Sec Form 13D Filing - Bold Energy Holdings LLC filing for EARTHSTONE ENERGY INC (ESTE) - 2020-12-23

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 13D

Under the Securities Exchange Act of 1934

(Amendment No. 5)

EARTHSTONE ENERGY, INC.

(Name of Issuer)

Class A Common Stock, $0.001 par value per share

(Title of Class of Securities)

27032D304

(CUSIP Number)

D. Martin Phillips

EnCap Investments L.P.

1100 Louisiana Street, Suite 4900

Houston, Texas 77002

(713) 659-6100

with a copy to:

W. Matthew Strock

Vinson & Elkins L.L.P.

1001 Fannin Street, Suite 2500

Houston, Texas 77002

(713) 758-2222

(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)

December 17, 2020

(Date of Event Which Requires Filing of This Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of §§ 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box.  ☐

NOTE: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 13d-7 for other parties to whom copies are to be sent.

The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

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Explanatory Note

This Amendment No. 5 (this “Amendment”) amends and supplements the Schedule 13D filed on May 27, 2014 (the “First Schedule 13D”) by Oak Valley Resources, LLC, a Delaware limited liability company (“Oak Valley”), as amended by Amendment No. 1 filed by Oak Valley on November 16, 2016 (the “Second Schedule 13D”), as further amended by Amendment No. 2 filed by Bold Energy Holdings, LLC, a Texas limited liability company (“Bold”), on June 1, 2018 (the “Third Schedule 13D”), as further amended by Amendment No. 3 filed by Bold on October 25, 2018 (the “Fourth Schedule 13D”), and as further amended by Amendment No. 4 filed by Bold on October 30, 2019 (the “Fifth Schedule 13D” and, together with the First Schedule 13D, the Second Schedule 13D, the Third Schedule 13D and the Fourth Schedule 13D, the “Original Schedule 13D” and, the Original Schedule 13D as further amended and supplemented by this Amendment, the “Schedule 13D”), and relates to the beneficial ownership of the shares of Class A common stock, $0.001 par value per share, of Earthstone Energy, Inc., a Delaware corporation (“Earthstone”). Except as otherwise specified in this Amendment, all items left blank remain unchanged in all material respects and any items that are reported are deemed to amend and restate the corresponding items in the Original Schedule 13D in their entirety. Capitalized terms used herein but not defined herein have the respective meanings ascribed to them in the Original Schedule 13D.

This Amendment is being filed on behalf of the reporting persons identified on the cover pages of this Amendment. Capitalized terms used in this Amendment and not otherwise defined shall have the same meanings ascribed to them in the Original Schedule 13D.

This Amendment amends and restates Item 4 of the Original Schedule 13D in its entirety as set forth below:

The Reporting Persons acquired the securities covered by this Schedule 13D for investment purposes and the Reporting Persons intend to review on a continuing basis the investments in Earthstone by the Reporting Persons. Depending upon market conditions and other factors that they may deem relevant, the Reporting Persons or their affiliates may seek to acquire additional securities of Earthstone or other financial instruments related to Earthstone or its securities (which may include rights or securities exercisable or convertible into securities of Earthstone) and/or sell or otherwise dispose of some or all of the Earthstone securities or financial instruments owned from time to time, in each case, in open market or private transactions, block sales or otherwise, including in connection with extraordinary corporate transactions such as a tender offer, merger or consolidation.

The Reporting Persons intend to communicate with Earthstone’s management and board of directors about a broad range of operational and strategic matters and may communicate with other shareholders or third parties regarding the foregoing. The Reporting Persons may in the future formulate, consider, explore, develop or make plans or proposals regarding Earthstone or its securities, including related to operational or financial matters or any other potential strategic alternative intended to maximize shareholder value, including but not limited to a take private transaction. Such discussions and actions may be preliminary and exploratory in nature and not rise to the level of a plan or a proposal.

Except as set forth herein, the Reporting Persons have no present plans or proposals that would relate to or result in any of the matters set forth in clauses (a) through (j) of Item 4 of Schedule 13D. Although the foregoing reflects activities presently contemplated by such persons with respect to Earthstone, the foregoing is subject to change at any time.

2017 Contribution Agreement

On May 9, 2017, Earthstone closed certain transactions structured in a manner known as an “Up-C” (the “2017 Contribution”) under the 2017 Contribution Agreement. Earthstone, Bold and Bold Sub are each affiliates of funds controlled by EnCap Partners GP.

In connection with the closing of the transactions contemplated by the 2017 Contribution Agreement (the “2017 Closing”), (i) Earthstone recapitalized all of its common stock, $0.001 par value per share, into two classes – Class A Common Stock and Class B Common Stock, (ii) all of Earthstone’s existing outstanding Common Stock was converted into Class A Common Stock pursuant to the Third Amended and Restated Certificate of Incorporation of

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Earthstone, (iii) Bold purchased 36,070,828 shares of Class B Common Stock for nominal consideration, with the Class B Common Stock having no economic rights in Earthstone but having voting rights on a pari passu basis with the Class A Common Stock and (iv) EEH issued 16,423,849 membership interests of EEH (“EEH Units”) to Earthstone and 5,865,328 EEH Units to Lynden, or 22,289,177 EEH Units in the aggregate, and 36,070,828 EEH Units to Bold in exchange for each of Earthstone, Lynden and Bold transferring all of their assets to EEH. Each EEH Unit held by Bold, together with one share of Class B Common Stock issued to Bold, are convertible, at the holders’ election, into Class A Common Stock on a one-for-one basis. Upon the 2017 Closing, Earthstone began conducting the combined business activities through EEH, with Earthstone as its sole managing member.

2017 Registration Rights Agreement

At the 2017 Closing and as required by the 2017 Contribution Agreement, Earthstone entered into a Registration Rights Agreement (the “2017 Registration Rights Agreement”) with Bold pursuant to which Earthstone agreed to register, at its cost, with the U.S. Securities and Exchange Commission (the “Commission”), the resale of the Class A Common Stock to be issued to holders of EEH Units and Class B Common Stock (such holders, the “Selling Stockholders”) upon the exchange with Earthstone, subject to the terms and conditions set forth therein. Pursuant to the 2017 Registration Rights Agreement, Earthstone filed a shelf registration statement on Form S-3 (File No. 333-218277) with the Commission on May 26, 2017, which was declared effective on October 18, 2017. In addition, the Selling Stockholders have (i) the right to demand that Earthstone register shares of their Class A Common Stock for sale in registered underwritten offerings, subject to certain limitations, and (ii) piggyback rights to register shares of Class A Common Stock held by them for sale in other registered underwritten offerings of equity securities conducted by Earthstone.

Amended Voting Agreement

On May 9, 2017, in connection with the 2017 Closing, Earthstone, Bold, Oak Valley and EnCap Investments L.P., a Delaware limited partnership (“EnCap Investments” and collectively with Bold and Oak Valley, the “Stockholders”), entered into a voting agreement (the “Voting Agreement”), pursuant to which EnCap, Oak Valley and Bold agreed not to vote any shares of Class A Common Stock or Class B Common Stock held by them in favor of any action, or take any action that would in any way alter the composition of Earthstone’s board of directors from its composition immediately following the 2017 Closing as long as the Voting Agreement is in effect, except in accordance with the Voting Agreement. Immediately following the 2017 Closing, Earthstone’s board of directors was increased to nine members from eight members, four of which were designated by EnCap Investments, three of which are independent (the “Independent Directors”), and two of which are members of Earthstone’s management, including Earthstone’s Chief Executive Officer (the “Earthstone Designated Directors” and, together with the Independent Directors, the “Non-EnCap Designated Directors”). On May 19, 2017, Oak Valley was dissolved after filing a certificate of cancellation with the Delaware Secretary of State and, consequently, ceased to be a party to the Voting Agreement.

On April 22, 2020, Earthstone, Bold and EnCap Investments entered into an amendment to the Voting Agreement (the Voting Agreement, as so amended, the “Amended Voting Agreement”), pursuant to which one of EnCap Investments’ designated directors did not seek re-election and Earthstone’s board of directors was reduced by one member effective at Earthstone’s 2020 Annual Meeting of Stockholders. EnCap Investments shall continue to have the ability to designate four directors to Earthstone’s board of directors and in the event that Earthstone’s board of directors has less than four directors designated by EnCap Investments, EnCap Investments shall have the ability to request that the size of the Board be increased by one member and EnCap Investments shall have the ability to designate such additional member during the term of the Amended Voting Agreement.

At any time while the Amended Voting Agreement is in effect and during which EnCap Investments’ collective ownership of Earthstone exceeds 50% of the total issued and outstanding voting stock, EnCap Investments may remove and replace one Non-EnCap Designated Director. Any such removal and replacement will be conducted in accordance with the provisions of the certificate of incorporation and bylaws of Earthstone then in effect. The Amended Voting Agreement terminates on the earlier of (i) May 9, 2022 and (ii) the date upon which EnCap Investments, Oak Valley and Bold collectively own, of record and beneficially, less than 20% of Earthstone’s outstanding voting stock. As of May 16, 2017, Oak Valley did not hold any outstanding voting stock of Earthstone.

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Oak Valley Distribution

On May 16, 2017, Oak Valley completed the Distribution. As a result of the Distribution, (i) EnCap Fund VII received 4,611,808 shares of Class A Common Stock, (ii) EnCap Fund VI received 316,937 shares of Class A Common Stock, (iii) EnCap Fund VI-B received 173,486 shares of Class A Common Stock, (iv) EnCap Fund V received 82,782 shares of Class A Common Stock and (v) EnCap Fund V-B received 65,539 shares of Class A Common Stock.

Bold Redemptions

On May 18, 2017, in connection with the 2017 Closing and in accordance with the Amended and Restated Limited Liability Company Agreement of Bold, dated as of May 9, 2017, Bold (a) redeemed (i) all of the Class B Units of Bold held by Bold Energy Management III LLC, a Texas limited liability company (“Bold Management”), in exchange for the distribution of 1,246,375 EEH Units and 1,246,375 shares of Class B Common Stock to Bold Management and (ii) all of the Class B Units of Bold held by Bold Energy Management Holdings III LLC, a Texas limited liability company (“Bold Management Holdings”), in exchange for the distribution of 217,929 EEH Units and 217,929 shares of Class B Common Stock to Bold Management Holdings and (b) following such redemption and distribution, canceled all of the outstanding Class B Units of Bold (the foregoing transactions, collectively, the “2017 Redemption”).

On June 1, 2018, Bold entered into a Redemption Agreement (the “Redemption Agreement&# x94;) with Bold Management. In connection with the closing of the transactions contemplated by the Redemption Agreement, Bold redeemed all of the Class C Units of Bold held by Bold Management in exchange for the distribution to Bold Management of 650,000 EEH Units and 650,000 shares of Class B Common Stock, and following such redemption Bold canceled all of the outstanding Class C Units of Bold (the foregoing transactions, collectively, the “2018 Redemption” and, together with the 2017 Redemption, the “Bold Redemptions”).

Purchase and Sale Agreement; Securities Purchase Agreement

On December 17, 2020, Earthstone, EEH, Independence Resources Holdings, LLC, a Delaware limited liability company (“IRH”), and Independence Resources Manager, LLC, a Delaware limited liability company (“IRM” and collectively with IRH, “Independence”), entered into a Purchase and Sale Agreement (the “PSA”). Pursuant to the PSA, among other things, EEH will acquire all of the issued and outstanding limited liability company interests in certain wholly owned subsidiaries of IRH and IRM (collectively, the “Acquisition”) for aggregate consideration consisting of the following, subject to certain adjustments: (i) an aggregate amount of cash from EEH equal to approximately $135.2 million and (ii) approximately 12.7 million shares of Class A Common Stock, to be newly issued to IRH.

On December 17, 2020, concurrently with the execution and delivery of the PSA, EnCap Fund V, EnCap Fund V-B, EnCap Fund VI, EnCap Fund VI-B (collectively, the “Sellers”) and IRH entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”). Pursuant to the Securities Purchase Agreement, immediately following (and subject to) the closing of the Acquisition (the “PSA Closing”), the Sellers will sell to IRH the 638,744 shares of Class A Common Stock held directly by the Sellers in the aggregate at a purchase price of $3.99 per share, subject to customary closing conditions (the “SPA Sale”). The Securities Purchase Agreement may only be terminated: (a) by the mutual written agreement of the Sellers and IRH; (b) upon written notice by the Sellers or IRH to the other party in the event that the PSA Closing shall not have occurred on or before February 15, 2021; provided, however that the right to terminate the Securities Purchase Agreement shall not be available to any party whose failure to fulfill any obligations under the Securities Purchase Agreement shall have been the cause of, or shall have resulted in, the failure of the PSA Closing to occur on or prior to such date; (c) by either the Sellers or IRH as to itself if a United States court of competent jurisdiction shall permanently enjoin the SPA Sale and such injunction shall be final and non-appealable; (d) without any action by any party, if the PSA is terminated in accordance with its terms at any time prior to the SPA Sale; (e) by notice if there have been certain inaccuracies in or breaches of one or more representations, warranties, covenants or agreements made between the parties and such defects shall not have been cured within thirty (30) days.

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The foregoing description of the Securities Purchase Agreement does not purport to be complete and is qualified in its entirety by the actual Securities Purchase Agreement, a copy of which is filed as Exhibit 10.5 to this Amendment and incorporated herein by reference.

Warburg Voting Agreement

In connection with the PSA Closing, certain affiliates of Warburg Pincus, LLC (“Warburg”), the principal owners of Independence, EnCap Investments and Earthstone will enter into a voting agreement containing provisions by which Warburg will have the right to appoint one director to Earthstone’s board of directors. Warburg’s right to appoint one director will terminate when Warburg, in the aggregate, no longer owns: (i) 8% of the outstanding Class A Common Stock; or (ii) 10% or more of the outstanding Class A Common Stock as a result of a sale by Warburg.

This Amendment amends and restates Item 5 of the Original Schedule 13D in its entirety as set forth below:

(a)    The aggregate number and percentage of Class A Common Stock beneficially owned by each Reporting Person is set forth in Items 7, 8, 9, 10, 11 and 13 of the cover pages to this Schedule 13D relating to such Reporting Person and is incorporated by reference herein.

(b)    For purposes of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), EnCap Partners GP has the shared power to vote or to direct the vote and to dispose or to direct the disposition of the Class A Common Stock held by the EnCap Funds. The shares held by the EnCap Funds represent approximately 61.10% of the outstanding shares of Class A Common Stock (an assumed combined total of 64,167,273 shares of Class A Common Stock outstanding consisting of (a) 30,210,749 shares of Class A Common Stock outstanding as of October 29, 2020, and (b) 33,956,524 shares of Class B Common Stock held by Bold, assuming that all of such shares of Class B Common Stock beneficially owned by Bold, along with an equivalent number of EEH Units (but no other shares of Class B Common Stock or EEH Units outstanding) were exchanged for newly-issued shares of Class A Common Stock on a one-for-one basis). Neither the filing of this Schedule 13D nor any of its contents shall be deemed to constitute an admission by any Reporting Person that it is the beneficial owner of any shares of Class A Common Stock for purposes of Section 13(d) of the Exchange Act, or for any other purpose, and such beneficial ownership is expressly disclaimed.

(c)    Except as set forth in this Schedule 13D, none of the Reporting Persons or, to their knowledge, any of its directors, executive officers or other control persons named on Schedule A, Schedule B or Schedule C, attached hereto, has effected any transaction in the shares of Class A Common Stock during the past 60 days.

(d)    No person other than the Reporting Persons have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the shares of Class A Common Stock reported on this Schedule 13D.

(e)    Not applicable.

This Amendment amends and restates Item 6 of the Original Schedule 13D in its entirety as set forth below:

The information set forth in Item 4 of this Schedule 13D is incorporated by reference in its entirety into this Item 6.

Other than as described in this Schedule 13D and in the agreements and documents attached as exhibits hereto or incorporated herein by reference, to the knowledge of the Reporting Persons, there are no contracts, arrangements, understandings or relationships (legal or otherwise) among the persons named in Item 2 or between such persons and any other person with respect to any securities of Earthstone, including but not limited to transfer or voting of any of the securities, finder’s fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or loss, or the giving or withholding of proxies, the existence of which would give another person voting or investment power over the securities of Earthstone.

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This Amendment amends and restates Item 7 of the Original Schedule 13D in its entirety as set forth below:

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SIGNATURE

After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.

Date: December 23, 2020

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Schedule A

CONTROL PERSONS OF BOLD

The name, business address, present principal occupation or employment and the name, principal business and address of any corporation or other organization in which such employment is conducted, of each of the general partner and other control persons of Bold are set forth below:

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Schedule B

CONTROL PERSONS OF THE ENCAP FUNDS

The name, business address, present principal occupation or employment and the name, principal business and address of any corporation or other organization in which such employment is conducted, of each of the general partner and other control persons of the EnCap Funds are set forth below:

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On July 10, 2018, EnCap Investments L.P. (“EnCap”) entered into a settlement with the Securities and Exchange Commission (“SEC”) under which EnCap consented to the entry of an order (the “Order”) that finds that EnCap violated Section 206(4) under the Investment Ad visers Act of 1940 (the “Advisers Act”) and Rule 206(4)-5 thereunder. Solely for the purpose of settling these proceedings, EnCap admitted to the SEC’s jurisdiction, the subject matter of these proceedings and consented to the Order. The Order required EnCap to cease and desist from committing or causing any violations and any future violations of Section 206(4) of the Advisers Act and Rule 206(4)-5 thereunder, to be censured, and to pay a civil monetary penalty in the amount of $500,000 to the SEC.

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Schedule C

CONTROL PERSONS OF ENCAP PARTNERS GP

The name, business address, present principal occupation or employment and the name, principal business and address of any corporation or other organization in which such employment is conducted, of each of the general partner and other control persons of EnCap Partners GP are set forth below. Except as indicated below, all members of the Board of Managers of EnCap Partners GP listed below are citizens of the United States.

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