of Classes of Claims and Interests      18  

C.

   Special Provision Governing Unimpaired Claims      22  

D.

   Elimination of Vacant Classes      22  

E.

   Voting Classes; Presumed Acceptance by Non-Voting Classes      22  

F.

   Subordinated Claims and Interests      22  

G.

   Intercompany Interests      22  

H.

   Controversy Concerning Impairment      22  

I.

   Confirmation Pursuant to Section 1129(b) of the Bankruptcy Code      22  

ARTICLE IV. MEANS FOR IMPLEMENTATION OF THE PLAN

      23  

A.

   General Settlement of Claims and Interests      23  

B.

   Restructuring Transactions      23  

C.

   Sources of Consideration for Plan Distributions      24  

D.

   Exemption from Registration Requirements      26  

E.

   Corporate Existence      27  

F.

   Corporate Action      27  

G.

   Vesting of Assets in the Reorganized Debtors      28  

H.

   Cancellation of Notes, Instruments, Certificates, and Other Documents      28  

I.

   Effectuating Documents; Further Transactions      29  

J.

   Exemptions from Certain Taxes and Fees      29  

K.

   New Corporate Governance Documents      29  

L.

   Directors and Officers      30  

M.

   Management Incentive Plan      30  

N.

   Preservation of Causes of Action      30  

O.

   Preservation of Royalty and Working Interests      31  

P.

   Restructuring Support Agreement      31  

ARTICLE V. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES

     31  

A.

   Assumption of Executory Contracts and Unexpired Leases      31  

B.

   Claims Based on Rejection of Executory Contracts or Unexpired Leases      32  

C.

   Cure of Defaults and Objections to Cure Amounts and Assumption      32  

D.

   Insurance Policies      33  

E.

   Indemnification Provisions      33  

F.

   Director, Officer, Manager, and Employee Liability Insurance      33  

G.

   Employee and Retiree Benefits      34  

H.

   Modifications, Amendments, Supplements, Restatements, or Other Agreements      34  

I.

   Reservation of Rights      34  

J.

   Nonoccurrence of Effective Date.      35  

K.

   Contracts and Leases Entered Into After the Petition Date      35  

ARTICLE VI. PROVISIONS GOVERNING DISTRIBUTIONS

      35  

A.

   Timing and Calculation of Amounts to Be Distributed      35  

B.

   Distributions on Account of Obligations of Multiple Debtors      35  

C.

   Distribution Agent      35  

D.

   Rights and Powers of Distribution Agent      35  

E.

   Delivery of Distributions      36  

F.

   Manner of Payment      37  

G.

   Compliance Matters      37  

H.

   No Postpetition or Default Interest on Claims      37  

I.

   Allocation Between Principal and Accrued Interest      38  

J.

   Setoffs and Recoupment      38  

K.

   Claims Paid or Payable by Third Parties      38  

ARTICLE VII. PROCEDURES FOR RESOLVING DISPUTED CLAIMS AND INTERESTS

     39  

A.

   Disputed Claims and Interests Process      39  

B.

   Claims Administration Responsibilities.      39  

C.

   Estimation of Claims and Interests      40  

D.

   No Distributions Pending Allowance      40  

E.

   Distributions After Allowance      40  

F.

   No Interest      40  

ARTICLE VIII. SETTLEMENT, RELEASE, INJUNCTION, AND RELATED PROVISIONS

     40  

A.

   Compromise and Settlement of Claims, Interests, and Controversies      40  

B.

   Discharge of Claims      41  

C.

   Release of Liens      41  

D.

   Debtor Release      41  

E.

   Third-Party Release      42  

F.

   Exculpation      42  

G.

   Injunction      43  

H.

   Protection Against Discriminatory Treatment      43  

I.

   Recoupment      44  

J.

   Reimbursement or Contribution      44  

K.

   Term of Injunctions or Stays      44  

L.

   Document Retention      44  

ARTICLE IX. CONDITIONS TO THE EFFECTIVE DATE

     44  

A.

   Conditions Precedent to the Effective Date.      44  

 

ii

B.

   Waiver of Conditions to Confirmation or the Effective Date      45  

C.

   Substantial Consummation      46  

D.

   Effect of Non-Occurrence of Conditions to Consummation      46  

ARTICLE X. MODIFICATION, REVOCATION, OR WITHDRAWAL OF THE PLAN

      46  

A.

   Amendment and Modification of Plan      46  

B.

   Effect of Confirmation on Modifications      46  

C.

   Revocation or Withdrawal of the Plan      46  

ARTICLE XI. RETENTION OF JURISDICTION

     46  

ARTICLE XII. MISCELLANEOUS PROVISIONS

     48  

A.

   Immediate Binding Effect      48  

B.

   Additional Documents      49  

C.

   Statutory Fees      49  

D.

   Payment of Certain Fees and Expenses      49  

E.

   Reservation of Rights      49  

F.

   Successors and Assigns      49  

G.

   Service of Documents      49  

H.

   Entire Agreement      50  

I.

   Plan Supplement Exhibits      51  

J.

   Non-Severability      51  

K.

   Votes Solicited in Good Faith      51  

L.

   Waiver or Estoppel      51  

M.

   Closing of Chapter 11 Cases      51  

INTRODUCTION

Chaparral Energy, Inc. and its affiliated debtors in the above-captioned chapter 11 cases (each a “Debtor” and, collectively, the “Debtors”) propose this joint plan of reorganization (the “Plan”) for the resolution of the outstanding Claims against and Interests in the Debtors pursuant to chapter 11 of the Bankruptcy Code. Capitalized terms used in the Plan and not otherwise defined shall have the respective meanings set forth in Article I.A of the Plan. Although proposed jointly for administrative purposes, the Plan constitutes a separate Plan for each Debtor for the resolution of outstanding Claims and Interests pursuant to the Bankruptcy Code. Each Debtor is a proponent of the Plan within the meaning of section 1129 of the Bankruptcy Code. The classifications of Claims and Interests set forth in Article III of the Plan shall be deemed to apply separately with respect to each Plan proposed by each Debtor, as applicable. The Plan does not contemplate substantive consolidation of any of the Debtors. Reference is made to the Disclosure Statement for a discussion of the Debtors’ history, business, properties and operations, projections, risk factors, a summary and analysis of the Plan, and certain related matters.

ALL HOLDERS OF CLAIMS AND INTERESTS ARE ENCOURAGED TO READ THE PLAN AND THE DISCLOSURE STATEMENT IN THEIR ENTIRETY, PARTICULARLY HOLDERS OF CLAIMS AND INTERESTS ENTITLED TO VOTE TO ACCEPT OR REJECT THE PLAN.

ARTICLE I

DEFINED TERMS, RULES OF INTERPRETATION,

COMPUTATION OF TIME, GOVERNING LAW, AND OTHER REFERENCES

 

A.

Defined Terms

1. “Ad Hoc Group” means the group or committee of Consenting Senior Noteholders represented by the Ad Hoc Group Representatives, as may be reconstituted from time to time.

2. “Ad Hoc Group Fees and Expenses” means all reasonable and documented fees and expenses of the Ad Hoc Group, including, without limitation, the reasonable and documented fees and all out-of-pocket costs and expenses of each of the Ad Hoc Group Representatives (in the case of Perella Weinberg Partners LP and Tudor, Pickering, Holt & Co., pursuant to the terms of their fee letter dated April 14, 2020 executed by the Company), in each case, in connection with the negotiation, formulation, preparation, execution, delivery, implementation, consummation, and/or enforcement of the Restructuring Support Agreement, the Plan, the Plan Supplement, and/or any of the other Definitive Documents, the Restructuring Transactions, the Chapter 11 Cases, and/or any of the transactions contemplated by (and/or any amendments, waivers, consents, supplements or other modifications to) any of the foregoing.

1. “Ad Hoc Group Representatives” means Stroock & Stroock & Lavan LLP, Perella Weinberg Partners LP, Tudor, Pickering, Holt & Co., and Young Conaway Stargatt & Taylor, LLP and any other advisor retained by the Ad Hoc Group with the consent of the Debtors (such consent not to be unreasonably withheld).

2. “Administrative Claim” means a Claim for costs and expenses of administration of the Chapter 11 Cases pursuant to section 503(b), 507(a)(2), 507(b), or 1114(e)(2) of the Bankruptcy Code, including: (a) the actual and necessary costs and expenses incurred on or after the Petition Date until and including the Effective Date of preserving the Estates and operating the Debtors’ businesses; (b) Allowed Professional Fee Claims; (c) all Ad Hoc Group Fees and Expenses; and (d) Backstop Premium (if paid in cash).

3. “Affiliate” has the meaning set forth in section 101(2) of the Bankruptcy Code as if such Entity were a debtor in a case under the Bankruptcy Code.

4. “All Lender Portion” means Cash in an amount equal to the difference of (a) the aggregate RBL Claims minus (b) the lesser of (i) $175,000,000 and (ii) the net present value, discounted at fifteen percent (15%) per annum, of the future net revenues expected to accrue to the Borrower’s and the Guarantors’ (each as defined in the Exit Facility Term Sheet) collective interest in their proved developed producing oil and gas properties (as adjusted for swap or other hedging agreements in existence on the Effective Date) calculated on a six month roll-forward basis and using the Royal Bank of Canada price deck.

5. “All Holder Settlement Portion” means $1,200,000.

6. “Allowed” means with respect to any Claim or Interest, except as otherwise provided in the Plan: (a) a Claim or Interest that either (i) is not Disputed or (ii) has been allowed by a Final Order; (b) a Claim or Interest that is allowed, compromised, settled, or otherwise resolved (i) pursuant to the terms of the Plan, (ii) in any stipulation that is approved by the Bankruptcy Court by a Final Order, or (iii) pursuant to any contract, instrument, indenture, or other agreement entered into or assumed in connection herewith; (c) a Claim relating to a rejected Executory Contract or Unexpired Lease that either (i) is not a Disputed Claim or (ii) has been allowed by a Final Order; or (d) a Claim or Interest as to which a Proof of Claim or Proof of Interest, as applicable, has been timely filed and as to which no objection has been filed. Notwithstanding anything to the contrary herein, no Claim of any Entity subject to section 502(d) of the Bankruptcy Code shall be deemed Allowed unless and until such Entity pays the amount, or turns over any property, for which such Entity is liable.

7. “Avoidance Actions” means any and all avoidance, recovery, subordination, or other Claims, actions, or remedies which any of the Debtors, the debtors in possession, the Estates, or other appropriate parties in interest have asserted or may assert under section 502, 510, 542, 544, 545, 547 through 553, or 724(a) of the Bankruptcy Code or under similar or related state or federal statutes and common law.

8. “Backstop Commitment” has the meaning set forth in the Backstop Commitment Agreement.

9. “Backstop Commitment Agreement” means that certain Backstop Commitment Agreement, dated as of August 15, 2020, by and among the Backstop Parties and Chaparral Parent, as may be amended, supplemented, or modified from time to time in accordance with the terms thereof, setting forth, among other things, the terms and conditions of the Rights Offering, the Backstop Commitment, and the payment of the Backstop Premium, which shall be in form and substance subject to the Creditor Approval Rights.

10. “Backstop Order” means the order (which may be the Confirmation Order) entered by the Bankruptcy Court in the Chapter 11 Cases approving the Backstop Commitment Agreement, approving the Rights Offering Procedures, authorizing the Debtors’ entry into the Backstop Commitment Agreement (including all exhibits and other attachments thereto), and approving the payment of the Backstop Premium, which shall be in form and substance subject to the Creditor Approval Rights.

11. “Backstop Parties” means at any time and from time to time, the parties that have committed to backstop the Rights Offering and are signatories to the Backstop Commitment Agreement, solely in their capacities as such, to the extent provided in the Backstop Commitment Agreement.

12. “Backstop Premium” means the Put Option Premium, as defined in the Backstop Commitment Agreement, in consideration for the Backstop Commitment, upon the terms set forth in the Backstop Commitment Agreement.

13. “Bankruptcy Code” means title 11 of the United States Code, 11 U.S.C. §§ 101-1532, as now in effect or hereafter amended, and the rules and regulations promulgated thereunder.

14. “Bankruptcy Court” means the United States Bankruptcy Court for the District of Delaware and, to the extent of the withdrawal of the reference under 28 U.S.C. § 157, the United States District Court for the District of Delaware.

15. “Bankruptcy Rules” means the Federal Rules of Bankruptcy Procedure as promulgated by the Supreme Court of the United States under section 2075 of title 28 of the United States Code, 28 U.S.C. § 2075, as applicable to the Chapter 11 Cases and the general, local, and chambers rules of the Bankruptcy Court, as now in effect or hereafter amended.

16. “Business Day” means any day, other than a Saturday, Sunday, or a legal holiday, as defined in Bankruptcy Rule 9006(a).

 

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17. “Cash” or “$” means the legal tender of the United States of America or the equivalent thereof, including bank deposits, checks, and cash equivalents, as applicable.

18. “Cash Collateral Order” means the interim or final, as applicable, order of the Bankruptcy Court setting forth the terms of the use of cash collateral, which shall be in form and substance subject to the Creditor Approval Rights.

19. “Cash-Out Cap” means $,.

20. “Causes of Action” means any actual or potential claims, interests, damages, remedies, causes of action, demands, rights, actions, Avoidance Actions, suits, obligations, liabilities, accounts, defenses, offsets, powers, privileges, licenses, Liens, indemnities, guaranties, and franchises of any kind or character whatsoever, whether known or unknown, foreseen or unforeseen, existing or hereinafter arising, contingent or non-contingent, liquidated or unliquidated, secured or unsecured, assertable, directly or derivatively, matured or unmatured, suspected or unsuspected, in contract, tort, law, equity, or otherwise. Causes of Action also include: (a) all rights of setoff, counterclaim, or recoupment and claims under contracts or for breaches of duties imposed by law; (b) the right to object to or otherwise contest Claims or Interests; (c) claims pursuant to section 362, 510, 542, 543, 544 through 550, or 553 of the Bankruptcy Code; (d) such claims and defenses as fraud, mistake, duress, and usury, and any other defenses set forth in section 558 of the Bankruptcy Code; and (e) any state or foreign law fraudulent transfer or similar claim.

21. “Chaparral Parent” means Chaparral Energy, Inc.

22. “Chaparral Parent Equity Interests” means the following Interests in Chaparral Parent: (a) common stock of Chaparral Parent issued and outstanding immediately prior to the Effective Date and (b) Prior Bankruptcy Equity Interests; provided, however, that restricted stock and/or restricted stock units that have not vested or are not scheduled to be settled as of the Petition Date shall not be Chaparral Parent Equity Interests.

23. “Chapter 11 Cases” means the procedurally consolidated cases filed for the Debtors in the Bankruptcy Court under chapter 11 of the Bankruptcy Code.

24. “Claim” means any claim, as defined in section 101(5) of the Bankruptcy Code, against any of the Debtors, whether or not assessed or Allowed.

25. “Claims Register” means the official register of Claims against and Interests in the Debtors maintained by the Solicitation Agent.

26. “Class” means a category of Holders of Claims or Interests under section 1122(a) of the Bankruptcy Code.

27. “Confirmation” means entry of the Confirmation Order by the Bankruptcy Court on the docket of the Chapter 11 Cases.

28. “Confirmation Date” means the date on which the Bankruptcy Court enters the Confirmation Order on the docket of the Chapter 11 Cases within the meaning of Bankruptcy Rules 5003 and 9021.

29. “Confirmation Hearing” means the hearing held by the Bankruptcy Court pursuant to Bankruptcy Rule 3020(b)(2) and section 1128 of the Bankruptcy Code, including any adjournments thereof, at which the Bankruptcy Court will consider confirmation of the Plan and approval of the Disclosure Statement.

30. “Confirmation Objection Deadline” means the deadline by which objections to confirmation of the Plan must be received by the Debtors.

31. “Confirmation Order” means the order of the Bankruptcy Court confirming the Plan under section 1129 of the Bankruptcy Code and approving the Disclosure Statement, which shall be in form and substance subject to the Creditor Approval Rights.

 

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32. “Consenting Creditors” has the meaning ascribed to such term in the Restructuring Support Agreement.

33. “Consummation” means the occurrence of the Effective Date.

34. “Consenting Senior Noteholders” means, collectively, the Senior Noteholders that are signatories to the Restructuring Support Agreement or any subsequent Senior Noteholder that becomes party thereto in accordance with the terms of the Restructuring Support Agreement.

35. “Creditor Approval Rights” means the approval, consent and/or consultation rights of the Consenting Creditors as and to the extent set forth in Section 3 of the Restructuring Support Agreement, including over the Definitive Documents.

36. “Cure Amount” means the payment of Cash or the distribution of other property (as the parties may agree or the Bankruptcy Court may order) as necessary to (a) cure a monetary default by the Debtors in accordance with the terms of an Executory Contract or Unexpired Lease and (b) permit the Debtors to assume such Executory Contract or Unexpired Lease under section 365(a) of the Bankruptcy Code.

37. “D&O Liability Insurance Policies” means all insurance policies (including any “tail policy”) maintained by the Debtors as of the Petition Date for liabilities against any of the Debtors’ current or former directors, managers, and officers, and all agreements, documents, or instruments relating thereto.

38. “Debtor Release” means the release given on behalf of the Debtors and their Estates to the Released Parties as set forth in Article VIII.D of the Plan.

39. “Definitive Documents” means (a) the Plan; (b) the Confirmation Order; (c) the Plan Supplement; (d) the New Corporate Governance Documents; (e) the Exit Facility Documents; (f) the New Convertible Notes Indenture; (g) the Backstop Commitment Agreement; (h) the Backstop Order; (i) the Rights Offering Documents; (j) the Intercreditor Agreement; (k) the New Warrant Agreements, and (l) the New Stockholders Agreement.

40. “Disclosure Statement” means the disclosure statement for the Plan, including all exhibits and schedules thereto, to be approved by the Confirmation Order, which shall be in form and substance subject to the Creditor Approval Rights.

41. “Disputed” means, with respect to any Claim or Interest, any Claim or Interest, or any portion thereof, (a) to the extent neither Allowed nor disallowed under the Plan or a Final Order nor deemed Allowed under section 502, 503, or 1111 of the Bankruptcy Code, (b) for which a Proof of Claim or Proof of Interest or a motion for payment has been timely filed with the Bankruptcy Court, to the extent the Debtors or any other party in interest has interposed a timely objection or request for estimation in accordance with the Plan, the Bankruptcy Code, or the Bankruptcy Rules, which objection or request for estimation has not been withdrawn or determined by a Final Order, or (c) any Claim that is otherwise disputed by any of the Debtors or Reorganized Debtors in accordance with applicable law or contract, which dispute has not been withdrawn, resolved or overruled by a Final Order; provided, however, that in no event shall a Claim that is deemed Allowed pursuant to the Plan be a Disputed Claim.

42. “Distribution Agent” means, as applicable, the Reorganized Debtors or any Entity the Reorganized Debtors select or designate to make or to facilitate distributions in accordance with the Plan.

43. “Distribution Record Date” means the date for determining which Holders of Allowed Claims and Interests are eligible to receive distributions pursuant to the Plan, which date shall be the Effective Date. The Distribution Record Date shall not apply to the Senior Notes or any securities of the Debtors deposited with DTC, the holders of which shall receive a distribution in accordance with the customary procedures of DTC.

44. “DTC” means the Depository Trust Company.

 

4

45. “Effective Date” means the date that is the first Business Day after the Confirmation Date on which all conditions precedent to the occurrence of the Effective Date set forth in Article IX.A of the Plan have been satisfied or waived in accordance with Article IX.C of the Plan.

46. “Entity” has the meaning set forth in section 101(15) of the Bankruptcy Code.

47. “Estate” means the estate of any Debtor created under sections 301 and 541 of the Bankruptcy Code upon the commencement of the applicable Debtor’s Chapter 11 Case.

48. “Exculpated Party” means, collectively, and in each case in its capacity as such: (a) each of the Debtors; (b) each of the Reorganized Debtors; (c) any statutory committees appointed in the Chapter 11 Cases and each of their respective members; (d) each current and former Affiliate of each Entity in clause (a) through the following clause (e); and (e) each Related Party of each Entity in clause (a) through this clause (e).

49. “Executory Contract” means a contract or lease to which one or more of the Debtors is a party that is subject to assumption or rejection under section 365 of the Bankruptcy Code.

50. “Exit Facility” means, collectively, the Exit Revolving Facility and the Second Out Term Loan Facility.

51. “Exit Facility Agent” means the administrative agent under the Exit Facility Credit Agreement, or any successor administrative agent as permitted by the terms set forth in the Exit Facility Credit Agreement.

52. “Exit Facility Credit Agreement” means the amended and restated credit agreement, to be effective as of the Effective Date, that will govern the Exit Facility, containing terms consistent with the Restructuring Support Agreement, including the Exit Facility Term Sheet, and which shall be in form and substance subject to the Creditor Approval Rights.

53. “Exit Facility Documents” means the Exit Facility Credit Agreement and all related amendments, supplements, ancillary agreements, notes, pledges, collateral agreements, loan and security agreements, instruments, mortgages, control agreements, deeds of trust, intercreditor agreements and other documents or instruments to be executed or delivered in connection with the Exit Facility, and which shall be in form and substance subject to the Creditor Approval Rights.

54. “Exit Facility Loans” means, collectively, the Exit Facility Revolving Loans and the Second Out Term Loans.

55. “Exit Facility Revolving Lender Cash Portion” means the portion of the RBL Cash Payment other than the All Lender Portion.

56. “Exit Facility Lenders” means the Exit Facility Revolving Lenders and the Second Out Term Lenders.

57. “Exit Facility Revolving Lenders” means the RBL Lenders electing to participate in the Exit Revolving Facility by executing the Restructuring Support Agreement and the Exit Facility Commitment Letter (as defined in the Restructuring Support Agreement) (or, in each case, a joinder thereto, as applicable) and any applicable assignees and participants thereof.

58. “Exit Facility Revolving Loans” means first out revolving loans under the Exit Revolving Facility that will be effectuated on the Effective Date in accordance with the Exit Facility Credit Agreement and the Plan.

59. “Exit Facility Term Sheet” means the “Exit Facility Term Sheet” attached as Exhibit C to the Restructuring Support Agreement.

 

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60. “Exit Revolving Facility” means the new senior secured first lien first out revolving credit facility entered into by Reorganized Chaparral Parent, as borrower, the other Reorganized Debtors, the Exit Facility Agent, and the Exit Facility Revolving Lenders under the Exit Facility Loan Documents, which facility shall be (x) a part of, and exist under, the Exit Facility Credit Agreement and (y) consistent with the Exit Facility Term Sheet and which shall be in form and substance subject to the Creditor Approval Rights.

61. “Exit Term Loan Facility” means the new senior secured first lien second out term loan credit facility entered into by Reorganized Chaparral Parent, as borrower, the other Reorganized Debtors, the Exit Facility Agent, and the Exit Facility Term Lenders under the Exit Facility Loan Documents, which facility shall be (x) a part of, and exist under, the Exit Facility Credit Agreement and (y) consistent with the Exit Facility Term Sheet and which shall be in form and substance subject to the Creditor Approval Rights.

62. “File,” “Filed,” or “Filing” means file, filed, or filing in the Chapter 11 Cases with the Bankruptcy Court or, with respect to the filing of a Proof of Claim, the Solicitation Agent.

63. “Final Decree” means the decree contemplated under Bankruptcy Rule 3022.

64. “Final Order” means, as applicable, an order or judgment of the Bankruptcy Court or other court of competent jurisdiction with respect to the relevant subject matter that has not been reversed, modified, or amended, is not subject to any pending stay and as to which the time to appeal, move for reargument, reconsideration, or rehearing, or seek certiorari has expired and no appeal, motion for reargument, reconsideration, or rehearing or petition for certiorari has been timely taken or filed, or as to which any appeal that has been taken, motion for reargument, reconsideration, or rehearing that has been granted or any petition for certiorari that has been or may be filed has been resolved by the highest court to which the order or judgment could be appealed or from which certiorari could be sought or the new trial, reargument, reconsideration, or rehearing shall have been denied, resulted in no modification of such order, or has otherwise been dismissed with prejudice; provided, however, that the possibility that a motion under rule 60 of the Federal Rules of Civil Procedure or any comparable Bankruptcy Rule may be filed relating to such order or judgment shall not cause such order or judgment to not be a Final Order.

65. “Full Cash-Out Equity Interests” means (A) any Chaparral Parent Equity Interests not registered in the name of Cede & Co., as nominee for DTC, (B) any Royalty Class Action Equity Interests, and (c) any other Prior Bankruptcy Equity Interests.

66. “General Unsecured Claim” means any Claim that is not Secured Claim and is not an Administrative Claim (including, for the avoidance of doubt, a Professional Fee Claim), an Other Secured Claim, a Priority Tax Claim, an Other Priority Claim, an RBL Claim, a Senior Notes Claim, an Intercompany Claim, or a Section 510(b) Claim.

67. “Governmental Unit” has the meaning set forth in section 101(27) of the Bankruptcy Code.

68. “Governance Term Sheet” means the “Governance Term Sheet” attached as Exhibit E to the Restructuring Support Agreement.

69. “Holder” means an Entity holding a Claim or an Interest, as applicable.

70. “Impaired” means, with respect to any Class of Claims or Interests, a Claim or an Interest that is not Unimpaired.

71. “Indemnification Provisions” means each of the Debtors’ indemnification provisions in place immediately prior to the Effective Date whether in the Debtors’ bylaws, certificates of incorporation, other formation documents, board resolutions, or contracts for, as applicable, the benefit of the current and former directors, officers, managers, employees, attorneys, other professionals, and agents and such current and former directors, officers, and managers’ respective Affiliates.

72. “Indenture Trustee” means UMB Bank, N.A., and any successor thereto, as trustee under the Senior Notes.

 

6

73. “Intercompany Claim” means any Claim held by a Debtor against another Debtor.

74. “Intercompany Interest” means an Interest held by a Debtor.

75. “Interest” means any common stock, limited liability company interest, equity security (as defined in section 101(16) of the Bankruptcy Code), equity (including restricted stock), ownership, profit interests, unit, or share in a Debtor, including all issued, unissued, authorized, or outstanding shares of capital stock of the Debtors and any other rights, options, warrants, stock appreciation rights, phantom stock rights, restricted stock units, redemption rights, repurchase rights, convertible, exercisable or exchangeable securities or other agreements, arrangements or commitments of any character relating to, or whose value is related to, any such interest or other ownership interest in any Debtor.

76. “Judicial Code” means title 28 of the United States Code, 28 U.S.C. §§ 1-4001, as now in effect or hereafter amended, and the rules and regulations promulgated thereunder.

77. “Lien” has the meaning set forth in section 101(37) of the Bankruptcy Code.

78. “Management Incentive Plan” means the management incentive plan to be established and implemented with respect to Reorganized Chaparral Parent (and/or its subsidiaries) by the Reorganized Chaparral Parent Board after the Effective Date pursuant to which up to 7% of the fully diluted New Common Stock (with anti-dilution protection with regard to the New Convertible Notes) may be reserved for grant to the participants.

79. “New Common Stock” means the common stock, limited liability company membership units, or functional equivalent thereof of Reorganized Chaparral Parent having the terms set forth in the New Corporate Governance Documents to be issued on the Effective Date subject to the terms and conditions set forth in the Restructuring Support Agreement and the New Stockholders Agreement.

80. “New Convertible Notes” means the 9%/13% second-lien convertible payment-in-kind toggle Notes issued pursuant to the New Convertible Notes Indenture, in the initial aggregate principal amount as of the Effective Date of $35,000,000.

81. “New Convertible Notes Indenture” means that certain second lien convertible note indenture, dated as of the Effective Date, by and among Reorganized Chaparral Parent, as issuer, and the New Convertible Notes Indenture Trustee, including all ancillary agreements, notes, pledges, collateral agreements, loan and security agreements, instruments, mortgages, control agreements, deeds of trust, intercreditor agreements, and any other documents delivered pursuant thereto or in connection therewith (in each case, as amended, modified or supplemented from time to time) which shall be included in the Plan Supplement and which shall be consistent with the New Convertible Notes Term Sheet and in form and substance subject to the Creditor Approval Rights.

82. “New Convertible Notes Indenture Trustee” means the trustee under the New Convertible Notes Indenture.

83. “New Convertible Notes Term Sheet” means the “New Convertible Notes Term Sheet” attached as Exhibit D to the Restructuring Support Agreement.

84. “New Corporate Governance Documents” means the form of certificate or articles of incorporation, bylaws, limited liability company agreement, partnership agreement, or such other applicable formation documents (if any) of the Reorganized Debtors, including any certificates of designation, each of which shall be included in the Plan Supplement and which shall be consistent with the Governance Term Sheet and in form and substance subject to the Creditor Approval Rights.

85. “New Stockholders Agreement” means that certain shareholders agreement that will govern certain matters related to the governance of the Reorganized Debtors, the New Common Stock and the New Warrants, which shall be included in the Plan Supplement and which shall be consistent with the Governance Term Sheet and in form and substance subject to the Creditor Approval Rights.

 

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86. “New Warrants” means the New Warrants-A and the New Warrants-B.

87. “New Warrants Agreements” means the New Warrants-A Agreement and the New Warrants-B Agreement, each of which shall be in form and substance subject to the Creditor Approval Rights.

88. “New Warrants-A” means warrants to purchase up to 5% of the New Common Stock, exercisable on a non-cash basis for a 4-year period after the Effective Date, at a $300 million equity value strike price with no Black-Scholes protection and otherwise on the terms and conditions set forth in the New Warrants-A Agreement.

89. “New Warrants-A Agreement” means the definitive agreement governing the terms of the New Warrants-A.

90. “New Warrants-B” means warrants to purchase up to 5% of the New Common Stock, exercisable on a non-cash basis for a 5-year period after the Effective Date, at a $350 million equity value strike price with no Black-Scholes protection and otherwise on the terms and conditions set forth in the New Warrants-B Agreement.

91. “New Warrants-B Agreement” means the definitive agreement governing the terms of the New Warrants-B.

92. “Other Chaparral Parent Interests” means any Interests in Chaparral Parent (other than Chaparral Parent Equity Interests), including Subordinated Claims and any claim, interest, or other equity-related rights associated with any equity-related agreements that are not Chaparral Parent Equity Interests);