CONFIDENTIAL — PRIVILEGED AND CONFIDENTIAL COMMUNICATION
CALDERWOOD & HARKNESS LLP Attorneys at Law
299 Park Avenue, 42nd Floor New York, NY 10171
Renata Vasquez Partner Direct: (212) 506-4837 Facsimile: (212) 506-4900 rvasquez@calderwoodharkness.com
September 13, 2024
Via Email and Overnight Courier
Ms. Antonia Blythe Managing Director, CEO & Board Practice Kensington Partners Ltd. 590 Madison Avenue, 26th Floor New York, NY 10022
Re: Northgate Telecommunications PLC — CEO Search / Termination of Negotiations with Marcus Elliot Harding
Dear Ms. Blythe:
I. Purpose and Authorization
I am writing on behalf of our client, Northgate Telecommunications PLC ("Northgate" or the "Company"), in connection with the Chief Executive Officer search engagement being conducted by Kensington Partners Ltd. ("Kensington Partners" or the "Firm") on behalf of Northgate. As you are aware, Calderwood & Harkness LLP serves as outside counsel to Northgate and has been engaged under matter reference 1022-00004 to negotiate and draft the executive employment agreement for the incoming Chief Executive Officer of the Company. In that capacity, we have been directly involved in all substantive negotiations with the preferred candidate and his personal counsel over the course of the past several months.
This letter is sent at the express direction of Elaine Whitford, Senior Vice President and Group General Counsel of Northgate Telecommunications PLC, and with the full authorization of the Board of Directors of the Company. The purpose of this correspondence is twofold: first, to formally notify Kensington Partners that negotiations with the preferred CEO candidate have been terminated; and second, to communicate the Board's direction regarding the resumption of the search process. Both matters are addressed in detail below.
II. Notification of Termination of Negotiations with Marcus Elliot Harding
I write to formally notify Kensington Partners that negotiations between Northgate Telecommunications PLC and Marcus Elliot Harding ("Mr. Harding") regarding the position of Chief Executive Officer of the Company have been terminated, effective as of September 12, 2024. On that date, the Board of Directors of Northgate Telecommunications PLC adopted a resolution authorizing and directing management to formally and finally terminate all negotiations with Mr. Harding in connection with his prospective appointment as Chief Executive Officer.
By way of background and for completeness of the record, Mr. Harding was the candidate recommended by the Nomination Committee of the Board, chaired by Lucinda Farrow, following a rigorous evaluation process facilitated by Kensington Partners. The Nomination Committee's recommendation was unanimously approved by the full Board on May 28, 2024, designating Mr. Harding as the preferred candidate for the role of Chief Executive Officer. This approval followed Kensington Partners' presentation of a final shortlist of three candidates to the Nomination Committee and the Board on May 22, 2024.
Following the Board's approval of Mr. Harding as the preferred candidate, an informal verbal offer was extended to Mr. Harding by Dame Philippa Thornton-Hale, Chair of the Board of Directors, on May 30, 2024. Mr. Harding indicated his preliminary interest in the position and his willingness to proceed to formal negotiations regarding the terms and conditions of his employment.
Substantive negotiations concerning the terms of the executive employment agreement commenced on June 4, 2024, and continued through September 12, 2024 — a period of approximately fourteen weeks. During this time, multiple rounds of negotiation were conducted between Calderwood & Harkness LLP, on behalf of the Company, and Mr. Harding's personal counsel, Victoria Hargrove of Hargrove & Liddell LLP (located at 51 Madison Avenue, 30th Floor, New York, NY 10010). The negotiations included the exchange of numerous drafts of the proposed employment agreement and several in-person and telephonic negotiation sessions.
Formal written notification of the termination of negotiations was delivered to Ms. Hargrove on behalf of Mr. Harding on September 12, 2024, promptly following the Board's adoption of the termination resolution. The notification confirmed that the Company would not be making a formal offer of employment to Mr. Harding and that the parties' discussions had concluded without the execution of any binding agreement.
III. Summary of Reasons for Negotiation Breakdown
While the full scope of the Board's deliberations and our legal strategy remain subject to attorney-client privilege and are not detailed herein, I believe it is appropriate — and useful for purposes of informing the resumed search process — to provide you with a high-level summary of the principal areas in which the parties were unable to reach agreement, which ultimately resulted in the collapse of negotiations.
The negotiations broke down over two principal substantive areas:
A. Change in Control Severance Provisions
The parties were unable to bridge a fundamental gap on the change in control ("CIC") severance provisions. This disagreement encompassed three specific elements:
First, the CIC severance multiplier. Northgate's final position, which was consistent with prevailing market practice for a company of Northgate's size and industry and was within the parameters recommended by the Company's independent advisors, was a multiplier of 2.5 times the sum of base salary plus target annual bonus. Mr. Harding's position, communicated as non-negotiable by his counsel, was a multiplier of 3.0 times base salary plus target annual bonus. Despite multiple proposals and counterproposals, the parties were unable to close this gap.
Second, the tax treatment of parachute payments under Section 280G of the Internal Revenue Code. The Company offered a "best-net" safe harbor cutback provision, under which payments would be reduced to the safe harbor amount only if the reduction would result in a greater after-tax benefit to the executive. Mr. Harding insisted on a full tax gross-up provision, under which the Company would make the executive whole for any excise tax imposed under Section 4999 of the Code. The Board considered the full gross-up position to be untenable from both a governance and shareholder relations perspective, as discussed further below.
Third, Mr. Harding insisted on the inclusion of a Board turnover trigger within the definition of "change in control." Specifically, Mr. Harding's demanded definition would have treated the replacement of a majority of the members of the Board of Directors within any twelve-month period as a change in control event, triggering the enhanced severance protections. The Board rejected this provision, concluding that it was inconsistent with sound governance principles and could create perverse incentives in connection with routine Board refreshment and succession.
B. Restrictive Covenant Obligations
The parties were also unable to reach agreement on the duration and scope of Mr. Harding's post-termination restrictive covenant obligations. Northgate's final position called for an eighteen-month post-termination non-competition restriction covering North America and Western Europe, with a broad activity definition encompassing competitive activities in the telecommunications sector. Mr. Harding's demand, also communicated as non-negotiable, was for a twelve-month non-competition period with a significantly narrower activity definition limited to a defined schedule of named direct competitors. In addition, the parties were unable to agree on the terms and quantum of garden leave compensation that would apply during the restricted period. The Board viewed robust restrictive covenants as essential to the protection of Northgate's competitive position, particularly given the nature and sensitivity of the strategic information to which the Chief Executive Officer would be privy.
I should note, for context, that the parties had reached agreement on most other material terms of the proposed employment arrangement. Specifically, the following key compensation elements had been agreed upon in principle:
• Annual base salary: $1,750,000
• Target annual incentive: 175% of base salary
• Sign-on cash bonus: $5,000,000
• Sign-on equity award: $18,400,000 (in the form of restricted share units, subject to vesting)
• Annual long-term incentive target: $9,000,000
• Benefits and perquisites: agreed in substantially final form, consistent with the Company's executive benefits program
The existence of broad agreement on these elements underscores that the breakdown was attributable specifically to the CIC severance and restrictive covenant issues described above.
The Board's decision to terminate negotiations was informed by guidance received from two independent advisory firms. Veltrano Proxy Advisors, Inc., the Company's governance consultant, and Whitmore Hobson LLP, the independent compensation consultant to the Remuneration Committee, both advised that Mr. Harding's demanded CIC terms — specifically, the 3.0x multiplier coupled with a full Section 280G tax gross-up — would likely trigger negative say-on-pay recommendations from the leading proxy advisory firms and generate adverse shareholder reaction. This concern was particularly acute given that the Company received 87.4% support on its advisory say-on-pay vote at the Annual General Meeting held on April 18, 2024, a level that, while above the majority threshold, reflects a degree of shareholder sensitivity that counseled against aggressive expansion of CIC protections. Additionally, both advisors noted the constraints imposed by the UK Corporate Governance Code 2024, which sets expectations regarding the structure and magnitude of executive severance arrangements for UK-listed companies.
On September 9, 2024, Ms. Hargrove communicated on behalf of Mr. Harding that the 3.0x CIC severance multiplier, the full tax gross-up on parachute payments, and the Board turnover trigger within the change in control definition were each "non-negotiable" and that Mr. Harding would not accept any employment agreement that did not include all three provisions. This communication left no room for further compromise and effectively foreclosed any productive continuation of negotiations. The Board, upon considering this communication, concluded that the parties had reached an impasse and that termination of negotiations was the appropriate course of action.
IV. Board Direction to Resume the CEO Search
In addition to authorizing the termination of negotiations with Mr. Harding, the Board resolution adopted on September 12, 2024, also directed Kensington Partners to resume the CEO search process on behalf of the Company.
As you are aware, the retirement of Sir Alistair Kemble, the Company's current Chief Executive Officer, remains effective as of December 31, 2024. Sir Alistair's planned retirement was publicly announced by the Company on May 15, 2024, and the Company has made no subsequent announcement indicating any change to this timeline. The approaching retirement date creates genuine urgency in identifying, evaluating, and securing an alternative candidate to serve as the Company's next Chief Executive Officer. The Board is mindful that the time between now and year-end is limited and that the complexity of negotiating and finalizing an employment arrangement with a candidate of appropriate caliber should not be underestimated — a point amply illustrated by the Harding experience.
The Board recognizes that the compressed timeline may necessitate consideration of interim leadership arrangements in parallel with the resumed search. Such arrangements could include, among other possibilities, an extension of Sir Alistair Kemble's tenure as Chief Executive Officer for a defined transitional period, or the appointment of an internal interim Chief Executive Officer from among the Company's existing senior leadership team. The Board wishes to discuss these contingency options with Kensington Partners and welcomes the Firm's perspective on how interim arrangements may affect the attractiveness of the permanent CEO opportunity to prospective candidates.
As noted above, Kensington Partners' original search engagement commenced on March 1, 2024, and culminated in the presentation of a three-candidate shortlist to the Board on May 22, 2024. With the termination of negotiations with Mr. Harding, the Board requests Kensington Partners' candid and current assessment of whether the other two candidates on the original shortlist remain viable for the position. Specifically, the Board would like to understand whether either of those candidates remains available and interested, whether any material changes in their circumstances have occurred since the shortlist was presented, and whether Kensington Partners believes the search should be broadened to include additional candidates beyond those previously identified. The Board is open to revisiting the scope and parameters of the search if the Firm recommends doing so.
Finally, with respect to Kensington Partners' fee arrangement, I note that the third tranche of the £1,200,000 search fee — the placement tranche, which was contingent upon the successful completion of a hire — was not triggered as a result of the collapse of negotiations with Mr. Harding. The fee arrangement applicable to the resumed search, including whether any adjustment to the overall fee structure is warranted in light of the additional work required, is a matter that should be discussed between the parties. We would propose that this topic be included on the agenda for the meeting described in Section VI below.
V. Confidentiality Obligations
I wish to emphasize, in the strongest terms, that all information concerning the negotiations with Mr. Harding, the reasons for the breakdown of those negotiations, and the specific terms discussed during the negotiation process remain strictly confidential. This obligation applies to Kensington Partners, its partners, employees, and agents, and extends to all written and oral communications related to the Harding candidacy.
Kensington Partners should not disclose to any third party — including other candidates or potential candidates for the CEO position, other clients of the Firm, media contacts, or any other person or entity — the identity of the prior candidate, the terms of compensation or employment that were discussed or proposed, or the reasons for the termination of negotiations, except as may be strictly necessary to conduct the resumed search with the prior written approval of the Board or its designees.
I note for your awareness that the Company does not intend to make any public disclosure regarding the failed negotiation with Mr. Harding. No definitive employment agreement was executed, no material commitment was made by either party, and no binding obligation arose from the negotiations. Accordingly, in the Company's assessment — which we have reviewed with its UK and US securities counsel — no disclosure obligation exists under the rules of the U.S. Securities and Exchange Commission, the New York Stock Exchange, or the UK Financial Conduct Authority. The Company's position is that the Harding negotiations were preliminary in nature, that no formal offer was made, and that no event requiring public disclosure occurred.
We request that Kensington Partners confirm, at its earliest convenience, its ongoing compliance with the non-disclosure and confidentiality provisions contained in its search engagement agreement with Northgate, dated on or about March 1, 2024, including any ancillary confidentiality agreements or undertakings executed in connection with the engagement. To the extent that any of Kensington Partners' personnel or subcontractors have had access to information regarding the Harding negotiations, we ask that the Firm take appropriate steps to remind those individuals of their confidentiality obligations.
VI. Request for Meeting and Next Steps
Given the urgency of the situation, we respectfully request a meeting at the earliest convenience to discuss the resumption of the CEO search process and related matters. We would suggest that this meeting be held during the week of September 16, 2024, either in person at Northgate's U.S. operations headquarters, located at 600 Lexington Avenue, 38th Floor, New York, NY 10022, or by video conference, as schedules permit.
The following individuals should be invited to participate in the meeting, or such subset as scheduling constraints may require:
• Antonia Blythe, Managing Director, Kensington Partners Ltd.
• Dame Philippa Thornton-Hale, Chair of the Board of Directors, Northgate Telecommunications PLC
• Lucinda Farrow, Chair of the Nomination Committee, Northgate Telecommunications PLC
• Elaine Whitford, Senior Vice President & Group General Counsel, Northgate Telecommunications PLC
• Renata Vasquez, Partner, Calderwood & Harkness LLP
We propose that the meeting address the following topics:
1. Kensington Partners' assessment of the remaining candidates from the original three-candidate shortlist presented on May 22, 2024, including current availability, interest level, and any changes in circumstances.
2. Whether the search scope should be broadened or the candidate profile adjusted in light of the experience with Mr. Harding and evolving market conditions.
3. A revised timeline and work plan for the search, taking into account the December 31, 2024 retirement date for Sir Alistair Kemble and the need for a reasonable onboarding and transition period.
4. Interim CEO arrangements that may be required pending the successful completion of the resumed search, including the potential extension of Sir Alistair Kemble's tenure or the designation of an internal interim CEO.
5. Lessons learned from the Harding negotiation that should inform the structuring of future compensation proposals presented to candidates, particularly with respect to change in control severance parameters, Section 280G treatment, and the scope and duration of post-termination restrictive covenants.
6. The fee arrangement between Northgate and Kensington Partners for the resumed search engagement, including any adjustments to the existing fee structure.
We believe that a prompt and comprehensive discussion of these matters will position the Company to move expeditiously in identifying and securing the right candidate for this critically important role.
VII. Closing
On behalf of Northgate and the Board, I wish to express sincere appreciation for the work that Kensington Partners has performed on this engagement to date. The identification, evaluation, and vetting of Mr. Harding as a candidate reflected a thorough and professional search process, and the Board recognizes the quality of the Firm's efforts. The ultimate breakdown in negotiations was attributable to substantive differences on specific contractual terms and does not reflect in any way on the caliber of Kensington Partners' search methodology or the suitability of the candidate identified by the Firm.
The Board remains fully committed to a thorough and expeditious CEO succession process. Ensuring a seamless leadership transition at the top of the organization is the Board's highest governance priority, and it is prepared to dedicate the time and resources necessary to bring the search to a successful conclusion.
Please do not hesitate to contact me directly at (212) 506-4837 or by email at rvasquez@calderwoodharkness.com should you wish to discuss any aspect of this letter or to begin coordinating the scheduling of the meeting described above. In addition, Elaine Whitford will be available to coordinate on behalf of the Company and can be reached at ewhitford@northgatetelecom.com or at +44 (0)20 7946 0128.
We look forward to working with you on the next phase of this important engagement.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Renata Vasquez Partner
299 Park Avenue, 42nd Floor New York, NY 10171 Direct: (212) 506-4837
Email: rvasquez@calderwoodharkness.com
cc:
Elaine Whitford, Senior Vice President & Group General Counsel, Northgate Telecommunications PLC
Dame Philippa Thornton-Hale, Chair of the Board of Directors, Northgate Telecommunications PLC
Lucinda Farrow, Chair, Nomination Committee, Northgate Telecommunications PLC
Geoffrey Stanton, Lead Independent Director; Chair, Remuneration Committee, Northgate Telecommunications PLC
Bernard Crawford, Partner, Calderwood & Harkness LLP
Enclosures: None