TRGL Toreador Resources Corp. (MM)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934

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o		Definitive Proxy Statement
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TOREADOR RESOURCES
CORPORATION

(Name of Registrant as Specified in its Charter)

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PRELIMINARY — SUBJECT TO COMPLETION — DATED November 21, 2011

 

 

Dear Toreador Stockholder,

 

 

On August 9, 2011, the board of directors of Toreador Resources Corporation (“Toreador”) unanimously approved Toreador’s entry into a merger agreement with ZaZa Energy, LLC (“ZaZa”). Pursuant to the merger agreement, Toreador and ZaZa will become wholly owned subsidiaries of a newly-formed company to be known as ZaZa Energy Corporation (and referred to in this proxy statement/prospectus as “New ZaZa”).

 

 

The merger will create an international resources-focused exploration and production company with a portfolio comprising three areas — the Eagle Ford core and the emerging Eagle Ford/Woodbine resource plays in Texas and the Paris Basin in France, with a current total of approximately 435,000 net acres.

 

 

In the merger, you will receive one share of common stock of New ZaZa for each share of Toreador common stock you own. Immediately following completion of the transactions, Toreador stockholders will own 25% of the outstanding shares of common stock of New ZaZa, and the current holders of the limited liability company interests of ZaZa will own the remaining 75%. It is expected that shares of New ZaZa common stock will trade on the Nasdaq Global Market under the symbol “ZAZA.”

 

 

Toreador will hold a Special Meeting of its stockholders to consider and vote on a proposal to approve the merger agreement, which is described in this proxy statement/prospectus. Information about the Special Meeting, the proposed transactions and related matters is contained in this proxy statement/prospectus, which we urge you to read in its entirety, including the annexes and exhibits.

 

 

For a discussion of risk factors related to the proposed transactions, please carefully review “Risk Factors” beginning on page 19 of the attached proxy statement/prospectus.

 

 

The board of directors of Toreador unanimously supports the combination of Toreador and ZaZa and recommends that you vote “ FOR” the approval of the merger agreement.

 

 

 

 

Neither the Securities Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this proxy statement/prospectus. Any representation to the contrary is a criminal offense.

 

 

This proxy statement/prospectus is dated [ • ], 2011 and is first being mailed to Toreador stockholders on or about [ • ], 2011.

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held on [ • ], 2011

 

To Our Stockholders:

 

A Special Meeting of the Stockholders of Toreador Resources Corporation will be held on [ • ], 2011 at [ • ] [a.m./p.m.], local time, at [location]. The purposes of the Special Meeting are to:

 

1. Consider and vote on a proposal to approve the Agreement and Plan of Merger and Contribution, dated as of August 9, 2011, by and among Toreador Resources Corporation, ZaZa Energy, LLC, ZaZa Energy Corporation and Thor Merger Sub Corporation, as it may be amended (the “merger agreement”), a copy of which is attached to the accompanying proxy statement/prospectus as Annex A. The board unanimously recommends a vote “FOR” this proposal.

 

2. Consider and vote on a proposal to approve, on a non-binding and advisory basis, golden parachute compensation that may be payable to executive officers of Toreador in connection with the proposed merger. The board unanimously recommends a vote “FOR” this proposal.

 

3. Consider and vote upon an adjournment of the Special Meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the Special Meeting to vote in favor of the approval of the merger agreement. The board unanimously recommends a vote “FOR” this proposal, if necessary.

 

4. Transact such other business that may properly come before the Special Meeting.

 

The board of directors of Toreador has fixed [ • ], 2011 as the record date for the determination of stockholders entitled to notice of, and to vote at, the Special Meeting or any adjournment thereof. Only holders of record of shares of Toreador common stock at the close of business on [ • ], 2011 are entitled to notice of, and to vote at, the Special Meeting or any adjournments or postponements thereof.

 

For more information about the proposals and the Special Meeting, please review carefully the accompanying proxy statement/prospectus.

 

Your vote is important. Whether or not you expect to attend the Special Meeting in person, please submit a proxy by telephone or over the internet as instructed in these materials, or complete, date, sign and return the enclosed proxy card, as promptly as possible in order to ensure that we receive your proxy with respect to your shares of Toreador stock. Instructions are shown on the enclosed proxy card and a return envelope (postage pre-paid if mailed in the United States) is enclosed for your convenience.

 

Please do not send documents or certificates representing your ownership of Toreador common stock at this time. If the merger is consummated, we will notify you of the procedures for exchanging your shares of Toreador common stock.

 

By Order of the Board of Directors,

 

Craig M. McKenzie
President and Chief Executive Officer

 

Paris, France

[ • ], 2011

REFERENCES TO ADDITIONAL INFORMATION

 

This proxy statement/prospectus incorporates by reference important business and financial information about Toreador from documents previously filed with the Securities and Exchange Commission (“SEC”) that are not included in or delivered with this proxy statement/prospectus. For a listing of the documents incorporated by reference into this proxy statement/prospectus, see “Where You Can Find More Information” on page 168. This information is available for you to review at the SEC’s Public Reference Room located at 100 F Street, N.E., Room 1580, Washington, DC 20549. You can obtain these documents through the SEC website at http://www.sec.gov. You can also obtain these documents at no charge by requesting them in writing or by telephone from Toreador at the following address and telephone number:

 

Toreador Resources Corporation

13760 Noel Road, Suite 1100

Dallas, Texas 75240-1383

(214) 559-3933

Attn: Shirley Z. Anderson, Corporate Secretary

 

You may also obtain these documents at no charge by requesting them in writing or by telephone from Toreador’s proxy solicitor:

 

MacKenzie Partners, Inc.

105 Madison Avenue

New York, NY 10016

(800) 322-2885 (toll-free)

or

(212) 929-5500 (banks and brokers)

E-mail: proxy@mackenziepartners.com

 

MacKenzie Partners is not affiliated with Toreador’s President and Chief Executive Officer, Craig McKenzie.

 

If you would like to request documents from Toreador, please do so no later than [ • ], 2011 to receive them before the Special Meeting .

 

The information provided in this proxy statement/prospectus with respect to Toreador was provided by Toreador and the information provided in this proxy statement/prospectus with respect to ZaZa was provided by ZaZa.

 

See “Where You Can Find More Information” beginning on page 168 for more information about the documents referenced in this proxy statement/prospectus.

 

TABLE OF CONTENTS

 

 

The following are brief answers to common questions that you may have regarding the Special Meeting of stockholders of Toreador, which we refer to as the “Special Meeting.” Toreador urges you to read carefully this entire proxy statement/prospectus because the information in this section may not provide all the information that might be important to you in determining how to vote. Additional information is also contained in the annexes to, and the documents incorporated by reference in, this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 168.

 

 

 

 

 

 

 

 

 

 

 

 

SUMMARY

 

Parties to the Transactions

 

The Merger and Contributions

 

Strategy of New ZaZa

	•	Execute on its existing portfolio of drilling opportunities;
	•	Expand its portfolio; and
	•	Consolidate and integrate its operations.

	•	New ZaZa plans to apply its experienced staff to solidify its land position by acquiring additional acreage that is adjacent to, or within close proximity of, the acreage in which ZaZa already holds an ownership position and/or increasing ZaZa’s net acreage position in acreage in which ZaZa already holds an ownership position by acquiring additional interests in that acreage. New ZaZa also plans to use its in-house technical skills in geoscience, drilling, and unconventional completion technology to aim to maximize returns in the Eagle Ford, the Eaglebine and the Paris Basin. New ZaZa’s management has specifically identified and scheduled drilling locations to plan its future multi-year drilling activities on its existing acreage position in the United States and France. These identified drilling locations represent a significant part of New ZaZa’s growth strategy. Over the next twelve months, New ZaZa plans to:

	•	Commence a conventional drilling one-rig program in the Paris Basin;
	•	Commence drilling a six well program targeting the Paris Basin Liassic source rock, operated by its joint venture partner;
	•	Finish the year ending 2011 with four active rigs and 30 carried wells drilled in the Eagle Ford;
	•	Expand to eight rigs drilling in the Eagle Ford and drill an additional 100 carried wells by year-end 2012; and
	•	Start a one rig program in the Eaglebine.

	•	New ZaZa intends to explore ways to accelerate the drilling program on its approximately 82,000 gross acres in the Eaglebine by pursuing a joint venture with a third party.

	•	In the Eagle Ford, New ZaZa intends to acquire additional acreage, either with its joint venture partner (expecting to increase its acreage to 160,000 gross acres) or as wholly owned adjacent acreage.
	•	In the Eaglebine, New ZaZa expects to build out its position to reach over 100,000 gross acres by early 2012.
	•	In the Paris Basin, New ZaZa will consider farming-in and/or acquiring additional acreage, either with its joint venture partner or as wholly owned adjacent acreage.
	•	New ZaZa will selectively evaluate and pursue emerging resource plays in the Americas or Europe on an opportunity-by-opportunity basis.

	•	New ZaZa intends to become an industry resource play aggregator by establishing footholds or acquiring acreage positions in several geographically diverse resource basins, increasing its technical capabilities, and managing its acreage portfolio through swaps, joint ventures and selective acquisitions throughout its area of operations. To achieve this, it is expected that New ZaZa will start high grading and continuously consolidating its properties worldwide.

	•	New ZaZa expects to integrate the organizations, procedures and operations of Toreador and ZaZa, and it is expected that such integration will result in increased operational efficiencies.

 

Toreador Board Reasons & Recommendations

 

Opinion of Toreador’s Financial Advisor

 

Key Terms of Transaction Agreements

	•	the approval of the merger agreement by the holders of a majority of the outstanding shares of Toreador common stock;
	•	the absence of orders or injunctions of U.S. or French courts prohibiting the consummation of the transactions;
	•	the declaration of the effectiveness by the SEC of the registration statement of which this proxy statement/prospectus is a part;
	•	the listing of New ZaZa common stock on the Nasdaq Global Market; and

	•	the obtaining of required clearance from the French Bureau of Exploration and Production of Hydrocarbons (we obtained this clearance as of October 25, 2011).

	•	Toreador’s and ZaZa’s cash immediately before closing, plus
	•	the amount of Toreador’s and ZaZa’s borrowing capacity immediately before closing that will remain in effect after closing, plus
	•	the amount of any cash of New ZaZa, Toreador and ZaZa reasonably expected to be funded (whether by borrowings, issuance or equity interests or otherwise) prior to or substantially concurrently with closing, plus

	•	any borrowing capacity reasonably expected to be available to New ZaZa, Toreador and ZaZa within five business days of closing after giving effect to any prepayment obligations under any of New ZaZa’s subordinated secured promissory notes triggered by any such obligation, minus

	•	any cash amounts payable by New ZaZa, Toreador and ZaZa in connection with the closing.

	•	may not solicit any inquiries or the making of any acquisition proposal for Toreador or ZaZa; and
	•	must cease or terminate any existing discussions or negotiations with third parties.

 

Regulatory Approvals

 

Tax Consequences to Toreador Stockholders

 

Differences with Respect to Rights of Toreador Stockholders and New ZaZa Stockholders

 

Officers and Directors of New ZaZa

 

Interests of the Current ZaZa Owners and the ZaZa Managing Partners in the Transactions

	•	make distributions of up to $13.9 million, in the aggregate, as a return of capital, to the holders of ZaZa’s limited liability company interests, which we refer to as “return of capital distributions,” unless making such distributions would reasonably be expected to cause the minimum cash condition to fail to be satisfied, and, provided that any return of capital distributions will result in a corresponding decrease in the ZaZa non-equity consideration;

	•	make tax distributions to the holders of ZaZa’s limited liability company interests with respect to the net income of ZaZa for the period from March 2009 through December 31, 2010 even if such distributions would result in a failure to satisfy the minimum cash condition; such unpaid tax distributions are estimated by ZaZa to be approximately $1.1 million in the aggregate;

	•	make tax distributions to the holders of ZaZa’s limited liability company interests with respect to the net income of ZaZa for the period from January 1, 2011 through closing, unless making such distributions would reasonably be expected to cause the minimum cash condition to fail to be satisfied. However, if the closing has not occurred by January 14, 2012, ZaZa is permitted to make these tax distributions to the holders of ZaZa’s limited liability company interests, even if such distributions would result in a failure to satisfy the minimum cash condition; the tax distributions in respect of the period from January 1, 2011 through December 31, 2011 are estimated by ZaZa to be approximately $1.5 million in the aggregate;

	•	pay to the managing partners of ZaZa back salary, bonuses, incentive compensation or other compensation payable to them in respect of periods prior to closing or in connection with the proposed transactions, unless paying these amounts would reasonably be expected to cause the minimum cash condition to fail to be satisfied; we refer to these amounts, excluding ordinary course base salary and benefits, as “additional compensation” and, assuming the closing occurs in late 2011, estimate that the additional compensation will be approximately $13.8 million, in the aggregate; and
	•	repay approximately $3 million of personal loans made to ZaZa by the holders of ZaZa’s limited liability company interests, which we refer to as the “member loans,” unless such repayments would reasonably be expected to cause the minimum cash condition to fail to be satisfied.

 

Interests of Toreador Management in the Transactions

 

Voting by Toreador’s Directors and Executive Officers

 

No Dissenters’ or Appraisal Rights

 

SELECTED HISTORICAL FINANCIAL DATA

 

														Period from
														March 4, 2009
		Nine Months Ended				Nine Months Ended				Year Ended				(Inception) to
		September 30,				September 30,				December 31,				December 31,
		2011				2010				2010				2009
		(Unaudited)				(Unaudited)
Statements of Income:
Total revenues		$	16,325,580			$	6,660,976			$	10,495,367			$	100,000
Operating expenses			11,167,084				1,921,000				3,881,411				334
Operating income			5,158,496				4,739,976				6,613,956				99,666
Interest income (expense), net			(152,525	)			—				4,340				—
Income before income tax			5,005,971				4,739,976				6,618,296				99,666
Income tax expense			55,599				52,645				73,507				—
Net income		$	4,950,372			$	4,687,331			$	6,544,789			$	99,666

		As of				As of				As of
		September 30,				December 31,				December 31,
		2011				2010				2009
		(Unaudited)
Balance Sheets:
Current assets		$	42,787,997			$	24,800,924			$	117,666
Total property and equipment, net			14,808,457				6,926,153				—
Total assets			57,596,454				31,727,077				117,666
Total current liabilities			46,317,615				24,329,622				15,000
Total noncurrent liabilities			131,012				—				—
Total members’ equity			11,147,827				7,397,455				102,666
Total liabilities and members’ equity		$	57,596,454			$	31,727,077			$	117,666

 

Selected Historical Consolidated Financial Data of Toreador

		As of and for				As of and for
		the Nine Months				the Nine Months
		Ended September 30,				Ended September 30,				As of and for the Year Ended December 31,
		2011				2010				2010				2009				2008				2007				2006
		(In thousands, except per share amounts)
		(Unaudited)				(Unaudited)
Statements of Operations:
Revenues		$	27,970			$	33,020			$	40,764			$	19,236			$	34,150			$	25,907			$	27,294
Operating costs and expenses			(31,212	)			(20,174	)			(33,496	)			(35,415	)			(32,586	)			(29,473	)			(20,552	)
Operating income (loss)			(3,242	)			12,846				7,268				(16,179	)			1,564				(3,566	)			6,742
Other income (expense)			(2,701	)			(9,958	)			(9,888	)			397				(3,082	)			(2,384	)			3,373
Income (loss) from continuing operations before income tax			(5,943	)			2,888				(2,620	)			(15,782	)			(1,518	)			(5,950	)			10,115
Income tax benefit (provision)			2,181				5,683				(6,130	)			450				(5,502	)			1,402				(3,236	)
Income (loss) from continuing operations, net of tax			(8,124	)			(2,795	)			(8,750	)			(15,332	)			(7,020	)			(4,548	)			6,879
Income (loss) from discontinued operations, net of tax			(3,203	)			(1,113	)			(740	)			(10,080	)			(101,585	)			(69,873	)			(4,301	)
Dividends on preferred shares			—				—				—				—				—				(162	)			(162	)
Income (loss) available to common shares			(11,327	)			(3,908	)			(9,490	)			(25,412	)			(108,605	)			(74,583	)			2,416
Basic income (loss) available to common shares per share			(0.43	)			(0.17	)			(0.35	)			(1.24	)			(5.48	)			(4.07	)			0.16
Diluted income (loss) available to common shares per share			(0.43	)			(0.17	)			(0.35	)			(1.24	)			(5.48	)			(4.07	)			0.15
Weighted average shares outstanding
Basic			25,989				24,393				25,153				20,564				19,831				18,358				15,527
Diluted			25,989				24,393				25,165				20,564				19,831				18,358				15,884
Balance Sheets:
Total Assets			83,150				132,278				100,299				97,155				207,156				323,111				317,204
Debt, including current portion			33,702				67,101				34,394				54,616				110,275				116,250				112,800
Stockholders’ equity			16,597				31,214				24,068				6,137				52,560				163,825				147,151

 

SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

	•	changes in Toreador’s net assets between the pro forma balance sheet date of September 30, 2011 and the closing of the transactions, which could impact the preliminary estimated purchase price or the preliminary estimated fair values as of the effective date of the transactions;

	•	the value of New ZaZa as of the effective date of the transactions;
	•	the timing of the completion of the transactions; and
	•	other changes in net assets that may occur prior to completion of the transactions, which could cause material differences in the information presented.

		For the				For the
		Nine Months				Year Ended
		Ended September 30,				December 31,
		2011				2010
		(In thousands,				(In thousands,
		except per share				except per share
		amounts)				amounts)
Total revenues		$	41,377			$	49,490
Total operating expenses			41,188				39,914
Operating Income (loss)			189				9,576
Net (loss) income from continuing operations			(8,431	)			(8,762	)
Net (loss) income per common share			(0.08	)			(0.09	)

		As of
		September 30,
		2011
		(In thousands)
Total current assets		$	72,060
Total Assets			235,723
Total current liabilities			95,006
Long-term debt			96,164
Total Liabilities			228,203
Total Stockholders Equity			7,520

 

COMPARATIVE PER SHARE DATA

		As of and for the				As of and for the
		Nine Months				Year Ended
		Ended September 30,				December 31,
		2011				2010
Toreador Historical Per Share Data:
Total income (loss) available to common shares per share		$	(0.43	)		$	(0.35	)
Cash dividends per share of common stock		$	—			$	—
Book value per share of common stock		$	0.76			$	0.96
ZaZa Historical Per Share Data:(1)
Net income per share		$	0.07			$	0.09
Cash distributions per share		$	—			$	—
Book value per share		$	0.15			$	0.10
New ZaZa Pro Forma Per Share Data:(2)
Net income (loss) per share		$	(0.08	)		$	(0.09	)
Cash dividends per share		$	—			$	—
Book value per share		$	0.00			$	N/A
Toreador Equivalent Pro Forma Per Share Data:(3)
Net income (loss) per share		$	(0.08	)		$	(0.09	)
Cash dividends per share of common stock		$	—			$	—
Book value per share of common stock		$	0.00			$	N/A

(1)		The ZaZa per share data was calculated by dividing ZaZa’s net income, cash distributions and book value as of and for the applicable time or period by 75,976,851, which is the number of new shares of New ZaZa expected to be issued in the transaction to the holders of the ZaZa limited liability company interests.

(2)		The New ZaZa per share pro forma per share data was calculated by assuming 101,302,468 shares of New ZaZa are outstanding and the impact of other pro forma adjustments discussed further in “Pro Forma Financial Information” on page 108 and the impact for income taxes as if ZaZa were subject to federal income taxes.

(3)		The Toreador equivalent pro forma per share data was computed by multiplying the New ZaZa pro forma per share data above by a ratio of 1 to 1. The ratio represents the number of shares of New ZaZa common stock which a Toreador stockholder would receive for each Toreador share in the merger.

 

		Price Range of
		Common Stock
		High				Low
2009 Fiscal Year
First Fiscal Quarter		$	4.74			$	1.96
Second Fiscal Quarter			7.26				2.39
Third Fiscal Quarter			10.79				4.50
Fourth Fiscal Quarter			11.58				7.66
2010 Fiscal Year
First Fiscal Quarter			13.69				7.02
Second Fiscal Quarter			9.84				5.31
Third Fiscal Quarter			11.56				5.34
Fourth Fiscal Quarter			16.38				11.04
2011 Fiscal Year
First Fiscal Quarter			18.97				10.28
Second Fiscal Quarter			10.92				3.14
Third Fiscal Quarter			4.31				2.62
Fourth Fiscal Quarter (through November 18, 2011)			4.19				2.90

 

In addition to the other information included in, incorporated by reference in, and found in the Annexes attached to, this proxy statement/prospectus, including the matters addressed in the “Cautionary Statement Regarding Forward — Looking Statements” on page 45, you should carefully consider the following risk factors in deciding whether to vote for adoption of the merger agreement. You should also read and consider the other information in this proxy statement/prospectus and the other documents incorporated by reference in this proxy statement/prospectus. Please see “Where You Can Find More Information” on page 168. Additional risks and uncertainties not presently known to Toreador or ZaZa or that are not currently believed to be important also may materially adversely affect the transactions and New ZaZa following the transactions. In addition, definitions for certain terms relating to the oil and gas business can be found in “Glossary of Certain Oil and Gas Terms” beginning on page 170.

 

The consummation of the merger agreement is contingent on Toreador, ZaZa and New ZaZa having at least $10 million in available cash, cash equivalents and/or borrowing capacity.

 

Under the merger agreement, the obligations of the parties to consummate the transactions is subject to the condition that the sum of the following amounts is not less than $10 million:

 

 

 

 

 

 

We refer to this condition as the “minimum cash condition.” Toreador and ZaZa estimate that New ZaZa, Toreador and/or ZaZa may need to raise up to $65 million of financing, less cash on hand at the closing, for the minimum cash condition to be satisfied. The pro forma combined balance sheet shows approximately $17.7 million of unrestricted cash (excluding cash committed to financing for ZaZa’s joint venture partner) as of September 30, 2011. However, cash on hand fluctuates during the course of the year and, as such, the amount of cash that Toreador and ZaZa will have on hand at closing is subject to a variety of factors, many of which are beyond the control of Toreador and ZaZa. Accordingly, the cash on hand at closing may be substantially less than estimated. Toreador’s, ZaZa’s and New ZaZa’s ability to raise the necessary financing may be hindered by the uncertain nature of the credit and capital markets as well as by the fact that, upon consummation of the transaction, New ZaZa and ZaZa may issue an aggregate principal amount of up to $63.5 million of secured subordinated promissory notes to the holders of the limited liability company interests of ZaZa and the managing partners of ZaZa. Accordingly, we cannot provide any assurance that we will be successful in raising the necessary financing. In addition, if we are able to raise the necessary financing, the terms of any such financing may not be favorable to New ZaZa.

 

If the transactions are consummated, New ZaZa will likely have significant leverage at closing.

 

Toreador and ZaZa estimate that New ZaZa, Toreador and/or ZaZa may need to raise up to $65 million of financing, less cash on hand at the closing, for the minimum cash condition to be satisfied. The pro forma combined balance sheet shows approximately $17.7 million of unrestricted cash (excluding cash committed to financing for ZaZa’s joint venture partner) as of September 30, 2011. However, cash on hand fluctuates during the course of the year and, as such, the amount of cash that Toreador and ZaZa will have on hand at closing is

subject to a variety of factors, many of which are beyond the control of Toreador and ZaZa. Accordingly, the cash on hand at closing may be substantially less than estimated. Toreador is seeking to raise debt financing, and, after the closing, New ZaZa may seek to raise additional capital, if and when necessary. In addition, under the terms of the transactions, New ZaZa and ZaZa may issue to the holders of the limited liability company interests of ZaZa and the managing partners of ZaZa, upon consummation of the transaction, secured subordinated promissory notes with aggregate principal amount of up to $63.5 million. Under the terms of the transactions the aggregate principal amount of the secured subordinated promissory notes would be reduced to the extent that ZaZa or New ZaZa has cash available to pay to the holders of the limited liability company interests of ZaZa and the managing partners of ZaZa without causing the minimum cash condition to fail to be satisfied. However, such cash is likely to be available only to the extent that ZaZa, Toreador and/or New ZaZa are able to secure financing.

 

New ZaZa is expected to have a high degree of leverage after the transactions that could have important consequences, including:

 

 

In addition, the terms of any financing that may be obtained by New ZaZa, ZaZa or Toreador will likely subject them to a number of financial or operational covenants as well as compliance with certain financial ratios. For example, the covenants may impose restrictions on them, including the ability to incur additional indebtedness and liens, make loans and investments, make capital expenditures, sell assets, engage in mergers, acquisitions and consolidations, enter into transactions with affiliates, enter into sale and leaseback transactions and pay dividends on New ZaZa’s common stock. A breach of any of the covenants imposed on New ZaZa, Toreador or ZaZa by the terms of any indebtedness, including any financial or operational covenants, could result in a default under such indebtedness. In the event of a default, the lenders could terminate their commitments to ZaZa, Toreador or New ZaZa, and could accelerate the repayment of all of ZaZa’s, Toreador’s and New ZaZa’s indebtedness. In such case, New ZaZa (and ZaZa and Toreador) may not have sufficient funds to pay the total amount of accelerated obligations, and the lenders could proceed against the collateral securing the facilities, which will likely consist of substantially all of the assets of ZaZa, Toreador and New ZaZa. Any acceleration in the repayment of indebtedness or related foreclosure could have a material adverse effect on New ZaZa’s business.

 

New ZaZa’s results of operations and financial condition following the transactions may materially differ from the pro forma information presented in this proxy statement/prospectus.

 

The pro forma financial information included in this proxy statement/prospectus is derived from Toreador’s and ZaZa’s separate historical audited and unaudited consolidated financial statements, as well as from certain internal, unaudited financial statements. The preparation of this pro forma information is based upon available information and certain assumptions and estimates that Toreador and ZaZa believe are reasonable. This pro forma information may be materially different from what New ZaZa’s actual results of operations and financial condition would have been had the transactions occurred during the periods presented or what New ZaZa’s results of operations and financial position will be after the consummation of the

proposed transactions. For example, the pro forma financial statements assume that New ZaZa will obtain $52 million of new financing although we may need to raise up to $65 million, less cash on hand at closing.

 

The consideration payable to Toreador stockholders in the merger is based on a fixed exchange ratio, and so the value of New ZaZa common stock received in the merger may be less than the value of the Toreador common stock as of the date of the merger agreement, the date of this proxy statement/prospectus or the date of the Special Meeting.

 

Toreador stockholders will receive one share of New ZaZa common stock for each share of Toreador common stock, and this exchange ratio is fixed and will not be adjusted in the event of any changes in the price of Toreador common stock prior to the merger. The market price of Toreador common stock at the time of consummation of the merger may vary significantly from the price on the date the merger agreement, the date of this proxy statement/prospectus or the date of the special meeting of Toreador stockholders. These variations may be caused by, among other things, changes in the businesses, operations, results or prospects of Toreador or ZaZa, market expectations of the likelihood that the transactions will be completed and the timing of completion, the prospects of post-merger operations, the effect of any conditions or restrictions imposed on or proposed with respect to the combined company by regulatory agencies and authorities, general market and economic conditions and other factors. Because the exchange ratio will not be adjusted in the event of any changes in the market value of Toreador common stock, the market value of New ZaZa common stock issued in the merger may be less than the value of the Toreador common stock at the consummation of the merger or on such earlier dates.

 

The merger will result in a significant dilution of the interests of the Toreador stockholders.

 

The consummation of the merger and related transactions will result in a significant dilution of the interests of the holders of the outstanding shares of Toreador common stock. Since Toreador stockholders in the aggregate will own 25% of New ZaZa, each such stockholder will have a significantly smaller percentage ownership of New ZaZa than such stockholder owned of Toreador.

 

The majority of New ZaZa’s common stock will be owned by the current ZaZa owners, whose interests may not be aligned with the interests of Toreador stockholders.

 

After the consummation of the transactions, the former holders of Toreador common stock will own 25% of the outstanding New ZaZa common stock and the current ZaZa owners will own the remaining 75%. Under the stockholders’ agreement entered into between the current ZaZa owners and New ZaZa, during the three years following the closing, the current ZaZa owners will be entitled to designate a proportional number of directors to the Board (but not more than seven) based upon the current ZaZa owners’ (and their permitted transferees’) percentage ownership of New ZaZa. During such period, as long as the current ZaZa owners (and their permitted transferees) own at least 72.2% of the outstanding shares of New ZaZa common stock, they will continue to have the right to designate seven directors. The remaining directors of New ZaZa will be nominated by a nominating committee consisting of two directors selected by the Toreador designees on the Board (and their successors) and one independent director selected by the current ZaZa owners. During the three years after closing, the current ZaZa owners will be required to vote their ZaZa shares in favor of the nominees of the nominating committee. However, after the third anniversary of the closing, there will be no limitation on the number of directors of New ZaZa that the current ZaZa owners may nominate and elect and, as such, they may be able to nominate and elect the entire Board and remove any directors, including directors who were Toreador designees or nominated by the Board’s nominating committee. In addition, as a result of their share ownership in New ZaZa, the current ZaZa owners will be able to control all matters requiring approval by New ZaZa stockholders, including, but not limited to: mergers, consolidations or acquisitions; the sale of all or substantially all of New ZaZa’s assets and other decisions affecting New ZaZa’s capital structure; the amendment of New ZaZa’s certificate of incorporation and bylaws, and New ZaZa’s liquidation, winding up and dissolution. Finally, under the stockholders’ agreement, the current ZaZa owners are subject to a three-year standstill period starting on the date of the consummation of the transactions. However, once the stand-still period ends, there will be no contractual restriction on the current ZaZa owners’ ability to purchase additional shares of New ZaZa common stock or take New ZaZa private on terms that may not be favorable to the other stockholders of New ZaZa. The interests of the current ZaZa owners may not be

aligned with the interests of the former Toreador stockholders. This concentration of share ownership may have a material adverse effect on the trading price of New ZaZa’s common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders.

 

There is a potential market overhang that could depress the value of New ZaZa’s common stock, and future sales of its common stock could put a downward pressure on the price of your shares and could have a material adverse effect on the price of your shares.

 

After the consummation of the transaction, the current ZaZa owners will own 75% of the outstanding New ZaZa common stock and may dispose of a substantial percentage of their stock from time to time after the six month anniversary of closing, including in open-market transactions and underwritten offerings. In that regard, the stockholders’ agreement provides that, after the six-month anniversary of the consummation of the transactions, the holders of at least 25% of New ZaZa common stock will have the right to request, up to ten separate times, that New ZaZa file a registration statement, which may be a shelf registration statement, under the Securities Act of 1933, for New ZaZa common stock representing not less than the lesser of $10 million and 2.5% of the then-outstanding shares of New ZaZa common stock. Once registered, shares of New ZaZa common stock generally can be freely sold in the public market. In addition, the current ZaZa owners will have the right to require that New ZaZa effect for them up to two underwritten offerings per year. The possibility that substantial amounts of our outstanding common stock may be sold by the current ZaZa owners, or the perception that such sales could occur, could materially adversely affect the market price of New ZaZa’s common stock and impair the ability of New ZaZa to raise additional capital through the sale of equity securities in the future. In addition, this selling activity could decrease the level of public interest in New ZaZa common stock, inhibit buying activity that might otherwise help support the market price of New ZaZa common stock, and prevent possible upward price movements in New ZaZa common stock.

 

The integration of Toreador and ZaZa following the transactions will present significant challenges that may reduce the anticipated potential benefits of the transactions.

 

Toreador and ZaZa will face significant challenges in consolidating functions and integrating their organizations, procedures and operations in a timely and efficient manner, as well as retaining key personnel. The integration of Toreador and ZaZa will be complex and time-consuming due to the locations of their corporate headquarters and the size and complexity of each organization. The principal challenges will include the following:

 

 

The respective managements of Toreador and ZaZa will have to dedicate substantial effort to integrating the businesses. These efforts could divert management’s focus and resources from the company’s business, corporate initiatives or strategic opportunities during the integration process.

 

Toreador and ZaZa will incur significant transaction and merger-related integration costs in connection with the transactions.

 

Toreador and ZaZa expect to pay transaction costs of approximately $17.8 million in the aggregate, excluding change of control severance payments to some of their departing employees. These transaction fees include investment banking, legal and accounting fees and expenses, expenses associated with the financing of the transactions, SEC filing fees, printing expenses, mailing expenses and other related charges. These amounts are preliminary estimates that are subject to change. Approximately $5.7 million of the transaction costs have been already incurred as of September 30, 2011 and additional transaction costs will be incurred regardless of whether the transactions are consummated. Toreador and ZaZa will each pay its own transaction costs, except that Toreador will pay the costs, expenses and filing fees for its regulatory filings and for printing and distributing the registration statement and this proxy statement/prospectus. Toreador and ZaZa also expect to incur costs associated with integrating the operations of the two companies and these costs could be significant and could have a material adverse effect on New ZaZa’s future operating results.

Toreador’s and ZaZa’s actual production could differ materially from the forecasts presented in this proxy statement/prospectus.

 

Toreador and ZaZa have included forecasts of expected quantities of future oil and gas production, as well as certain financial information in this proxy statement/prospectus. These forecasts are based on a number of estimates, including expectations of production from existing wells and the outcome of future drilling activity. Should these estimates prove inaccurate, because of the risks summarized herein, including facility or equipment malfunctions, adverse weather effects, or downturns in commodity prices or significant increases in costs, which could make certain drilling activities or production uneconomical, actual production could be materially adversely affected and the forecasted production as well as financial information could differ materially from the forecasted amounts contained in this proxy statement/prospectus.

 

While the transactions are pending, Toreador and ZaZa will be subject to business uncertainties and contractual restrictions that could have a material adverse effect on their businesses.

 

Uncertainty about the effect of the transactions on customers and suppliers may have a material adverse effect on Toreador and ZaZa and, consequently, on New ZaZa. These uncertainties could cause customers, suppliers and others who deal with Toreador and ZaZa to seek to change existing business relationships with Toreador and ZaZa. In addition, the merger agreement restricts Toreador and ZaZa, without the other party’s consent and subject to certain exceptions, from making certain acquisitions and taking other specified actions until the transactions occur or the merger agreement terminates. These restrictions may prevent Toreador and ZaZa from pursuing otherwise attractive business opportunities that may arise prior to completion of the transactions or termination of the merger agreement and from making other changes to their businesses.

 

Failure to complete the transactions could negatively impact the stock price and the future business and financial results of Toreador.

 

The stockholders of Toreador may not approve the transactions, or the parties may not satisfy the other conditions to the completion of the transactions. If the transactions are not completed for any reason, Toreador could be subject to several risks, including the following:

 

 

Further, Toreador would not realize any of the expected benefits of having completed the transactions.

 

In addition, if the agreement is terminated because Toreador breaches any of its representations, warranties or covenants in the merger agreement, and, as a result, the closing conditions relating to the accuracy of its representations and warranties or its compliance with its covenants cannot be satisfied, Toreador will be required to pay ZaZa its out of pocket expenses up to $750,000.

 

If the transactions are not completed, the price of Toreador common stock may decline to the extent that the current market price of that stock reflects a market assumption that the transactions will be completed and that the related benefits will be realized, or a market perception that the transactions were not consummated due to an adverse change in Toreador’s business. In addition, Toreador’s business may be harmed, and the price of its stock may decline as a result, to the extent that customers, suppliers and others believe that Toreador cannot compete in the marketplace as effectively without the transactions or otherwise remain uncertain about Toreador’s future prospects in the absence of the transactions. Similarly, current and prospective employees of Toreador may experience uncertainty about their future roles with the resulting company and choose to pursue other opportunities, which could have a material adverse effect on Toreador if the transactions are not completed. The realization of any of these risks may materially adversely affect the business, financial results, financial condition and stock price of Toreador.

Some of the directors and executive officers of Toreador have interests in the transactions that are different from the interests of Toreador’s stockholders.

 

When considering the recommendation of their board of directors with respect to the transactions, stockholders should be aware that some directors and executive officers of Toreador have interests in the transactions that are different from, or in addition to, the interests of the Toreador stockholders. These interests include (1) their designation as New ZaZa directors or executive officers following the completion of the transactions, (2) the fact that the completion of the transaction will result in the acceleration of vesting of restricted stock awards held by the executive officers of Toreador and (3) the fact that the two executive officers of Toreador have employment agreements with change of control provisions that will entitle them to cash payments and other benefits if the transactions are completed and their employment is terminated or if the executive in question resigns or terminates his employment under certain specified circumstances. The Toreador stockholders should consider these interests in conjunction with the recommendation of the board of directors of Toreador that the stockholders approve the transactions.

 

Upon the expiration of the non-competition agreements and under certain other circumstances, the three ZaZa managing partners will be able to directly compete with New ZaZa.

 

On August 9, 2011, each of the three ZaZa managing partners (referred to as a “restricted person”) entered into a separate non-competition agreement with New ZaZa. The non-competition agreements provide that each of the restricted persons and his controlled affiliates may not engage in, carry on or assist any oil or gas business in specified areas in the Eagle Ford and Eagle Ford/Woodbine resource plays in Texas and the Paris Basin in France or acquire oil and gas interests in, or acquire interests in any businesses with oil and gas interests in, those specified areas, subject to certain exceptions. The restricted persons also agreed not to advise, request, induce, attempt to induce or otherwise divert any customer, supplier, licensee or other business relation of New ZaZa, ZaZa and Toreador and their present and future subsidiaries, and further agreed not to materially curtail, limit or cease doing business with any such entities or materially interfere with the customer, supplier and other business relationships of, or oil and gas interests or the businesses of, New ZaZa, and its present and future subsidiaries. The non-competition agreement with each restricted person lasts only until the later of the termination of the restricted person’s employment with New ZaZa or three years after the consummation of the transaction.

 

In addition, the non-competition agreements will not apply to any opportunity in which the restricted persons would be prohibited from participating, if such opportunity is first offered to New ZaZa and a majority of the full board of directors of New ZaZa, including a majority of the disinterested directors, declines to pursue such opportunity, or a majority of the disinterested directors fails to make a determination as to whether New ZaZa will pursue such opportunity within ten business days following such offer. Upon the expiration of the non-competition agreements, or during the term of the non-competition agreements if the New ZaZa board of directors declines or fails to determine whether to pursue a corporate opportunity within ten business days, the current ZaZa owners will be free to pursue competitive activities or such corporate opportunities, which could create conflicts of interest and limit New ZaZa’s ability to acquire additional assets or pursue its businesses and could have a material adverse effect on New ZaZa.

 

New ZaZa will be a “controlled company” within the meaning of the Nasdaq rules and expects to qualify for, and rely on, exemptions from certain corporate governance standards, which may limit the presence of independent directors on the board of directors or board committees of New ZaZa.

 

Following the consummation of the transactions, the current ZaZa owners will beneficially own shares of New ZaZa capital stock which would represent approximately 75% of the outstanding voting power of New ZaZa’s capital stock. Accordingly, the current ZaZa owners will have the ability to elect New ZaZa’s board of directors and thereby control the management and affairs of New ZaZa. Therefore, New ZaZa will be deemed to be a “controlled company” for purposes of Nasdaq Rule 5615(c)(2). Under this rule, a company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company is a “controlled company” and may elect to be exempt from certain corporate governance requirements, including requirements that (1) a majority of the board of directors consist of independent

directors, (2) compensation of officers be determined or recommended to the board of directors by a majority of its independent directors or by a compensation committee that is composed entirely of independent directors and (3) director nominees be selected or recommended for selection by a majority of the independent directors or by a nominating committee composed solely of independent directors. Accordingly, New ZaZa’s stockholders will not have the same protections afforded to stockholders of other companies that are required to fully comply with the Nasdaq rules.

 

The risk factors listed herein under the heading “Risks Related to the Business of ZaZa” similarly apply to New ZaZa and its subsidiaries after the transactions.

 

ZaZa’s development and exploration operations require substantial capital and ZaZa 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 ZaZa’s oil and gas reserves.

 

The oil and gas exploration and development industry is capital intensive. ZaZa makes and expects to continue making substantial capital expenditures in its business and operations for the purpose of exploration for, and development, production and acquisition of, oil and gas reserves. To date, ZaZa has financed capital expenditures primarily with cash generated by operations, loans and capital contributions from its current members and contributions, bonus payments and cost reimbursements by Hess pursuant to the Exploration and Development Agreement between Hess and ZaZa. ZaZa’s cash flow from operations and access to capital are subject to a number of variables that may or may not be within its control, including:

 

 

ZaZa, Toreador and New ZaZa are seeking to raise financing. If financing and joint venture partnerships are not available on acceptable terms, in addition to up to $65 million of financing (less cash on hand at closing) being sought to satisfy the minimum $65 cash condition, or at all, New ZaZa may have limited ability to obtain the capital necessary to sustain ZaZa’s operations at current levels or to implement the strategy of New ZaZa, including existing on New ZaZa’s portfolio of drilling opportunities or expanding New ZaZa’s existing portfolio. New ZaZa may, from time to time, need to seek additional financing. However, any indebtedness of New ZaZa, including up to $63.5 million of subordinated secured promissory notes expected to be issued by New ZaZa at closing, or Toreador or ZaZa may limit the ability of New ZaZa to seek additional financing. There can be no assurance as to the availability or terms of any additional or alternative financing.

 

The failure to obtain additional financing on acceptable terms could result in an inability to purchase additional oil and gas properties and a curtailment of ZaZa’s operations relating to exploration and development of its prospects, which in turn could lead to possible write-downs in the carrying value of its properties, a material decline in ZaZa’s oil and gas reserves as well as its revenues and results of operations.

ZaZa currently relies on funds from Hess for acquisition of properties in the Eagle Ford shale. If ZaZa is unable to receive funds from Hess, it may need to find alternative sources of capital, which may not be available on favorable terms, or at all.

 

Pursuant to an existing Exploration and Development Agreement between ZaZa and Hess, Hess is required to fund all of the acquisition costs for acquiring new properties in the Eagle Ford shale. Hess has previously provided financing for the acquisition of approximately 122,000 gross acres, however, ZaZa’s business plan contemplates the acquisition of approximately 160,000 gross acres in the aggregate in the Eagle Ford shale. Hess has the right to approve any property that will be subject to the joint venture, and its total commitment is limited to $500 million, of which approximately $366 million has already been financed as of September 30, 2011. If Hess does not approve a property or fund its commitments, ZaZa may need to find alternative sources of capital to carry out ZaZa’s business plan, which may be on less favorable terms. The failure to identify acceptable alternative financing could prevent ZaZa from acquiring new properties in the Eagle Ford shale and materially adversely affect New ZaZa’s operations and prospects.

 

ZaZa currently relies on funds from Hess to finance the drilling of wells in the Eagle Ford shale. If ZaZa is unable to receive funds from Hess, it may need to find alternative sources of capital, which may not be available on favorable terms, or at all.

 

Pursuant to the Exploration and Development Agreement, Hess is required to fund all of the costs associated with wells drilled in the Eagle Ford shale, subject to a cap on such number of “carried” wells in each Eagle Ford shale prospect area. The number of wells for which ZaZa is entitled to be carried is calculated by dividing the acres in a prospect area by 640. For example, if a prospect area has 19,200 acres, ZaZa is entitled to be carried through the first 30 wells, and must pay its proportionate share of expenses (10% based on its 10% working interest in such prospects under the Exploration and Development Agreement with ZaZa) for wells after such first 30 wells. If additional wells are drilled in a prospect area, ZaZa may need to find alternative sources of capital to fund its portion of these wells. The failure to identify acceptable alternative financing to fund these wells could materially adversely affect ZaZa’s operations and prospects.

 

If ZaZa is unable to find a joint venture partner in the Eaglebine to finance acquisition and development, it may need to find alternative sources of capital, which may not be available on favorable terms, or at all.

 

ZaZa is currently having discussions with potential joint venture partners to acquire and develop properties in the Eaglebine trend. ZaZa currently holds approximately 60,000 net acres in the Eaglebine, but expects to acquire 100,000 net acres in the aggregate. There can be no assurances that ZaZa will identify a joint venture partner, that such partner will provide funding on acceptable terms to develop the existing properties or acquire new properties, or that ZaZa will be able to increase its net acreage in the Eaglebine. If ZaZa cannot identify a joint venture partner, ZaZa will need to utilize cash flow from other operations or will need to find alternative sources of capital to finance operations in the Eaglebine, which may slow the acquisition and development of the Eaglebine properties and have a material adverse effect on ZaZa’s operations and prospects.

 

ZaZa’s joint venture agreement with Hess and other agreements that ZaZa may enter into present a number of challenges that could have a material adverse effect on its business, financial condition and results of operations.

 

The joint venture agreement with Hess represents an important part of ZaZa’s business. In addition, ZaZa is seeking a joint venture partner in the Eaglebine. Joint venture arrangements typically present financial, managerial and operational challenges, including potential disputes, liabilities or contingencies and may involve risks not otherwise present when exploring and developing properties directly, including, for example:

 

 

 

The risks described above or the failure to continue any joint venture or to resolve disagreements with the joint venture partners could materially adversely affect ZaZa’s ability to transact the business that is the subject of such joint venture, which would in turn negatively affect ZaZa’s financial condition and results of operations.

 

The unavailability or high cost of drilling rigs, equipment, raw materials, supplies, personnel and oil field services could materially adversely affect ZaZa’s ability to execute its exploration and development plans on a timely basis and within its budget.

 

ZaZa’s industry is cyclical and, from time to time, there is a shortage of drilling rigs, equipment, raw materials (particularly sand, cement and other proppants), supplies or qualified personnel. During these periods, the costs and delivery times of rigs, equipment, raw materials and supplies are substantially greater. In addition, the demand for, and wage rates of, qualified drilling rig crews rise as the number of active rigs in service increases. If oil and gas prices increase in the future, increasing levels of exploration, development and production could result in response to these stronger prices, and as a result, the demand and the costs of oilfield services, drilling rigs, raw materials, supplies and equipment could increase, while the quality of these services and supplies may suffer. In addition, ZaZa’s exploration, development and production operations also require local access to large quantities of water supplies and disposal services for produced water in connection with our hydraulic fracture stimulations due to prohibitive transportation costs. Existing shortages of drilling rig service providers for pressure pumping and other services required for well completion in the Eagle Ford shale have delayed ZaZa’s development and production operations and caused ZaZa to incur additional expenditures that were in excess of those provided for in its capital budget. ZaZa cannot determine the magnitude or length of these shortages or future shortages or price increases, which could have a material adverse effect on its business, cash flows, financial condition or results of operations. In addition, shortages and price increases could restrict ZaZa’s ability to drill wells and conduct ordinary operations.

 

Drilling for and producing oil and gas are high-risk activities with many uncertainties that could materially adversely affect ZaZa’s financial condition and results of operations.

 

ZaZa’s success will depend on the results of its exploration, development and production activities. Oil and gas exploration, development and production activities are subject to numerous risks beyond ZaZa’s control, including the risk that drilling will not result in commercially viable oil or gas production. Decisions to purchase, explore, develop or otherwise exploit prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data, and engineering studies, the results of which are often inconclusive or inaccurate or subject to varying interpretations or uncertainty. Costs of drilling, completing and operating wells are often uncertain before drilling commences. Overruns in budgeted expenditures are common risks that can make a particular project uneconomical. Furthermore, many factors may curtail, delay or cancel drilling, and such work stoppage may not be covered by ZaZa’s insurance, including:

 

 

 

ZaZa’s future drilling activities may not be successful and, if unsuccessful, such failure could have a material adverse effect on ZaZa’s future results of operations and financial condition.

 

Part of ZaZa’s strategy involves drilling in new or emerging plays; therefore, ZaZa’s drilling results in these areas are not certain, and unsuccessful drilling results could result in material write-downs of unevaluated properties or a decline in value of its undeveloped acreage.

 

The results of ZaZa’s drilling in new or emerging plays are more uncertain than drilling results in areas that are more developed and have a history of established production. Since new or emerging plays and new formations have limited or no production history, ZaZa is less able to use past drilling results in those areas to help predict its future drilling results. In addition, the use of horizontal drilling and completion techniques used in ZaZa’s drilling operations in shale formations involve certain risks and complexities that do not exist in conventional wells. Accordingly, ZaZa’s drilling projections and results are subject to greater risks in these areas and could be unsuccessful. ZaZa may be unable to execute its expected drilling program in these areas because of disappointing drilling results, capital constraints, lease expirations, inadequate access to gathering systems or limitations on pipeline take-away capacity, unavailability of drilling rigs and other services or otherwise, and/or oil, gas and natural gas liquids price declines. To the extent ZaZa is unable to execute its expected drilling program in these areas, its return on investment may not be as attractive as anticipated. ZaZa could incur material write-downs of unevaluated properties, and the value of its undeveloped acreage could decline in the future if its drilling results are unsuccessful.

 

Development and exploration drilling activities do not ensure reserve replacement and thus ZaZa’s ability to produce revenue.

 

Exploration and development drilling and strategic acquisitions are the main methods of replacing reserves. However, exploration and development drilling operations may not result in any increases in reserves for various reasons. ZaZa’s future oil and gas production depends on ZaZa’s success in finding or acquiring additional reserves. If ZaZa fails to replace reserves through drilling or acquisitions, its level of production and cash flows will be materially adversely affected. In general, production from oil and gas properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. In the absence of reserve replacements, ZaZa’s total proved reserves will decline as reserves are produced. ZaZa’s ability to make the necessary capital investment to maintain or expand its asset base of oil and gas reserves would be impaired to the extent cash flow from operations is reduced and external sources of capital become limited or unavailable. ZaZa may not be successful in exploring for, developing or acquiring additional reserves.

When ZaZa presents oil and gas reserve information in the future, numerous uncertainties will be inherent in those estimates of oil and gas reserves and estimated reserve quantities, and the present value calculations presented in the future relating to such reserves may not be accurate. Any material inaccuracies in future reserve estimates or underlying assumptions will affect materially the estimated quantities and present value of ZaZa’s reserves.

 

As discussed in “ZaZa Business, Industry & Properties — Oil and Gas Reserves,” ZaZa did not have material reserves as of December 31, 2010. Consequently, ZaZa did not have internal or third party reserve reports prepared as of December 31, 2010, and no oil and gas reserve information is included in this proxy statement/prospectus as of such date, since oil and gas producing activities were not material to ZaZa as of such date. By virtue of its drilling success during 2011, New ZaZa expects to report proved oil and gas reserves as of December 31, 2011. There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves and cash flows attributable to such reserves, including factors beyond ZaZa’s engineers’ control (or the third party preparing the reserve report). Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner. The accuracy of an estimate of quantities of reserves, or of cash flows attributable to such reserves, is a function of the available data, assumptions regarding future oil and gas prices, expenditures for future development and exploration activities, engineering and geological interpretation and judgment. In addition, accurately estimating reserves in shale formations such as ZaZa’s can be even more difficult than estimating reserves in more traditional hydrocarbon bearing formations given the complexities of the projected decline curves and economics of shale gas wells. Reserves and future cash flows may be subject to material downward or upward revisions, based upon production history, development and exploration activities and prices of oil and gas. In addition, different reserve engineers may make different estimates of reserves and cash flows based on the same available data.

 

The present value of future net revenues from ZaZa’s proved reserves referred to in any future reserve report will not necessarily be the actual current market value of ZaZa’s estimated oil and gas reserves at such time. In accordance with SEC requirements, ZaZa will base the estimated discounted future net cash flows from its proved reserves using the un-weighted arithmetic average of the first day of the month for each month within a twelve month period.

 

Unless ZaZa replaces its reserves, its reserves and production will decline, which would adversely affect its financial condition, results of operations and cash flows.

 

Producing oil and gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Decline rates are typically greatest early in the productive life of a well. Estimates of the decline rate of an oil or gas wells, and those in shale formations, in particular are inherently imprecise, and are less precise with respect to new or emerging oil and gas formations with limited production histories than for more developed formations with established production histories. ZaZa’s production levels and the reserves that ZaZa may recover from its wells will change if production from its existing wells declines in a different manner than ZaZa has estimated. Thus, ZaZa’s future oil and gas reserves and production and, therefore, ZaZa’s future cash flow and results of operations are highly dependent upon ZaZa’s success in efficiently developing and exploiting its current properties and economically finding or acquiring additional recoverable reserves. ZaZa may not be able to develop, find or acquire additional reserves or future production at acceptable costs. If ZaZa is unable to replace ZaZa’s current or future production, ZaZa’s cash flows and the value of ZaZa’s reserves may decrease, and have a material adverse effect on ZaZa’s business, financial condition and results of operations.

 

ZaZa’s strategy as an onshore unconventional resource player has resulted in operations concentrated in one geographic area, which increases its exposure to many of the risks enumerated herein.

 

Currently, ZaZa’s operations are highly concentrated in the Eagle Ford shale and the Eaglebine. This concentration increases the potential impact that many of the risks stated herein may have upon ZaZa’s ability to perform. For example, ZaZa has greater exposure to regulatory actions impacting Texas, natural disasters in the geographic area, competition for equipment, services and materials available in the area and access to infrastructure and markets.

ZaZa may not be able to obtain access to pipelines, gas gathering, transmission, storage and processing facilities to market its oil and gas production and its ability to sell its production and/or receive market prices for its production may be materially adversely affected by transportation capacity constraints and interruptions.

 

The marketing of oil and gas production depends in large part on the availability, proximity and capacity of pipelines and storage facilities, gas gathering systems and other transportation, processing and refining facilities, as well as the existence of adequate markets. If there were insufficient capacity available on these systems, or if these systems were unavailable to ZaZa, the price offered for ZaZa’s production could be significantly depressed, or ZaZa could be forced to shut-in some production or delay or discontinue drilling plans and commercial production following a discovery of hydrocarbons while it constructs its own facility. ZaZa also relies (and expects to rely in the future) on facilities developed and owned by third parties in order to store, process, transmit and sell its oil and gas production. ZaZa’s plans to develop its oil and gas reserves could be materially and adversely affected by the inability or unwillingness of third parties to provide sufficient transmission, storage or processing facilities to ZaZa, especially in areas of planned expansion where such facilities do not currently exist.

 

If the amount of oil, gas or condensate being produced by ZaZa and others exceeds the capacity of the various transportation pipelines and gathering systems currently available in ZaZa’s operating areas, it will be necessary for new transportation pipelines and gathering systems to be built. Or, in the case of oil and condensate, it will be necessary for ZaZa to rely more heavily on trucks to transport its production, which is more expensive and less efficient than transportation by pipeline. Currently, ZaZa anticipates that additional pipeline capacity will be required in the Eagle Ford shale to transport oil and condensate production, which increased substantially during 2010 and is expected to continue to increase. The construction of new pipelines and gathering systems is capital intensive and construction may be postponed, interrupted or cancelled in response to changing economic conditions and the availability and cost of capital. In addition, capital constraints could limit ZaZa’s ability to build gathering systems to transport its production to transportation pipelines. In such event, costs to transport our production may increase materially or ZaZa might have to shut-in its wells awaiting a pipeline connection or capacity and/or sell its production at much lower prices than market or than ZaZa currently projects, which would materially adversely affect its results of operation.

 

A portion of ZaZa’s production may also be interrupted, or shut-in, from time to time for numerous other reasons, including as a result of weather conditions, loss of pipeline or gathering system access, field labor issues or strikes, or ZaZa might voluntarily curtail production in response to market conditions. If a substantial amount of ZaZa’s production is interrupted at the same time, it could materially adversely affect ZaZa’s cash flow.

 

ZaZa’s identified drilling location inventories are scheduled out over several years, making them susceptible to uncertainties that could materially alter the occurrence or timing of their drilling.

 

ZaZa’s management has specifically identified and scheduled drilling locations as an estimation of its future multi-year drilling activities on its existing acreage. These identified drilling locations represent a significant part of ZaZa’s growth strategy. ZaZa’s ability to drill and develop these locations depends on a number of factors, including the availability of capital, seasonal conditions, regulatory approvals, oil and gas prices, negotiation of agreements with third parties, costs, access to and availability of equipment, services and personnel and drilling results. Because of these uncertainties, ZaZa cannot give any assurance as to the timing of these activities, if the potential drilling locations ZaZa has identified will ever be drilled or if it will be able to economically produce oil or gas from these or any other potential drilling locations. As such, ZaZa’s actual drilling activities may materially differ from ZaZa’s current expectations, which could materially adversely affect ZaZa’s business, results of operations and financial condition.

Competition in the oil and gas industry is intense, and many of ZaZa’s competitors have resources that are greater than ZaZa’s.

 

ZaZa operates in a highly competitive environment for acquiring prospects and productive properties, marketing oil and gas and securing equipment and trained personnel. ZaZa’s competitors include major and large independent oil and gas companies that possess financial, technical and personnel resources substantially greater than ZaZa’s resources. Those companies may be able to develop and acquire more prospects and productive properties at a lower cost and more quickly than ZaZa’s financial or personnel resources permit. ZaZa’s ability to acquire additional prospects and discover reserves in the future will depend on its ability to evaluate and select suitable properties and consummate transactions in a highly competitive environment. Larger competitors may be better able to withstand sustained periods of unsuccessful drilling and absorb the burden of changes in laws and regulations more easily than ZaZa can, which could materially adversely affect its competitive position. ZaZa may not be able to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing hydrocarbons, attracting and retaining quality personnel and raising additional capital.

 

A failure to attract and retain qualified personnel could have a material adverse effect on ZaZa’s business, financial position, results of operations, cash flows and future growth.

 

ZaZa’s success is largely dependent upon its ability to attract and retain personnel with the technical expertise, specialized knowledge and training, skills and experience required for ZaZa’s business. An inability to sufficiently staff its operations or the loss of the services of one or more members of its senior management or of numerous employees with technical skills could have a material adverse effect on its business, financial position, results of operations, cash flows and future growth. While a number of senior executives and consultants have employment or consulting agreements with ZaZa or New ZaZa, there can be no assurances they will remain with ZaZa or New ZaZa.

 

ZaZa may incur substantial losses and be subject to substantial liability claims as a result of its oil and gas operations.

 

Oil and gas exploration, drilling and production activities are subject to numerous operating risks, including the possibility of:

 

 

Any of these operating hazards could cause damage to properties, serious injuries, fatalities, oil spills, discharge of hazardous materials, remediation and clean-up costs, and other environmental damages, which could expose ZaZa to liabilities. The payment of any of these liabilities could reduce, or even eliminate, the funds available for exploration, development, and acquisition or could result in a loss of ZaZa’s properties. ZaZa is not fully insured against all risks, including development and completion risks that are generally not recoverable from third parties or insurance. In addition, ZaZa’s insurance policies provide limited coverage for losses or liabilities relating to sudden and accidental pollution, but not for other types of pollution. ZaZa’s insurance might be inadequate to cover its liabilities. ZaZa’s energy package is written on reasonably standard terms and conditions that are generally available to the exploration and production industry. The insurance market in general and the energy insurance market in particular have been difficult markets over the past

several years. Insurance costs could increase in the future as the insurance industry adjusts to difficult exposures and ZaZa may decrease coverage and retain more risk to mitigate future cost increases. If ZaZa incurs substantial liability and the damages are not covered by insurance or are in excess of policy limits, or if ZaZa incurs a liability for a risk at a time when ZaZa does not have liability insurance, then ZaZa’s business, financial position, results of operations and cash flows could be materially adversely affected.

 

Shortage and competition in hydraulic fracturing services could impede ZaZa’s ability to develop its shale plays.

 

The unavailability or high cost of high pressure pumping services (or hydraulic fracturing services), chemicals, proppant, water, and related services and equipment could limit ZaZa’s ability to execute its exploration and development plans on a timely basis and within its budget. ZaZa’s industry is experiencing a growing emphasis on the exploitation and development of shale gas and shale oil resource plays, which are dependent on hydraulic fracturing for economically successful development. Hydraulic fracturing in shale plays requires high pressure pumping service crews. A shortage of service crews or proppant, chemical, or water, especially if this shortage occurred in South Texas, could materially and adversely affect ZaZa’s operations and the timeliness of executing its development plans within its budget.

 

ZaZa does not own all of the land on which its transportation pipelines and gathering and treating systems are located, which could materially disrupt its operations.

 

ZaZa does not own all of the land on which its gathering and treating systems have been constructed, and ZaZa is therefore subject to the possibility of increased costs to retain necessary land use. ZaZa obtains the rights to construct and operate its gathering and treating systems on land owned by third parties and governmental agencies for a specific period of time. ZaZa’s loss of these rights, through its inability to renew right-of-way contracts or otherwise, could have a material adverse effect on its business, results of operations and financial condition.

 

Title to the properties in which ZaZa has an interest may be impaired by title defects.

 

ZaZa generally obtains title opinions on significant properties that it drills or acquires. Additionally, undeveloped acreage has greater risk of title defects than developed acreage. Generally, under the terms of the operating agreements affecting ZaZa’s properties, any monetary loss is to be borne by all parties to any such agreement in proportion to their interests in such property. If there are any title defects or defects in assignment of leasehold rights in properties in which ZaZa holds an interest, ZaZa could suffer a material financial loss.

 

ZaZa’s property acquisition strategy could fail or present unanticipated problems for its business in the future, which could materially adversely affect its ability to make property acquisitions or realize anticipated benefits of those acquisitions.

 

ZaZa’s growth strategy includes acquiring oil and gas properties. ZaZa may not be able to identify suitable acquisition opportunities or finance and complete any particular acquisition successfully. Furthermore, acquisitions involve a number of risks and challenges, including:

 

 

 

ZaZa’s decision to acquire a property will depend in part on the evaluation of data obtained from production reports and engineering studies, geophysical and geological analyses, and seismic and other information, the results of which are often inconclusive and subject to various interpretations.

 

Also, ZaZa’s reviews of acquired properties are inherently incomplete because it generally is not feasible to perform an in-depth review of the individual properties involved in each acquisition given time constraints imposed by sellers. Even a detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to fully access their deficiencies and potential. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken.

 

ZaZa faces risks associated with hurricanes and other natural disasters in connection with its operations near coastal areas in Texas.

 

A portion of ZaZa’s oil and gas properties are located near coastal areas of the Texas Gulf Coast. As a result, in the event of damage due to hurricanes, tropical storms, flooding or similar natural disasters, ZaZa could be subject to production curtailments in the future resulting from hurricane damage to certain fields or, even in the event that producing fields are not damaged, production could be curtailed due to damage to facilities and equipment owned by oil and gas purchasers, or vendors and suppliers.

 

Volatile oil and gas prices could materially adversely affect ZaZa’s financial condition and results of operations.

 

ZaZa’s most significant market risk is the pricing of oil and gas. Management expects energy prices to remain volatile and unpredictable. Moreover, oil and gas prices depend on factors that are outside of ZaZa’s control, including:

 

 

 

Further, oil and gas prices do not necessarily fluctuate in direct relation to each other. Lower oil and gas prices not only decrease revenues on a per unit basis, but also may reduce the amount of oil and gas that ZaZa can economically produce. Lower prices could also negatively impact estimates of ZaZa’s proved reserves. ZaZa’s revenues, profitability and cash flow depend upon the price of and demand for oil and gas, and a drop in prices can significantly affect ZaZa’s financial results and impede its growth.

 

If oil and gas prices decrease or exploration efforts are unsuccessful, ZaZa may be required to write-down the capitalized cost of individual oil and gas properties.

 

A write-down of the capitalized cost of individual oil and gas properties could occur when oil and gas prices are low or if ZaZa has substantial downward adjustments to its estimated proved oil and gas reserves, if operating costs or development costs increase over prior estimates, or if exploratory drilling is unsuccessful.

 

ZaZa uses the successful efforts accounting method. All property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending the determination of whether proved reserves are discovered. If proved reserves are not discovered with an exploratory well, the costs of drilling the well are expensed. All geological and geophysical costs on exploratory prospects are expensed as incurred.

 

To the extent that ZaZa has proved reserves in the future, the capitalized costs of ZaZa’s proved oil and gas properties, on a field-by-field basis, may exceed the estimated undiscounted future cash flows of that field. If so, we will adjust the carrying value of the field to its fair value in the current period. The factors used to determine fair value include, but are not limited to, estimates of reserves, future commodity prices, future production estimates, anticipated capital expenditures, and a discount rate commensurate with the risk associated with realizing the expected cash flows projected. Unproved properties are reviewed to determine if there has been an impairment of the carrying value, with any such impairment charged to expense. Given the complexities associated with oil and gas reserves estimates and the history of price volatility in the oil and gas market, events may arise that will require us to record an impairment of our oil and gas properties and there can be no assurance that such impairments will not be required in the future nor that they will not be material.

 

ZaZa is subject to regulations that are evolving and may cause it to incur substantial costs.

 

ZaZa’s activities are subject to federal, state, regional and local laws and regulations. Extensive laws, regulations and rules regulate activities and operations in the oil and gas industry. For example, matters subject to regulation and the types of permits required include:

 

 

 

Under these laws and regulations, ZaZa could be liable for:

 

 

Environmental and other governmental laws and regulations also increase the costs to plan, permit, design, drill, install, operate and abandon oil and gas wells. A major risk inherent in ZaZa’s drilling plans is the need to obtain drilling permits from applicable federal, state and local authorities. Delays in obtaining regulatory approvals or drilling permits for producing and water injection wells, the failure to obtain a drilling permit for a well, or the receipt of a permit with excessive conditions or costs could have a material adverse effect on ZaZa’s ability to explore or develop its properties. Additionally, the oil and gas regulatory environment could change in ways that might substantially increase the financial and managerial costs to comply with the requirements of these laws and regulations and, consequently, adversely affect ZaZa’s profitability. Furthermore, ZaZa may be put at a competitive disadvantage to larger companies in its industry that can spread these additional costs over a greater number of wells and larger operating area. Any or all of these contingencies could delay or halt ZaZa’s drilling activities or the construction of ancillary facilities necessary for production, which would prevent ZaZa from developing its property interests as planned. Conditions, delays or restrictions imposed on the management of groundwater produced during drilling could severely limit its operations or make them uneconomic.

 

Changes in laws and regulations could affect ZaZa’s costs of operations, production levels, royalty obligations, price levels, environmental requirements, and other aspects of its business, including ZaZa’s general profitability. ZaZa is unable to predict changes to existing laws and regulations. For example, in response to the April 2010 fire and explosion onboard the semisubmersible drilling rig Deepwater Horizon, and the resulting oil spill in the Gulf of Mexico, the federal government has limited certain drilling activities in the U.S. Gulf of Mexico. While ZaZa does not conduct any offshore activities, the U.S. Environmental Protection Agency, or the “EPA,” has recently focused on public concerns about the risk of water contamination and public health problems from drilling and hydraulic fracturing activities. This renewed focus could

lead to additional federal and state regulations affecting the oil and gas industry. There can be no assurance that present or future regulations will not materially adversely affect ZaZa’s business and operations, including that ZaZa may be required to suspend drilling operations or shut-in production pending compliance. Additional regulations or other changes to or reinterpretations of existing laws and regulations could significantly impact ZaZa’s business, results of operations, cash flows, financial position and future growth.

 

Environmental matters and costs can be significant.

 

ZaZa’s oil and gas exploration and production operations are subject to stringent and complex federal, state and local laws and regulations governing health and safety aspects of ZaZa’s operations, the discharge of materials into the environment, the generation, storage, transportation and handling of hazardous materials or otherwise relating to environmental protection. These laws and regulations may impose numerous obligations that are applicable to ZaZa’s operations including the acquisition of a permit before conducting drilling or underground injection activities; the restriction of types, quantities and concentration of materials that can be released into the environment; the limitation or prohibition of drilling activities on certain lands lying within wilderness, wetlands and other protected areas; the application of specific health and safety criteria addressing worker protection; and the imposition of substantial liabilities for pollution resulting from operations. Numerous governmental authorities, such as the EPA and analogous state agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly actions. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil or criminal penalties, the imposition of investigatory or remedial obligations, and the issuance of orders limiting or prohibiting some or all of ZaZa’s operations.

 

There is inherent risk of incurring significant environmental costs and liabilities in the performance of ZaZa’s operations due to its handling of petroleum hydrocarbons and wastes, because of air emissions and wastewater discharges related to its operations, and as a result of historical industry operations and waste disposal practices. The exploration and production of oil and gas involves many risks concerning equipment and human operational problems that could lead to leaks or spills of petroleum products. Under certain environmental laws and regulations, ZaZa could be subject to strict, joint and several liability for the removal or remediation of previously released materials or property contamination regardless of whether ZaZa was responsible for the release or contamination or whether the operations were in compliance with all applicable laws at the time those actions were taken. Private parties, including the owners of properties upon which ZaZa’s wells are drilled and facilities where ZaZa’s petroleum hydrocarbons or wastes are taken for reclamation or disposal, also may have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property or natural resource damages. Contamination of groundwater by oil and gas drilling, production and related operations may result in fines, penalties, and remediation costs. In addition, the risk of accidental spills or releases could expose ZaZa to significant liabilities that could have a material adverse effect on its business, financial condition or results of operations. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly waste control, handling, storage, transport, disposal or cleanup requirements could require ZaZa to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse effect on its own results of operations, competitive position or financial condition.

 

Possible legislation and regulations related to global warming and climate change could have a material adverse effect on ZaZa’s operations and the demand for oil and gas.

 

In December 2009, the EPA determined that emissions of carbon dioxide, methane, and other greenhouse gases, or “GHGs,” present an endangerment to public health and the environment because emissions of such gasses are contributing to the warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA recently adopted regulations under existing provisions of the Clean Air Act that require a reduction in emissions of GHGs from motor vehicles and that regulate emissions of GHGs from certain large stationary sources, effective January 2, 2011. The EPA has published its final rule to address the permitting of GHG emissions from stationary sources under the Prevention of Significant Deterioration, or “PSD,” and Title V permitting programs, pursuant to which these permitting programs have been “tailored” to apply to

certain stationary sources of GHG emissions in a multi-step process, with the largest sources subject to permitting first. Facilities required to obtain PSD permits for their GHG emissions also will be required to meet “best available control technology” standards, which will be established by the states or, in some instances, by the EPA on a case-by-case basis. The EPA’s rules relating to emissions of GHGs from large stationary sources of emissions are currently subject to a number of legal challenges, but the federal courts have thus far declined to issue any injunctions to prevent the EPA from implementing or requiring state environmental agencies to implement the rules. Although ZaZa’s current operations do not require PSD or Title V air permits and are not affected by the tailoring rule, the rule may affect ZaZa in the future as its operations grow. Finally, the EPA is considering additional rulemaking to apply these requirements to broader classes of emission sources by 2012, which may apply to some of ZaZa’s facilities. These EPA rulemakings could materially adversely affect ZaZa’s operations and restrict or delay its ability to obtain air permits for new or modified facilities. As a result of these regulatory initiatives, ZaZa’s operating costs may increase in compliance with these programs. The EPA has also adopted regulations requiring the reporting of GHG emissions from specified large GHG emission sources in the United States including certain onshore and offshore oil and gas production facilities, which may include certain of ZaZa’s operations, beginning in 2012 for emissions occurring in 2011.

 

In addition, Congress has from time to time considered adopting legislation to reduce emissions of GHGs and almost one-half of the states have already taken legal measures to reduce emissions of GHGs primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. Most of these cap and trade programs work by requiring either major sources of emissions or major producers of fuels to acquire and surrender emission allowances, with the number of allowances available for purchase reduced each year until the overall GHG emission reduction goal is achieved. These allowances would be expected to escalate significantly in cost over time. The adoption of legislation or regulatory programs to reduce emissions of GHGs could require ZaZa to incur increased operating costs, such as costs to purchase and operate emissions control systems, to acquire emissions allowances or to comply with new regulatory or reporting requirements. Any such legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for, the oil and gas it produces. Consequently, legislation and regulatory programs to reduce emissions of GHGs could have a material adverse effect on ZaZa’s business, financial condition and results of operations. Finally, some scientists have concluded that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events. If any such effects were to occur, they could have a material adverse effect on ZaZa’s financial condition and results of operations.

 

Recent legislative proposals could materially lessen the economic viability of domestic exploration and production companies, including ZaZa.

 

The budgetary proposals of the Obama Administration, if enacted into law by Congress, could have a material adverse impact on the domestic oil and gas industry and on exploration and production companies in particular. The proposals would eliminate the so called “oil and gas company preferences” and raise other taxes on the industry. The proposed budget would eliminate tax mechanisms critical to capital formation for drilling, such as expensing of intangible drilling costs and eliminating the percentage depletion allowance. This, or similar legislation, if enacted, would have a significant adverse impact on domestic drilling for oil and gas. The proposals also seek to eliminate the deduction for certain U.S. production activities and extend the amortization period for certain geological and geophysical expenditures. The proposed budget would also charge producers user fees for processing permits to drill on federal lands and increase royalty rates of minerals produced from federal lands. While the budget as proposed will not be adopted by the current congress, some of the proposals will likely be discussed by the new bipartisan committee recently authorized to make proposals to reduce the federal debt. ZaZa cannot predict the outcome of the deliberations by this committee or new budgets or other legislation that will be proposed in the coming years, but the enactment of any of these proposals or similar proposals or changes to U.S. federal income tax law would likely adversely affect the domestic oil and gas exploration and production business and affect ZaZa’s results of operations and financial condition.

Federal and state legislation and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays and inability to book future reserves.

 

Hydraulic fracturing involves the injection of water, sand and additives under pressure into rock formations to stimulate hydrocarbon (oil and gas) production. ZaZa engages third parties to provide hydraulic fracturing or other well stimulation services to us in connection with several wells or proposed wells for which it is the operator. ZaZa finds that the use of hydraulic fracturing is necessary to produce commercial quantities of oil and gas from many reservoirs where ZaZa has significant acreage. The process is typically regulated by state oil and gas commissions. However, Congress is currently considering two companion bills in connection with the proposed “Fracturing Responsibility and Awareness of Chemicals Act,” or the “FRAC Act.” If enacted, the bills would repeal an exemption in the federal SDWA for the underground injection of hydraulic fracturing fluids near drinking water sources and require the disclosure of chemicals used by the oil and gas industry in the hydraulic fracturing process. Sponsors of the FRAC Act have asserted that chemicals used in the fracturing process may be adversely impacting drinking water supplies. If enacted, the legislation would result in additional regulatory burdens, including requiring the reporting and public disclosure of chemicals used in the fracturing process to state and federal regulatory authorities, who would then make this information publicly available. The availability of this information could make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. Further, if enacted, the FRAC Act could result in additional regulatory burdens such as permitting, construction, financial assurance, monitoring, recordkeeping, and plugging and abandonment requirements.

 

Hydraulic fracturing impacts and practices have also been the subject of a number of governmental and private studies. The Secretary of Energy Advisory Board Subcommitee on Shale Gas Production recently issued two reports, which contain a number of recommendations for producers and regulatory agencies that would create additional regulatory burdens. These include the disclosure of water flow and fracturing fluid used in the fracturing and well completion process and the adoption of best practices in well development and construction, requirements for background water quality measurements, and air emission limits for sources of GHGs, air toxics, ozone precursors and other air pollutants. In addition, the Energy and Commerce Committee of the United States House of Representatives is conducting an investigation of hydraulic fracturing practices. Similarly, the EPA is conducting an investigation of hydraulic fracturing practices. On November 3, 2011, the EPA released its study plan on the effects of hydraulic fracturing on human health and the environment to the EPA’s Science Advisory Board for comment. The EPA expects to make public its initial findings by the end of 2012 and an additional report with further research in 2014. Further, certain members of Congress have asked for further investigation through the U.S. Government Accountability Office, the SEC and the U.S. Energy Information Administration. These ongoing and proposed studies could lead to initiatives to further regulate hydraulic fracturing. Additional requirements could be imposed, including permitting requirements, financial assurances, public disclosure obligations, monitoring and reporting requirements. New requirements could increase operating costs and any disclosure requirements could increase the possibility of third-party or governmental legal challenges to hydraulic fracturing.

 

The EPA has also begun to assert regulatory authority over certain aspects of hydraulic fracturing. Recently, the EPA asserted federal regulatory authority over hydraulic fracturing involving diesel additives under the SDWA’s Underground Injection Control Program, or the “UIC,” and is currently developing UIC permitting guidance for hydraulic fracturing activities that use diesel fuel in fracturing fluids. While the EPA has yet to take any action to enforce or implement this newly asserted regulatory authority, industry groups have filed suit challenging the EPA’s recent decision. In addition, the EPA recently proposed new emission standards to reduce VOC emissions from oil and gas exploration and production operations including specific limitations for emissions associated with hydraulic fracturing. Further, the agency has announced that one of its enforcement initiatives for its 2011 to 2013 fiscal years would be to focus on environmental compliance by the energy extraction sector, and has already commenced one potential enforcement matter in Texas. Finally, on October 20, 2011, the EPA announced its plan to propose pretreatment standards for wastewater generated during the hydraulic fracturing process. These governmental studies of hydraulic fracturing impacts and practices and the EPA’s regulatory and enforcement initiatives could make it more difficult to perform hydraulic fracturing and increase ZaZa’s costs of compliance and doing business. If hydraulic fracturing

becomes regulated at the federal level as a result of federal legislation or regulatory initiatives by the EPA, ZaZa’s fracturing activities could become subject to additional permitting requirements and also to attendant permitting delays and potential increases in costs. If such permitting requirements delay ZaZa’s drilling activity, ZaZa’s ability to present reserves, and once presented, book reserves, will be delayed as well.

 

In addition, some states have adopted, and other states are considering adopting, regulations that could impose more stringent permitting, disclosure and well construction requirements on hydraulic fracturing operations. For example, Pennsylvania, Colorado, and Wyoming have each adopted a variety of well construction, set back, and disclosure regulations limiting how fracturing can be performed and requiring various degrees of chemical disclosure. Texas recently passed a law requiring public disclosure of certain information about chemicals used in the hydraulic fracturing process, and the Texas Railroad Commission has issued a proposed rule setting forth requirements for such public disclosure. In addition, the Texas Commission on Environmental Quality recently adopted more stringent air emission and permitting requirements for oil and gas exploration operations in the Barnett Shale. More stringent air emissions and permitting requirements may be imposed on the areas in which ZaZa operates sometime in the future. These regulations, if adopted, would affect ZaZa’s operations, increase ZaZa’s costs of exploration and production and limit the quantity of oil and gas that ZaZa can economically produce. A major risk inherent in ZaZa’s drilling plans is the need to obtain drilling permits from state and local authorities on a timely basis following leasing. Delays in obtaining regulatory approvals, drilling permits, the failure to obtain a drilling permit for a well or the receipt of a permit with unreasonable conditions or costs could have a material adverse effect on ZaZa’s ability to explore or develop its properties. Additionally, the oil and gas regulatory environment could change in ways that might substantially increase ZaZa’s financial and managerial costs to comply with the requirements of these laws and regulations and, consequently, materially adversely affect ZaZa’s profitability. Furthermore, these additional costs may put us at a competitive disadvantage compared to larger companies in the industry which can spread such additional costs over a greater number of wells and larger operating staff.

 

Any increased costs for fracturing or restrictions on the use of fracturing could result in ZaZa being unable to economically produce hydrocarbons that it discovers, resulting in its inability to book reserves, and materially adversely affecting its future results of operations.

 

Access to water to conduct hydraulic fracturing may not be available if water sources become scarce.

 

The availability of sources of water is crucial to conduct hydraulic fracturing. Approximately 80,000-100,000 gallons of water are necessary for drilling and completing one well in the Eagle Ford shale and in the Eaglebine. Texas is currently experiencing a severe drought that has limited the water supplies that are necessary to conduct hydraulic fracturing. ZaZa has been sourcing its water from deeper aquifers that have not yet been impacted by the drought. ZaZa can make no assurances that sufficient water resources will be available in the short or long term to carry out ZaZa’s current business plan.

 

Global financial and economic circumstances may have impacts on ZaZa’s business and financial condition that ZaZa currently cannot predict.

 

Global financial markets may have a material adverse impact on ZaZa’s business and its financial condition, and it may face challenges if conditions in the financial markets are inadequate to finance ZaZa’s activities at a reasonable cost of capital. While the current economic situation has improved since 2008, continuing concerns over the worldwide economic outlook, geopolitical issues, the availability and costs of credit, and the sovereign debt crisis have contributed to increased volatility in the global financial markets and commodity prices and diminished expectations for the global economy and these conditions could make it more difficult for ZaZa to access capital. In addition, adverse economic circumstances could cause customers, joint owners or other parties with whom ZaZa transacts business to fail to meet their obligations to ZaZa. Also, worldwide economic conditions could lead to reduced demand for oil and gas, or lower prices for oil and gas, or both, which could have a material negative impact on ZaZa’s revenues, results of operations and financial conditions.

ZaZa has historically depended on two customers and a loss of either customer or a decrease in demand would adversely affect ZaZa’s business and operating results.

 

ZaZa’s customer base is highly concentrated. Since ZaZa began producing crude oil in commercial quantities in 2011, Hess has sold the crude oil produced by the joint venture to two major purchasers, Shell Oil and Superior Oil Company, pursuant to an oral agreement between Hess and ZaZa. Under this oral agreement, Hess markets all of the crude oil produced by the Hess joint venture and remits payment to ZaZa for its share of such sales, but does not provide detail of what percentage is sold to each of these producers. ZaZa expects that revenue from a small number of customers will continue to account for a high percentage of ZaZa’s revenue for the foreseeable future. The loss of either of these customers or a decrease in demand, and the related impact on ZaZa’s future anticipated revenue, would materially and adversely affect ZaZa’s business, financial condition or results of operations, and there can be no assurance that ZaZa will be able to replace the business from these customers. In addition, this type of loss could cause significant fluctuations in ZaZa’s results of operations because ZaZa’s expenses are fixed in the short term and its sales and development cycle to obtain new customers is long.

 

You should read and consider the risks associated with the business of Toreador described below in addition to the risks described in Item 1A — Risk Factors, in Toreador’s Annual Report on Form 10-K/A for the year ended December 31, 2010 and Item 1A-Risk Factors, in Toreador’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, which have been filed with the SEC and are incorporated by reference in this proxy statement/prospectus.

 

The recent ban in France on hydraulic fracturing, unless lifted or modified, will likely impair Toreador’s ability to economically produce oil in commercial quantities from the Liassic source rock in the Paris Basin and may materially adversely affect its results of operations.

 

A French law that went into effect on July 13, 2011 bans the use of hydraulic fracturing for oil and gas extraction. This law does not prevent implentation of the proof of concept program under which Toreador and its strategic partner plan to drill and test six or more exploration wells to determine the commercial viability of oil production from the Liassic source rock in the Paris Basin as this program does not call for hydraulic fracturing. However, if this proof of concept program is successful, Toreador and its strategic partner will need to consider the feasibility of commercial production of oil from the Liassic source rock in the Paris Basin. Toreador believes that at the current level of technical know-how, hydraulic fracturing is required to have economically viable oil production from the Liassic source rock in the Paris Basin. Unless the French government repeals its ban on hydraulic fracturing or another economically viable extraction method for production from the Paris Basin Liassic is developed or improved, Toreador may be unable to commercially produce any oil that it may discover in the Paris Basin Liassic, resulting in its inability to book reserves, and materially adversely affecting its future results of operations.

 

Toreador may not be able to maintain or renew its existing exploration permits or exploitation concessions or obtain new ones, which could reduce its proved reserves.

 

Toreador does not hold title to its properties in France but holds exploration permits and exploitation concessions granted by the French government. Under French law, each exploration permit is an exclusive right to explore for liquid and/or gaseous hydrocarbons and requires Toreador to commit expenditures of a certain amount and is subject to renewal being granted after the initial term of between three to five years. Renewal can be granted twice, each time for a similar duration as the initial term and based on a similar financial commitment. Under French law, each exploitation concession is subject to renewal after an initial term of up to 50 years. Renewal is subject to having the requisite operational capabilities to continue operations in accordance with French regulations.

 

Toreador currently holds ten exploration permits and has filed renewal applications for four exploration permits that expired in 2010 or 2011 (Aufferville, Mairy, Rigny le Ferron and Joigny). These renewal

applications are currently pending with the French government. However, the revised French regulations are unclear as to whether such exploration will still be possible after 15 months following the date of filing of the renewal application. Under previous regulations, which were not repealed in their entirety, the lack of answer to a renewal application for more than 15 months following the date of filing of the renewal application was construed as an implicit refusal to grant the renewal of an exploration permit. For all four expired permits (other than the Mairy permit), 15 months have elapsed since the submission of a renewal application (and, in the case of the Mairy permit, the 15 month period will elapse in May 2012). Although we believe that, under revised French regulations, we are permitted to operate under expired permits until an express decision is issued with respect to their renewal, this position is not entirely free from doubt.

 

Toreador currently holds three exploitation concessions covering two producing oil areas in the Paris Basin — the Neocomian Complex (the Chateaurenard and St. Firmin Des Bois concession) and Charmottes fields (the Charmottes concession, producing from the Dogger and Trias horizons). The production from these oil fields currently represents substantially all of Toreador’s sales and other operating revenue. Toreador obtained a renewal of the Chateaurenard and St. Firmin Des Bois concessions in February 2011, extending the expiration date of each to January 1, 2036. Toreador filed a renewal application in February 2011 for the Charmottes concession, which concession expires in October 2013. Toreador has not yet received a response as to whether its Charmottes concession will be renewed.

 

There can be no assurance that Toreador will be able to renew any of its ten exploration permits or concessions when they expire, convert exploration permits into exploitation concessions or obtain additional permits or concessions in the future. If Toreador does not satisfy the French government that Toreador has the financial and technical capacities necessary to operate under such permits or concessions, such permits or concessions may be withdrawn and/or not renewed. If Toreador cannot renew some or all of these permits or concessions when they expire or convert exploration permits into exploitation concessions, Toreador will not be able to include the proved reserves associated with the permit or concession and Toreador will be unable to engage in production to recover reserves, which production currently represents substantially all of its revenue. Any such negative developments with respect to Toreador’s permits would have a material adverse effect on Toreador’s ability to conduct its business.

 

New ZaZa does not intend to pay cash dividends on its common stock in the foreseeable future.

 

Toreador has not declared or paid dividends on its common stock since paying a cash dividend on its common stock in 2000. New ZaZa does not anticipate paying dividends in the foreseeable future, but expects to retain earnings to finance the growth of its business. Therefore, any return on investments will only occur if the market price of New ZaZa common stock appreciates. In addition, the terms of any financing may restrict New ZaZa’s ability to pay dividends on its common stock.

 

There has been no prior public market for New ZaZa common stock.

 

Prior to the completion of the merger, no public market will have existed for the shares of New ZaZa common stock that you will receive in the merger. Your shares of New ZaZa common stock will be listed on the Nasdaq Global Market. However, an active public market for New ZaZa common stock may not develop or be sustained, which could affect your ability to sell, or depress the market price of, the New ZaZa common stock. We are unable to predict whether an active trading market for New ZaZa common stock will develop or will be sustained.

The public price and trading volume of New ZaZa common stock may be volatile.

 

The price and volume of New ZaZa common stock may be volatile and subject to fluctuations. Some of the factors that could cause fluctuations in the stock price or trading volume of New ZaZa common stock include:

 

 

There can be no assurance that the price of New ZaZa common stock will not fluctuate or decline significantly. The stock market in recent years has experienced considerable price and volume fluctuations that has often been unrelated or disproportionate to the operating performance of individual companies and that could materially adversely affect the price of New ZaZa common stock, regardless of New ZaZa’s operating performance. The market prices of stock in exploration stage companies have been especially volatile. You should also be aware that price volatility might be worse if the trading volume of shares of the common stock is low. Furthermore, stockholders may initiate securities class action lawsuits if the market price of New ZaZa’s stock declines significantly, which may cause New ZaZa to incur substantial costs and could divert the time and attention of New ZaZa’s management.

 

New ZaZa will have the ability to issue “blank check” preferred stock, which could affect the rights of holders of New ZaZa common stock.

 

Following the consummation of the merger, New ZaZa’s certificate of incorporation will be restated to allow the board of directors of New ZaZa to issue 25 million shares of preferred stock and to set the terms of such preferred stock. The terms of such preferred stock may materially adversely impact the dividend and liquidation rights of holders of New ZaZa common stock.

 

The controlling persons of ZaZa have economic interests in ZaZa’s properties and their interests may not be aligned with the interests of New ZaZa or of the Toreador stockholders.

 

Each of the managing partners of ZaZa is also the controlling person of each of the three ZaZa members that collectively own all the outstanding membership interests in ZaZa. These individuals will also be board members of New ZaZa, and they will collectively beneficially own 75% of the common stock of New ZaZa.

In addition to their interests as equity owners of the current ZaZa owners, each of these individuals also has a direct or indirect overriding royalty interest relating to certain of ZaZa’s properties. These overriding royalty interests generally entitle them to three percent of the net revenue interest associated with sales of oil and gas produced from these properties, without any corresponding responsibility for payment of any expenses, as described in “ZaZa Related-Party Transactions.” The overriding royalty interests may present a potential conflict of interest with the interests of New ZaZa or the former stockholders of Toreador. See “ZaZa Related-Party Transactions” on page 151. In addition, ZaZa’s joint venture agreement with Hess requires that the joint venture have at least a 72% net revenue interest in all leases included in the joint venture. To the extent that an acquired lease includes less than a 72% net revenue interest, ZaZa may be required to satisfy the overriding royalty interests held directly or indirectly by the ZaZa managing partners out of its own 10% interest in the joint venture.

 

The requirements of being a public company, including the requirements of the Sarbanes-Oxley Act of 2002, may strain New ZaZa’s resources, increase its costs and distract management; and New ZaZa may be unable to comply with these requirements in a timely or cost-effective manner.

 

New ZaZa has no history operating as a publicly-traded company. Following consummation of the merger, as a public company with listed equity securities, New ZaZa will need to comply with certain laws and regulations and public reporting requirements, including the reporting obligations of the Securities Exchange Act of 1934, as amended, or the Exchange Act, certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, laws, and regulations and rules of the SEC and the Nasdaq, all of which New ZaZa and ZaZa are not required to comply with as a private company. Complying with these statutes, regulations and requirements will increase New ZaZa’s general and administrative costs as a result of higher expenses associated with director and officer liability insurance, audit work, regulatory requirements and the establishment and maintenance of heightened corporate governance measures and management oversight. Compliance will occupy a significant portion of New ZaZa’s board of directors’ and management’s time.

 

New ZaZa will need to:

 

 

If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with our public reporting requirements and other rules that apply to public companies could be impaired, and we may be subject to sanction or investigation by the SEC or the Nasdaq.

 

After the merger, New ZaZa’s failure to achieve and maintain effective internal control in accordance with Section 404 of the Sarbanes-Oxley Act could result in a restatement of its financial statements, cause investors to lose confidence in its financial statements and New ZaZa and have a material adverse effect on New ZaZa’s business and stock price.

 

Neither New ZaZa nor ZaZa is currently required to evaluate its internal control over financial reporting in the manner that is currently required of certain public companies in the United States. ZaZa produces its consolidated financial statements in accordance with the requirements of GAAP, and as a public company New ZaZa’s internal accounting controls will need to meet all standards applicable to companies with publicly traded securities. Effective internal controls are necessary for New ZaZa to provide reliable financial reports, to help mitigate the risk of fraud and to operate successfully as a publicly traded company. As a public

company, New ZaZa will be required to document and test its internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC, the Public Company Accounting Oversight Board, including annual management assessments of the effectiveness of New ZaZa’s internal control over financial reporting and a report by New ZaZa’s independent registered public accounting firm that addresses its internal control over financial reporting. The requirement for such report will apply starting with the annual report for the year ended December 31, 2012.

 

As New ZaZa prepares to comply with Section 404 of the Sarbanes-Oxley Act with respect to internal control over financial reporting, it may identify significant deficiencies or errors that it may not be able to remediate in time to meet its deadline for compliance. Testing and maintaining internal control over financial reporting can divert New ZaZa’s management’s attention from other matters that are important to its business. New ZaZa may not be able to conclude on an ongoing basis that it has effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act or New ZaZa’s independent registered public accounting firm may not be able or willing to issue a favorable assessment if New ZaZa concludes that its internal control over financial reporting is ineffective. If either New ZaZa is unable to conclude that it has effective internal control over financial reporting or New ZaZa’s independent registered public accounting firm is unable to provide New ZaZa with an unqualified report, investors could lose confidence in New ZaZa’s reported financial information and New ZaZa itself, which could result in a decline in the market price of New ZaZa’s shares, and cause New ZaZa to fail to meet its future reporting obligations, which in turn could impact its ability to raise additional financing if needed in the future.

 

Once New ZaZa is a public company, if it fails to implement the requirements of Section 404 of the Sarbanes-Oxley Act with respect to internal control over financial reporting in a timely manner, it may also be subject to sanctions or investigation by regulatory authorities such as the SEC or the Nasdaq.

 

This proxy statement/prospectus and the documents that are incorporated into this proxy statement/prospectus by reference may contain or incorporate by reference statements that do not directly or exclusively relate to historical facts. We consider such statements to be “forward-looking statements.” You can typically identify forward-looking statements by the use of forward-looking words, such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “aim,” “seek,” “forecast” and other similar words. These include, but are not limited to, statements relating to the strategy of New ZaZa, the synergies and the benefits that we expect to achieve in the transaction discussed herein, including future financial and operating results, the combined company’s plans, objectives, expectations and intentions, ZaZa’s additional drilling locations, acreage, projections related to future production and financial information of ZaZa and Toreador, including future carry under joint venture agreements, and other statements that are not historical facts. Those statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside the control of New ZaZa, ZaZa and Toreador, and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In addition to the risk factors described under “Risk Factors” beginning on page 19, those factors include:

 

 

 

 

 

 

 

The areas of risk and uncertainty described above should be considered in connection with any written or oral forward-looking statements that may be made after the date of this proxy statement/prospectus by Toreador or ZaZa or anyone acting for any or all of them.

 

Toreador and New ZaZa also caution the reader that undue reliance should not be placed on any forward-looking statements, which speak only as of the date of this proxy statement/prospectus. Neither Toreador nor New ZaZa undertakes any duty or responsibility to update any of these forward-looking statements to reflect events or circumstances after the date of this proxy statement/prospectus or to reflect actual outcomes.

 

The Special Meeting is scheduled to be held at [ • ], local time, on [ • ], 2011, at [ • ], located at [ • ].

 

At the Special Meeting, Toreador stockholders will be asked to:

 

 

The board of directors of Toreador has fixed [ • ], 2011, as the record date for the Special Meeting. If you were a Toreador stockholder at the close of business on the record date, you are entitled to vote your Toreador shares at the Special Meeting.

 

As of the record date, there were [ • ] shares of Toreador common stock, par value $0.15625 per share, outstanding and entitled to vote at the Special Meeting.

 

If your Toreador shares are registered directly in your name with Toreador’s transfer agent, American Stock Transfer & Trust Company, LLC, you are considered, with respect to those Toreador shares, the “stockholder of record.” This proxy statement/prospectus and the enclosed proxy card have been sent directly to you by Toreador.

 

If your Toreador shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of Toreador shares held in “street name.” This proxy statement/prospectus has been forwarded to you by your broker, bank or nominee who is considered, with respect to those Toreador shares, the stockholder of record. As the beneficial owner of Toreador shares held in street name, you have the right to direct your broker, bank or nominee how to vote your Toreador shares by using the voting instruction card included in the mailing or by following their instructions for voting by telephone or the Internet.

 

In order to transact business at the Special Meeting, a quorum of Toreador stockholders must be present. A quorum will exist if holders of one-third of the outstanding shares of Toreador common stock entitled to vote on a matter are present in person, or represented by proxy, at the Special Meeting. Accordingly, the presence at the Special Meeting, either in person or by proxy, of holders of at least [ • ] shares of Toreador common stock will be required to establish a quorum. If a quorum is not present, the Special Meeting may be adjourned, pending stockholder approval, to a later date.

 

Holders of shares of Toreador common stock present in person at the Special Meeting but not voting, and shares of Toreador common stock for which Toreador has received proxies indicating that their holders have abstained, will be counted as present at the Special Meeting for purposes of determining whether a quorum is established.

 

Under Delaware law, the affirmative vote of the holders of at least a majority of the outstanding shares of Toreador common stock is required to approve the merger agreement.

 

The affirmative vote of the holders of at least a majority of the outstanding shares of Toreador common stock who are present at the meeting, in person or by proxy, and entitled to vote on the applicable matter is required to approve:

 

 

Because approval of the merger agreement requires the affirmative vote of the majority of the outstanding shares of common stock of Toreador as of the record date, if you mark “abstain” or fail to vote on the proposed merger, it will have the same effect as a vote “AGAINST” the merger. If you mark “abstain” with respect to the golden parachute proposal, it will have the same effect as a vote “AGAINST” the proposal. If you fail to vote in person or by proxy with respect to any Toreador shares for which you are the record owner or fail to instruct your broker or other nominee on how to vote the Toreador shares you hold in street name with respect to the golden parachute proposal, your Toreador shares will not be voted, or treated as present at the Special Meeting and entitled to vote, on that proposal, and as such, your failure to vote or to instruct your broker or nominee how to vote will not have the effect of a “FOR” or “AGAINST” vote with respect to that proposal. If you mark “abstain” with respect to the adjournment, it will have the same effect as a vote “AGAINST” that proposal. If you fail to vote in person or by proxy with respect to any Toreador shares for which you are the record owner or fail to instruct your broker or other nominee on how to vote the Toreador shares you hold in street name with respect to the adjournment proposal, your Toreador shares will not be voted, or treated as present at the Special Meeting and entitled to vote, on that proposal, and as such, your failure to vote or to instruct your broker or nominee how to vote will not have the effect of a “FOR” or “AGAINST” vote with respect to that proposal.

 

Proposal No. 1:   Toreador’s board of directors unanimously determined that the merger agreement is advisable, fair and in the best interests of Toreador and its stockholders and unanimously approved the merger agreement. The Toreador board of directors recommends that the stockholders of Toreador vote “FOR” the proposal to approve the merger agreement. Additional information on the recommendation of Toreador’s board of directors is set forth in “The Transactions — Toreador’s Reasons for the Transactions and Recommendation of Toreador’s Board of Directors” beginning on page 64.

 

Toreador stockholders should carefully read this proxy statement/prospectus in its entirety for additional information concerning the merger agreement and the proposed transaction. In addition, Toreador stockholders are directed to the merger agreement, as amended, which is attached as Annex A to this proxy statement/prospectus and is incorporated by reference as an exhibit to the registration statement of which this proxy statement/prospectus is a part.

 

Proposal No. 2:   Toreador’s board of directors unanimously recommends that the stockholders of Toreador vote “FOR” the non-binding proposal regarding golden parachute compensation in connection with the merger.

 

Proposal No. 3:   Toreador’s board of directors unanimously recommends that the stockholders of Toreador vote “FOR” the adjournment of the Special Meeting to permit further solicitation of proxies if there are not sufficient proxies at the Special Meeting to vote in favor of the approval of the merger agreement.

 

As of the record date, Toreador’s directors and executive officers and certain of their affiliates beneficially owned [ • ] shares of Toreador common stock entitled to vote at the Special Meeting. This represents less than [ • ]% of the total votes entitled to be cast at the Special Meeting. Each Toreador director and executive officer and certain of their affiliates have indicated his or her present intention to vote, or cause to be voted, the shares of Toreador common stock owned by him or her for the approval of the merger agreement.