Contract analysis

From: Renata Vasquez <rvasquez@calderwoodharkness.com> To: Elaine Whitford <ewhitford@northgatetelecom.com> Cc: Bernard Crawford <bcrawford@calderwoodharkness.com> Date: Thu, 22 Aug 2024 06:47:00 -0000 Subject: RE: Harding CEO Agreement — Status Report: Two Critical Open Issues Remaining After Draft 2 Redline

Thank you for your patience while we worked through the redline. I wanted to provide you with a comprehensive status report following our receipt on August 19 of Hargrove & Liddell's redline of Draft 2 of the Executive Employment Agreement between Northgate Telecommunications US, Inc. and Marcus Elliot Harding. This is intended to be sufficiently detailed that you can share it directly with Board members if useful.

James Underwood has completed a thorough analysis of H&L's 42 remaining comments — a meaningful reduction from the 88 comments in the Draft 1 redline we received on August 5. While we have made real progress on the majority of provisions, I want to be candid: two critical open issues remain that present a genuine risk of impasse. I address each below.

**1. Summary of Progress — Resolved and Near-Resolved Items**

The parties have reached agreement or near-agreement on the following key terms, which I note here both for completeness and because the breadth of consensus underscores that the remaining gaps, while narrow in number, are substantive:

- **Base Salary:** $1,750,000 - **Target Annual Bonus:** 175% of base ($3,062,500); maximum bonus at 300% of base ($5,250,000) - **Sign-On Cash Bonus:** $5,000,000, subject to 24-month clawback on voluntary resignation - **Sign-On Equity:** $18,400,000 total ($12,000,000 in RSUs vesting ratably over 3 years; $6,400,000 in PSUs cliff vesting at the end of Year 3) — structured to partially offset Harding's estimated $2

Approximately 30 of H&L's 42 comments are non-material or stylistic in nature and can be resolved quickly once the principal-level issues are addressed.

**2. Critical Open Issue #1: Change in Control Severance (Section 7)**

This is the more complex of the two issues and involves several interconnected sub-issues.

*CIC Multiplier.* Northgate's position in Draft 2 is a 2.5x multiplier on base salary plus target bonus (2.5 × $4,812,500 = $12,031,250). Harding's position, unchanged from the Draft 1 redline, is 3x ($14,437,500). The cash gap is $2,406,250. I note with some concern that during the July 12 negotiation call, Victoria Hargrove floated a possible compromise at 2.75x, but in the Draft 2 redline H&L has reverted to 3x. T

*Tax Treatment — 280G Gross-Up vs. Best-Net Cutback.* This is the most contentious single issue in the agreement. Northgate's position is a best-net (safe harbor) cutback, capping parachute payments at the safe harbor limit of $23,519,999 (based on Harding's $7,840,000 base amount derived from his Marlowe Asset Management W-2 history, 2019–2023). Harding demands a full excise tax gross-up. Under Harding's demanded 3x

What makes this particularly frustrating is that Whitmore Hobson's analysis indicates that under a best-net cutback analysis, Harding's after-tax outcome is roughly equivalent to — and may even slightly exceed — his after-tax outcome under the full-payment-plus-excise-tax scenario. The gross-up demand appears to be largely a matter of principle and optics rather than economics. Nevertheless, the estimated potential g

I also want to flag the governance dimension. Both Veltrano Proxy Advisors and ISS policy guidance identify tax gross-ups as "problematic" and likely to trigger negative say-on-pay recommendations. Northgate's 87.4% say-on-pay vote at the April 18, 2024 AGM is respectable but leaves limited margin for deterioration. A gross-up provision in the CEO's agreement would be a visible target.

*CIC Definition — Board Turnover Trigger.* Both sides have agreed on standard triggers: (a) acquisition of more than 50% of voting securities, (b) merger or consolidation where NTP shareholders hold less than 50% post-transaction, and (c) sale of substantially all assets. However, Harding continues to demand inclusion of a fourth trigger: (d) a change in Board composition where a majority of directors are replaced wi

*PSU Treatment on CIC.* Harding demands full acceleration of PSUs at target performance levels. Northgate proposed full acceleration but at pro-rata performance levels based on the elapsed portion of the performance period. This has secondary financial significance but adds to the overall quantum of parachute payments and, accordingly, compounds the 280G issue.

*Benefit Continuation.* Northgate has offered 24 months of COBRA continuation plus $50,000 in outplacement services. Harding seeks 36 months of benefit continuation. The gap is 12 months of benefit continuation — modest in isolation but part of a pattern of overreach across the CIC provisions.

**3. Critical Open Issue #2: Restrictive Covenants (Section 9)**

*Non-Compete Duration.* Northgate's Draft 2 position is 18 months post-termination — already a concession from the 24 months in Draft 1, made per Board direction conveyed in your August 9 email. Harding's position remains 12 months, matching his current Marlowe Asset Management Digital Holdings non-compete.

*Non-Compete Geographic Scope.* This is actually a point of convergence. Both sides now agree on North America and Western Europe — a positive development following Northgate's concession from the worldwide scope in Draft 1.

*Non-Compete Activity Definition.* Northgate defines the restricted activity as employment with any company deriving more than 15% of revenue from telecommunications services, telecommunications infrastructure, or enterprise SaaS platforms serving telecom operators. Harding proposes limiting the restriction to "direct competitors" listed on a schedule of 8 named companies. The scheduled-competitor approach is narrowe

*Garden Leave.* Northgate has proposed 6 months at base salary only, running concurrently with the first 6 months of the non-compete period. Harding demands 12 months at full compensation (base plus pro-rata bonus), with the garden leave and non-compete running concurrently — effectively reducing the post-departure competitive restriction to 12 months and at significantly higher cost to Northgate.

*Non-Solicitation.* Northgate has proposed 24 months, covering both employees and customers. Harding seeks 18 months covering employees only, with no customer non-solicitation.

*A Note on Enforceability.* Without disclosing the detail of our privileged analysis, I will note that our internal review indicates that a non-compete exceeding 18 months under a New York-governed agreement may face enforceability challenges under New York's reasonableness analysis. We are also monitoring pending New York legislation that could further restrict non-competes. Our recommended fallback position — and e

I want to be direct with you, Elaine. Harding's positions on change in control severance and the restrictive covenant provisions have not materially moved across the term sheet and draft agreement stages. Victoria Hargrove characterized Harding's 3x multiplier, full gross-up, and Board turnover trigger as reflecting his "baseline expectations" — language that suggests limited flexibility.

The total financial delta between the parties on CIC alone is substantial: $2,406,250 in cash severance, plus $4,200,000 to $6,800,000 in potential gross-up exposure, plus differences in benefit continuation and PSU acceleration. On restrictive covenants, while geographic scope has converged, duration (18 vs. 12 months), activity definition, and garden leave terms remain meaningfully apart.

I am concerned that without direct engagement between the principals, this negotiation may stall.

**5. Recommendation — Principals Meeting**

We recommend that Northgate arrange an in-person principals meeting as soon as practicable, ideally during the week of August 26. We would suggest the meeting take place at Northgate's US offices at 600 Lexington Avenue, 38th Floor, New York.

From the Northgate side, we would recommend Board representation — Dame Philippa Thornton-Hale and Geoffrey Stanton, if available — together with you and me. From the candidate side, Harding and Victoria Hargrove.

Our rationale is straightforward: direct dialogue between Harding and Board leadership may be the only viable path to bridging the impasse. It would also allow both sides to assess candidly whether a deal is realistically achievable before investing further time and resources.

If the meeting does not produce meaningful movement, we would recommend that the Board consider whether to authorize a final best-and-final proposal with a defined response deadline, or to terminate negotiations. I would also suggest, Elaine, that you begin preliminary contingency thinking — specifically, whether Kensington Partners should be asked to revisit other candidates from the search shortlist.

We are coordinating with Simon Aldridge at Moorfield Bates LLP on the UK service agreement, which has been proceeding in parallel and is largely non-controversial. The UK-side issues — SM&CR compliance, tax equalization under the US-UK Totalization Agreement — are not driving the impasse.

On the governance and compensation front, both Whitmore Hobson's compensation benchmarking and Veltrano Proxy Advisors' governance analysis support the view that Northgate's current offer is at the upper range of market practice for a UK-listed company and that Harding's demands exceed that range on several dimensions. I would specifically reference UK Corporate Governance Code 2024 Provision 40, which constrains sev

**7. Next Steps — Request for Direction**

- Confirmation of whether the Board would support a principals meeting as described above. - Whether Geoffrey Stanton (and Dame Philippa) have availability during the week of August 26. - Whether you would like us to prepare a formal briefing memo with talking points and fallback positions for the principals meeting.

We will hold on further drafting work until we receive your direction. There is no point in preparing a Draft 3 until the principal-level impasse is addressed.

I am available by phone at any time tomorrow or over the weekend to discuss. James Underwood's detailed memorandum analyzing the Draft 2 redline (dated August 21) is also available if you would like it circulated to Board members.

Renata Vasquez Partner, Labor & Employment Calderwood & Harkness LLP 299 Park Avenue, 42nd Floor New York, NY 10171 T: (212) 554-2380 rvasquez@calderwoodharkness.com

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