EXHIBIT 10.6

 

EMPLOYMENT AGREEMENT

 

EMPLOYMENT AGREEMENT (the “Agreement”) made as of the 13th day of September 2002
by and between Legato Systems, Inc., a Delaware corporation (the “Corporation”),
and Noah D Mesel (“Executive”).

 

WHEREAS, the Corporation desires to continue to employ the Executive, and the
Executive desires to continue his employment with the Corporation, upon the
terms and conditions set forth in this Agreement.

 

WHEREAS, the Executive acknowledges that he has had an opportunity to consider
this agreement and consult with an independent advisor(s) of his choosing with
regard to the terms of this Agreement, and enters this agreement voluntarily and
with a full understanding of its terms.

 

NOW, THEREFORE, in consideration of the promises and mutual covenants contained
herein, the parties agree to as follows:

 

PART ONE—DEFINITIONS

 

For purposes of this Agreement, the following definitions shall be in effect:

 

Board means the Corporation’s Board of Directors.

 

Change in Control means a change in the ownership or control of the Corporation
effected through any of the following transactions:

 

(i) a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation’s
outstanding securities are transferred to a person or persons different from the
persons holding those securities immediately prior to such transaction;

 

(ii) the sale, transfer or other disposition of all or substantially all of the
Corporation’s assets in complete liquidation or dissolution of the Corporation;

 

(iii) any transaction or series of related transactions pursuant to which any
person or any group of persons comprising a “group” within the meaning of Rule
13d-5(b)(1) under the Securities Exchange Act of 1934, as amended (other than
the Corporation or a person that, prior to such transaction or series of related
transactions, directly or indirectly controls, is controlled by or is under
common control with, the Corporation) becomes directly or indirectly the
beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange
Act of 1934, as amended) of securities possessing (or convertible into or
exercisable for securities possessing) more than fifty percent (50%) of the
total combined voting power of the Corporation’s securities outstanding
immediately after the consummation of such transaction or series of related
transactions, whether such transaction involves a

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direct issuance from the Corporation or the acquisition of outstanding
securities held by one or more of the Corporation’s stockholders; or

 

(iv) a change in the composition of the Board over a period of thirty-six (36)
consecutive months or less such that a majority of the Board members ceases to
be comprised of individuals who either (A) have been Board members continuously
since the beginning of such period, or (B) have been elected or nominated for
election as Board members during such period by at least a majority of the Board
members described in clause (A) who were still in office at the time the Board
approved such election or nomination.

 

Change in Control Severance Payments means the various payments and benefits to
which the Executive may become entitled under Paragraph 14 of Part Three of this
Agreement upon his Involuntary Termination in connection with a Change in
Control.

 

Code means the Internal Revenue Code of 1986, as amended.

 

Common Stock means the Corporation’s common stock.

 

Employment Period means the duration of the Executive’s employment with the
Corporation pursuant to the terms of this Agreement.

 

Employment Year means each full consecutive twelve (12)-month period that the
Executive is employed by the Corporation after the date of this Agreement.

 

Fair Market Value means, with respect to the shares of Common Stock subject to
any of the Executive’s Options, the closing selling price per share on the date
in question, as such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market and published in The Wall Street Journal.
If there is no closing selling price reported for the Common Stock on the date
in question, then the Fair Market Value will be the closing selling price on the
last preceding date for which such published report exists.

 

Incapacity means the inability of the Executive, by reason of any injury or
illness, to properly perform his normal duties under this Agreement for a period
of more than one hundred eighty (180) days.

 

Independent Auditors means the accounting firm serving as the Corporation’s
independent certified public accountants immediately prior to the Change in
Control; provided, however, that in the event such accounting firm also serves
as the independent certified public accountants for the corporation or other
entity effecting the Change in Control transaction with the Corporation, then
the Independent Auditors shall mean a nationally-recognized public accounting
firm mutually acceptable to both the Corporation and the Executive.

 

Involuntary Termination means (i) the Corporation’s termination of the
Executive’s employment for any reason other than a Termination for Cause, or
(ii) the Executive’s voluntary resignation within one hundred eighty (180) days
following (A) a material reduction in the scope of his duties and
responsibilities or the level of management to which he

 

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reports, (B) a reduction in the aggregate dollar amount of his base salary and
Target Bonus by more than fifteen percent (15%), (C) a relocation of his
principal place of employment by more than fifty (50) miles or (D) a material
breach by the Corporation of any of its obligations under this Agreement and the
failure of the Corporation to cure such breach within sixty (60) days after
receipt of written notice from the Executive in which the actions or omissions
constituting such material breach are specified.

 

An Involuntary Termination shall not include the termination of Executive’s
employment by reason of death or Incapacity.

 

Option means any option granted to the Executive under the Plan or otherwise to
purchase shares of Common Stock which is outstanding at the time of a Change in
Control. The Options will be divided into two (2) separate categories as
follows:

 

Acquisition-Accelerated Options: any outstanding Option (or installment thereof)
which immediately accelerates upon a Change in Control pursuant to the
acceleration provisions of the agreement evidencing that Option or the special
acceleration provisions of this Agreement.

 

Severance-Accelerated Options: any outstanding Option (or installment thereof)
which, pursuant to the terms of this Agreement, accelerates upon the Executive’s
Involuntary Termination following a Change in Control.

 

Option Parachute Payment means, with respect to any Acquisition-Accelerated
Option or any Severance-Accelerated Option, the portion of that Option deemed to
be a parachute payment under Code Section 280G and the Treasury Regulations
issued thereunder. The portion of such Option which is categorized as an Option
Parachute Payment will be calculated in accordance with the valuation provisions
established under Code Section 280G and the applicable Treasury Regulations and
will include an appropriate dollar adjustment to reflect the lapse of the
Executive’s obligation to remain in the Corporation’s employ or service as a
condition to the vesting of the accelerated installment.

 

Other Parachute Payment means any payment or benefit in the nature of
compensation (other than the Change in Control Severance Payments to which the
Executive may become entitled under Part Three of this Agreement and his
Acquisition-Accelerated Options) which is made to the Executive in connection
with the Change in Control and which is deemed to constitute a parachute payment
under Code Section 280G(b)(2) and the Treasury Regulations issued thereunder.

 

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Parachute Payment means (i) any Change in Control Severance Payment provided the
Executive under Part Three of this Agreement which is deemed to constitute a
parachute payment within the meaning of Code Section 280G(b)(2) and the Treasury
Regulations issued thereunder and (ii) any Option Parachute Payment attributable
to his Acquisition-Accelerated Options.

 

Plan means (i) the Corporation’s 1995 Stock Option/Stock Issuance Plan, as
amended or restated from time to time, and (ii) any successor stock incentive
plan subsequently implemented by the Corporation.

 

Present Value means the value, determined as of the date of the Change in
Control, of any payment in the nature of compensation to which the Executive
becomes entitled in connection with the Change in Control or his subsequent
Involuntary Termination, including (without limitation) the Option Parachute
Payment attributable to the Executive’s Acquisition-Accelerated and
Severance-Accelerated Options and the Parachute Payment attributable to the
additional severance benefits to which the Executive becomes entitled under Part
Four of this Agreement. The Present Value of each such payment shall be
determined in accordance with the provisions of Code Section 280G(d)(4),
utilizing a discount rate equal to one hundred twenty percent (120%) of the
applicable Federal rate in effect at the time of such determination, compounded
semi-annually to the effective date of the Change in Control.

 

Target Bonus means the annual incentive bonus to which the Executive may become
entitled for one or more fiscal years upon the Corporation’s attainment of the
financial milestones designated for the applicable year and the Executive’s
attainment of any personal objectives specified for him for that year.

 

Termination for Cause means the termination of the Executive’s employment due to
(i) the commission of any act of fraud, embezzlement or dishonesty by the
Executive, (ii) any unauthorized use or disclosure by the Executive of
confidential information or trade secrets of the Corporation (or any parent or
subsidiary), (iii) any other intentional misconduct by the Executive adversely
affecting the business or affairs of the Corporation in a material manner, or
(iv) the Executive’s breach of this Agreement. The foregoing definition shall
not be deemed to be inclusive of all the acts or omissions which the Corporation
(or any parent or subsidiary) may consider as grounds for the dismissal or
discharge of the Executive or any other individual in the service of the
Corporation (or any parent or subsidiary).

 

The Corporation may not terminate the Executive under clause (iv) above, unless
it has given the Executive notice in writing of its intention to terminate his
employment for Cause pursuant to such provisions and thirty (30) days to correct
any condition giving rise to Cause for termination. In the event that the
Executive fails satisfactorily to correct such conditions of which he is
notified, which determination shall be made by the Board, his employment shall
be terminated.

 

PART TWO—TERMS AND CONDITIONS OF EMPLOYMENT

 

1. Duties and Responsibilities.

 

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A. The Executive shall continue to serve as the Senior Vice President and
General Counsel of the Corporation and shall in such capacity report directly to
the Chief Executive Officer of the Corporation. As General Counsel, the
Executive’s job duties shall include, without limitation (and the Corporation
reserves the right to change), the following: overseeing all legal matters
pertaining to the Corporation, including patent, copyright, intellectual
property matters, and the coordination of legal matters handled by outside legal
counsel. The Executive shall devote his full business time and attention to the
business and affairs of the Corporation during the Employment Period. The
Executive shall not engage in any other business, job or consulting activity
during the Employment Period without the written permission of the Corporation.

 

B. The Executive hereby agrees to remain in his capacity as General Counsel
during the Employment Period specified in Paragraph 2 and to perform in good
faith and to the best of his ability all services which may be required of
Executive hereunder and to be available to render services at all reasonable
times and places in accordance with such reasonable directions and requests made
by the Chief Executive Officer and/or the Board.

 

C. The Executive shall be based at the Corporation’s principal offices in the
Silicon Valley/Bay Area, California, but the Executive may be required from time
to time to travel to other geographic locations in connection with the
performance of his duties hereunder.

 

2. Employment Period. The Employment Period shall begin with the initial
Employment Year commencing as of the date of this Agreement and shall continue
for an additional two (2) Employment Years thereafter. After the expiration of
each Employment Year for which this Agreement remains in effect, the Employment
Period shall automatically be extended for an additional one (1)-year period
upon the same terms and conditions as are set forth herein, unless either party
gives written notice to the other at least thirty (30) days prior to the end of
the then current Employment Year that the Employment Period shall not be
extended beyond the remaining term of the Employment Period.

 

3. Cash Compensation.

 

A. Executive shall be paid a base salary at the annual rate of Two Hundred
Fifteen Thousand Dollars ($215,000.00). Such rate shall be subject to annual
review by the Chief Executive Officer and/or the Board and may be increased or
decreased at the Chief Executive Officer’s and/or the Board’s discretion. Base
salary shall be paid at periodic intervals in accordance with the Corporation’s
payroll practices for salaried employees.

 

B. For each fiscal year of the Corporation during the Employment Period,
including the fiscal year which commenced January 1, 2002, the Executive shall
be entitled to a Target Bonus of up to sixty percent (60%) of his annual base
salary for that fiscal year.

 

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The amount of the bonus shall be based on the individual performance of the
Executive, as well as the Corporation’s attainment of certain financial
objectives. The Chief Executive Officer will establish the Executive’s
individual performance objectives, as well as financial objectives of the
Corporation, and such objectives shall be submitted to the Board for approval no
later than March 31 of the fiscal year in which the bonus is to be awarded. The
bonus earned for each fiscal year shall become payable within ninety (90) days
after the close of that year.

 

C. The Corporation shall deduct and withhold from the compensation payable to
Executive hereunder any and all applicable federal, state and local income and
employment withholding taxes and any other amounts required to be deducted or
withheld by the Corporation under applicable statutes, regulations, ordinances
or orders governing or requiring the withholding or deduction of amounts
otherwise payable as compensation or wages to employees.

 

4. Equity Compensation

 

A. The Executive has received a series of Options over his period of employment
to date with the Corporation. Each of those Options shall vest and become
exercisable for the shares of Common Stock subject to that Option in
installments over the Executive’s period of service with the Corporation. The
Options granted to date may be summarized as follows:

 

Grant Date

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Number of Option Shares

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Exercise Price

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11/10/00

 

22,000

 

$

9.7500

01/22/01

 

1,000

 

$

14.2500

04/02/01

 

9,915

 

$

9.6875

04/02/01

 

85

 

$

9.6875

05/07/01

 

9,908

 

$

15.6300

05/07/01

 

65,902

 

$

15.6300

09/21/01

 

5

 

$

4.7600

09/21/01

 

49,995

 

$

4.7600

05/02/02

 

2,604

 

$

5.8600

05/02/02

 

22,396

 

$

5.8600

 

B. The Executive shall be eligible to receive one or more additional Option
grants during the Employment Period, as the Board or the Compensation Committee
of the Board may deem appropriate in order to provide him with sufficient equity
incentives for his position.

 

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C. The shares of Common Stock subject to the Options summarized in Paragraph 4.A
above, together with each additional Option which the Executive may subsequently
receive over the remainder of the Employment Period, shall be subject to the
applicable vesting acceleration provisions of Paragraph 12 or 14(d) of Part
Three in the event there should occur a Change in Control during the Employment
Period.

 

5. Expense Reimbursement. In addition to the compensation specified in Paragraph
3, the Executive shall be entitled, in accordance with the reimbursement
policies in effect from time to time, to receive reimbursement from the
Corporation for all business expenses incurred by the Executive in the
performance of his duties hereunder, provided the Executive furnishes the
Corporation with vouchers, receipts and other details of such expenses in the
form required by the Corporation sufficient to substantiate a deduction for such
business expenses under all applicable rules and regulations of federal and
state taxing authorities.

 

6. Fringe Benefits. The Executive shall, throughout the Employment Period, be
eligible to participate in fringe benefit plans, described in the Employee
Benefit Handbook for employee’s at the Executive’s level, as may be modified
from time to time.

 

7. Indemnification. Throughout the Employment Period, the Corporation shall
indemnify and hold the Executive harmless from and against all loss, cost and
expense arising from or relating to (i) his service as officer or employee of
the Corporation or a member of the Board or (ii) his service at the
Corporation’s request as an officer, employee, agent or board member of any
other corporation, limited liability company, partnership, joint venture, trust
or other enterprise, other than losses attributable to the Executive’s
intentional misconduct. The Corporation shall maintain in full force and effect
a Directors and Officers Liability Insurance Policy issued by an established and
nationally-recognized insurer which shall provide coverage in reasonable amounts
for the Executive. In addition, the Corporation shall pay and advance all
expenses, including (without limitation) attorneys’ fees, disbursements and
retainers, accounting and witness fees, travel and deposition costs, expenses of
investigations and judicial or administrative proceedings and appeals, actually
incurred by the Executive in connection with any threatened, pending or
completed claim, action, suit or proceeding, whether formal or informal and
whether civil, criminal, administrative or investigative in nature, or amounts
paid by the Executive or on the Executive’s behalf in settlement of any such
claim, action, suit or proceeding, to the extent such claim, action, suit or
proceeding arises from or relates to the Executive’s service as officer or
employee of the Corporation or as a member of the Board or his service at the
Corporation’s request as an officer, employee, agent or board member of any
other corporation, limited liability company, partnership, joint venture, trust
or other enterprise.

 

8. Death or Incapacity. Upon the Executive’s death or Incapacity during the
Employment Period, the employment relationship created pursuant to this
Agreement shall immediately terminate, and the Corporation shall provide to the
Executive or his estate, contingent on the Executive or the Executive’s heirs
executing a general release in a form prescribed by the Corporation: (i) any
unpaid base salary earned under Paragraph 3 for services rendered through the
date of death or Incapacity, (ii) the dollar value of all accrued and unused
vacation benefits based upon the Executive’s most recent level of base salary,
(iii) any bonus compensation which becomes due and payable for the fiscal year
in which the Executive’s death

 

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or Incapacity occurs, pro-rated in amount on the basis of the portion of that
year completed prior to the Executive’s death or Incapacity; (iv) a lump sum
cash payment equal to one (1) times the annual rate of base salary in effect for
the Executive under Paragraph 3 at the time of his death or Incapacity; and (v)
in the case of Incapacity, but not death, continued health care coverage under
the Corporation’s medical plan for the Executive and his eligible

 

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dependents, without charge, upon his election to receive such continued health
care coverage under Code Section 4980B (“COBRA”), for a period not to exceed the
earlier of (a) the expiration of the twelve (12)-month period following the
termination of the Executive’s employment or (b) the first date on which the
Executive and his eligible dependents are covered under another employer’s
health benefit program without exclusion for any pre-existing medical condition.
Any additional health care coverage to which the Executive and his dependents
may be entitled under COBRA following the period of such Corporation-paid
coverage shall be at the Executive’s sole cost and expense. All vesting of the
Executive’s outstanding Options shall cease at the time of his termination of
employment by reason of death or Incapacity, and the Executive shall not have
more than the period of time specified in the applicable stock option agreement
for each Option in which to exercise that Option following such termination of
employment for the shares of Common Stock which are vested and exercisable at
the time of such termination.

 

9. Restrictive Covenants.

 

A. During the Employment Period, the Executive shall not, without prior written
consent from the Board, on his own account or as an employee, agent, promoter,
consultant, partner, officer, director, or shareholder of any other person,
firm, entity, partnership or corporation, own, operate, lease, franchise,
conduct, engage in, be connected with, have any interest in, or assist any
person or entity engaged in any business that is competitive with the business
that is conducted by the Corporation or is in the same general field or industry
as the Corporation, except as the holder of not more than 1% of the outstanding
stock of a publicly held company. In the event that the Executive engages in any
conduct described in this Paragraph 9, while receiving severance payments from
the Corporation under Part 3 or 4 of this Agreement, the Corporation may
withhold such payment from the Executive, until the Executive ceases to engage
in such activity described in this paragraph.

 

B. In addition, the Executive shall not during the Employment Period:

 

(i) contact, solicit or call upon any customer or supplier of the Corporation on
behalf of any person or entity other than the Corporation for the purpose of
selling, providing or performing any services of the type normally provided or
performed by the Corporation; or

 

(ii) induce or attempt to induce any person or entity to curtail or cancel any
business or contracts which such person or entity had with the Corporation.

 

10. Proprietary Information.

 

A. The Executive hereby acknowledges that the Corporation may, from time to time
during the Employment Period, disclose to the Executive confidential information
pertaining to the Corporation’s business and affairs, technology, research and
development projects and customer base, including (without limitation) financial
information concerning customers and prospective business opportunities. All
information and data, whether or not in writing, of a private or confidential
nature concerning the business, technology or financial

 

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affairs of the Corporation and its clients (collectively, “Proprietary
Information”) is and shall remain the sole and exclusive property of the
Corporation. All tangible manifestations of such Proprietary Information
(whether written, printed or otherwise reproduced) shall be returned by the
Executive upon the termination of the Employment Period, and the Executive shall
not retain any copies or excerpts of the returned items.

 

B. The Executive shall, throughout the term of the Employment Period, remain
subject to the terms and conditions of the Proprietary Information and
Inventions Agreement which he previously executed with the Corporation, and
nothing in this Agreement shall supersede, modify or affect the Executive’s
obligations, duties and responsibilities under such Proprietary Information and
Inventions Agreement, and that agreement shall accordingly continue in full
force and effect.

 

11. Termination of Employment.

 

A. The Corporation, acting by majority vote of the Board, may terminate the
Executive’s employment under this Agreement at any time for any reason, with or
without Cause, by providing written notice of such termination to the Executive.
If such termination notice is given to the Executive, the Corporation may, if it
so desires, immediately relieve the Executive of some or all of his duties.

 

B. The Executive may terminate his employment under this Agreement at any time
by giving the Corporation written notice of such termination.

 

C. The Corporation, acting by majority vote of the Board, may at any time, upon
written notice, discharge the Executive from employment with the Corporation
hereunder pursuant to a Termination for Cause. Such termination shall be
effective immediately upon such notice.

 

D. Upon the termination of the Executive’s employment pursuant to this Paragraph
11, the Executive shall be paid (i) any unpaid base salary earned under
Paragraph 3 for services rendered through the date of such termination, and (ii)
the dollar value of all accrued and unused vacation benefits based upon the
Executive’s most recent level of base salary. Unless such termination occurs in
connection with a Change in Control which entitles the Executive to the payments
and benefits provided under Part Three of this Agreement, all vesting of the
Executive’s outstanding Options shall cease at the time of such termination of
employment, and the Executive shall not have more than the period of time
specified in the applicable stock option agreement for each Option in which to
exercise that Option following such termination of employment for the shares of
Common Stock which are vested and exercisable at the time of such termination.

 

PART THREE—CHANGE IN CONTROL PAYMENTS

 

This Part Three sets forth certain payments and benefits to which the Executive
may become entitled in connection with a Change in Control or Involuntary
Termination following such Change in Control.

 

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12. Option Acceleration. Each Option, to the extent outstanding at the time of a
Change in Control but not otherwise vested and exercisable for all the shares of
Common Stock subject to that Option will, immediately prior to the effective
date of that Change in Control, vest and become exercisable for all of the
shares of Common Stock at the time subject to the Option and may be exercised
for any or all of those shares as fully-vested shares of Common Stock; provided
and only if the following conditions are satisfied with respect to that Change
in Control:

 

(i) the Option is not to be assumed by the successor corporation (or its parent
company) or otherwise continued in effect pursuant to the terms of the Change in
Control transaction, and

 

(ii) the Option is not to be replaced with a substitute option or cash incentive
plan that preserves the spread existing at the time of the Change in Control on
any shares for which that Option is not otherwise at that time vested and
exercisable (the excess of the Fair Market Value of those shares over the
applicable option exercise price) and which vests at the same or faster rate as
the vesting schedule applicable to that Option.

 

13. Entitlement to Change in Control Severance Payments. Should the Executive’s
employment pursuant to this Agreement terminate by reason of an Involuntary
Termination within eighteen (18) months after such Change in Control, then the
Executive shall become entitled to receive the Change in Control Severance
Payments set forth in Paragraph 14, subject to his compliance with the following
requirement:

 

The Executive shall, at the time of such Involuntary Termination, execute and
deliver to the Corporation a general release which shall become effective under
applicable law and pursuant to which the Executive releases the Corporation and
its officers, directors, employees and agents from any and all claims the
Executive may otherwise have with respect to the terms and conditions of his
employment with the Corporation and the termination of that employment (other
than his rights pertaining to the Change in Control Severance Payments provided
under this Part Three).

 

The Change in Control Severance Payments provided under this Part Three shall be
in lieu of any other severance benefits to which the Executive might otherwise,
by reason of the termination of his employment in connection with a Change in
Control, be entitled under any other severance plan, program or arrangement of
the Corporation.

 

14. Nature of Change in Control Severance Payments. The Change in Control
Severance Payments to which the Executive shall receive under this Part Three
shall consist of the following payments and benefits:

 

(a) Lump Sum Payment. Executive shall be entitled to a lump sum cash payment
equal to one (1) times the sum of (i) the annual rate of base salary in effect
for him under Paragraph 3 at the time of his Involuntary Termination and (ii)
the Target Bonus in effect

 

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for him for the fiscal year of the Corporation in which such Involuntary
Termination occurs. Such lump sum payment shall be made within three (3)
business days following the date the general release required of the Executive
pursuant to Paragraph 13 and shall be subject to all applicable withholding
requirements as set forth in Paragraph 3.C.

 

(b) Target Bonus Pro-Ration. For each full or partial month of employment which
the Executive completes with the Corporation in the fiscal year in which his
Involuntary Termination occurs, the Executive shall also be entitled to receive
a lump sum cash payment equal to one-twelfth (1/12th) of the annual Target Bonus
in effect for him for that year. Such lump sum payment shall be made within
three (3) business days following the date the general release required of the
Executive pursuant to Paragraph 13 and shall be subject to all applicable
withholding requirements as set forth in Paragraph 3.C.

 

(b) Health Care Coverage. Continued health care coverage under the Corporation’s
medical plan shall be provided, without charge, to the Executive and his
eligible dependents upon his election to receive such continued health care
coverage under Code Section 4980B (“COBRA”). Such Corporation-paid coverage
shall continue until the earlier of (i) the expiration of the eighteen
(18)-month period measured from the first day of the calendar month following
the calendar month in which his Involuntary Termination occurs or (ii) the first
date on which the Executive and his eligible dependents are covered under
another employer’s health benefit program without exclusion for any pre-existing
medical condition. Any additional health care coverage to which the Executive
and his dependents may be entitled under COBRA following the period of such
Corporation-paid coverage shall be at the Executive’s sole cost and expense.
However, should the Executive not be covered under another employer’s health
plan at the time the initial eighteen (18)-month period of Corporation-paid
coverage expires, then the Corporation shall, for up to an additional six
(6)-month period thereafter, reimburse the Executive for any premiums paid
during such period on his continued COBRA coverage (if any) or the individual
health care coverage policy issued to him in conversion of his COBRA coverage.

 

(d) Option Acceleration. Each Option outstanding at the time of such Involuntary
Termination, to the extent not otherwise vested and exercisable for all the
shares subject to that Option, will immediately vest and become exercisable for
all those option shares and may be exercised for any or all of those shares as
fully vested shares.

 

(e) Extension of Exercise Period. For each outstanding Option (i) which is
granted to the Executive on or after September 13, 2002 or (ii) which is
outstanding on that date and is not otherwise listed as an excluded Option on
attached Schedule I, the Executive shall have until the earlier of (i) the
expiration of the twelve (12)-month period measured from the date of his
Involuntary Termination or (ii) the expiration date of the option term in which
to exercise that Option. To the extent the exercise period of any existing
Option which is an incentive stock option under the federal income tax laws is
so extended, that Option shall be deemed to be regranted on the date of this
Agreement and may accordingly fail to retain such incentive stock option status
by reason of the One Hundred Thousand Dollar ($100,000) limit on the initial
exercisability of incentive stock options per calendar year or because the
exercise price of that Option is below the Fair Market Value of the Common Stock
on September 13, 2002.

 

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Accordingly, if the Option does lose such incentive stock option status, the
Executive shall recognize immediate taxable income upon the subsequent exercise
of that Option in an amount equal to the Fair Market Value of the purchased
shares less the exercise price paid for those shares, and the Executive will
have to satisfy all applicable income and employment withholding taxes at the
time of such exercise. To the extent any such Option does retain its incentive
stock option status, the Executive shall not be entitled to long-term capital
gain treatment upon the subsequent sale of any shares purchased under that
Option unless such sale occurs more than two (2) years after the deemed
September 13, 2002 regrant date of that Option and more than one (1) year after
the date such Option is exercised for those shares.

 

PART FOUR—SPECIAL TAX PAYMENT

 

15. Special Tax Gross-Up. In the event that one or more of the
Acquisition-Accelerated Options or any of the Change in Control Severance
Payments to which the Executive becomes entitled under Part Three of this
Agreement or any Other Parachute Payments are deemed, in the opinion of the
Independent Auditors or by the Internal Revenue Service, to constitute an excess
parachute payment under Code Section 280(G), then the Executive shall be
entitled to receive from the Corporation an additional payment (the “Gross-Up
Payment”) in a dollar amount determined pursuant to the following formula,
provided and only if the general release required of the Executive pursuant to
Paragraph 13 has become effective:

 

X = Y ÷ [1 - (A + B + C)], where

 

X is the total dollar payment of the Gross-up Payment.

 

Y is the total excise tax, together with all applicable interest and penalties
(collectively, the “Excise Tax”), imposed on the Executive pursuant to Code
Section 4999 (or any successor provision) with respect to the excess parachute
payment attributable to (i) one or more of the Change in Control Severance
Payments provided the Executive under Part Three of this Agreement, (ii) his
Acquisition-Acceleration Options and (iii) any Other Parachute Payments.

 

A is the Excise Tax rate in effect under Code Section 4999 for such excess
parachute payment,

 

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B is the highest combined marginal federal income and applicable state income
tax rate in effect for the Executive for the calendar year in which the Gross-Up
Payment is made, determined after taking into account the deductibility of state
income taxes against federal income taxes to the extent actually allowable for
that calendar year, and

 

C is the applicable Hospital Insurance (Medicare) Tax Rate in effect for the
Executive for the calendar year in which the Gross-Up Payment is made.

 

16. Determination Procedures. All determinations required to be made under this
Part Four shall be made by the Independent Auditors in accordance with the
following procedures:

 

(a) Within ten (10) business days after each receipt of written notice from the
Corporation or the Executive that a Change in Control Severance Payment or Other
Parachute Payment has or is to be made or that one or more Options have or will
become Acquisition-Accelerated Options, then the Independent Auditors shall
provide both the Executive and the Corporation with a written determination of
the Parachute Payment attributable to that Change in Control Severance Payment
or Other Parachute Payment or the Option Parachute Payment attributable to those
Acquisition-Accelerated Options, together with detailed supporting calculations
with respect to the Gross-Up Payment to which the Executive is entitled by
reason of those various Parachute Payments. The Corporation shall pay the
resulting Gross-Up Payment to the Executive within three (3) business days after
receipt of such determination or (if later) contemporaneously with the Change in
Control Severance Payment, Other Parachute Payment or Acquisition-Accelerated
Options triggering such Gross-Up Payment.

 

(b) In the event temporary, proposed or final Treasury Regulations in effect at
the time under Code Section 280G (or applicable judicial decisions) specifically
address the status of any Change in Control Severance Payment,
Acquisition-Accelerated Option or Other Parachute Payment or the method of
valuation therefor, the characterization afforded to such payment by the
Regulations (or such decisions) shall, together with the applicable valuation
methodology, be controlling. All other determinations by the Independent
Auditors shall be made on the basis of “substantial authority” (within the
meaning of Section 6662 of the Code).

 

(c) The Corporation and the Executive shall each provide the Independent
Auditors with access to and copies of any books, records and documents in their
possession which may be reasonably requested by the Independent Auditors and
shall otherwise cooperate with the Independent Auditors in connection with the
preparation and issuance of the determinations contemplated by this Part Four.

 

(d) All fees and expenses of the Independent Auditors and the appraisers shall
be borne solely by the Corporation, and to the extent those fees or expenses are

 

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treated as a Parachute Payment, they shall be taken into account in the
calculation of the Gross-Up Payment to which the Executive is entitled under
this Part Four.

 

17. Additional Claims. The Executive shall provide written notification to the
Corporation of any claim made by the Internal Revenue Service which would, if
successful, require the payment by the Corporation of an additional Gross-Up
Payment. Such notification shall be given as soon as practicable after the
Executive is informed in writing of such claim and shall apprise the Corporation
of the nature of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim prior to the expiration of the
thirty (30)-day period following the date on which such notice is given to the
Corporation (or such shorter period ending on the date that any payment of
taxes, interest and/or penalties with respect to such claim is due). Prior to
the expiration of such thirty (30)-day or shorter period, the Corporation shall
ether (i) make the additional Gross-Up Payment to the Executive attributable to
the Internal Revenue Service claim or (ii) provide written notice to the
Executive that the Corporation shall contest the claim on the Executive’s
behalf. In the event, the Corporation provides the Executive with such written
notice, the Executive shall:

 

(A) provide the Corporation with any information reasonably requested by the
Corporation relating to such claim;

 

(B) take such action in connection with contesting such claim as the Corporation
may reasonably request in writing from time to time, including (without
limitation) accepting legal representation with respect to such claim by an
attorney reasonably selected by the Corporation and reasonably satisfactory to
the Executive, with the fees and expenses of such attorney to be the sole
responsibility of the Corporation without any tax implications to the Executive
in accordance with the same tax indemnity/gross-up arrangement as in effect
under subparagraph (D) below;

 

(C) cooperate with the Corporation in good faith in order to effectively contest
such claim; and

 

(D) permit the Corporation to participate in any proceedings relating to such
claim; provided, however, that the Corporation shall bear and pay directly all
additional Excise Taxes imposed upon the Executive and all costs, legal fees and
other expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify the Executive for and hold him
harmless from, on an after-tax basis, any additional Excise Tax (including
interest and penalties) imposed upon the Executive and any Excise Tax or income
or employment tax (including interest and penalties) attributable to the
Corporation’s payment of that additional Excise Tax on the Executive’s behalf or
imposed as a result of such representation and payment of all related costs,
legal fees and expenses. The amounts owed to the Executive by reason of the
foregoing shall be paid to him or on his behalf as they become due and payable.
Without limiting the foregoing provisions of this subparagraph (D), the
Corporation shall control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim and may, at the Corporation’s sole option, either direct the
Executive to pay the tax claimed and sue for a refund or contest the claim in
any permissible

 

15

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manner, and the Executive shall prosecute such contest to a determination before
any administrative tribunal, in a court of initial jurisdiction and in one or
more appellate courts, as the Corporation shall determine; provided, however,
that should the Corporation direct the Executive to pay such claim and sue for a
refund, the Corporation shall advance the amount of such payment to the
Executive, on an interest-free basis, and shall indemnify the Executive for and
hold him harmless from, on an after-tax basis, any Excise Tax or income or
employment tax (including interest or penalties) imposed with respect to such
advance or with respect to any imputed income with respect to such advance or
any income resulting from the Corporation’s forgiveness of such advance;
provided, further, that the Corporation’s control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be payable
hereunder, and the Executive shall be entitled to settle or contest, as the case
may be, any other issue raised by the Internal Revenue Service or any other
taxing authority.

 

PART FIVE—RESTRICTIVE COVENANTS

 

18. Non-Solicitation. For a period of one (1) year following the Executive’s
termination of employment with the Corporation, whether or not in connection
with a Change in Control, the Executive shall not encourage or solicit any of
the Corporation’s employees to leave the Corporation’s employ for any reason or
interfere in any other manner with employment relationships at the time existing
between the Corporation and its employees.

 

PART SIX—MISCELLANEOUS PROVISIONS

 

19. Continued Indemnification. The indemnification provisions for Officers and
Directors under the Corporation’s bylaws and Directors and Officers Liability
Insurance shall (to the maximum extent permitted by law) be extended to the
Executive during the period following his resignation or termination of
employment for any reason (other than a Termination for Cause), whether or not
in connection with a Change in Control, with respect to all matters, events or
transactions occurring or effected during the Executive’s period of employment
with the Corporation.

 

20. Cessation of Severance Benefits. In the event of a material breach by the
Executive of any of his obligations under Paragraph 9, 10 or 18 of this
Agreement or his Proprietary Information and Inventions Agreement with the
Corporation, he shall cease to be entitled to any further severance benefits
under Part Three of this Agreement, including (without limitation) any
subsequent right to exercise any outstanding Options or to receive any further
salary/target bonus payments or continued health care coverage at the
Corporation’s expense. In

 

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no event shall the Executive be entitled to any benefits under Part Three of
this Agreement if his employment ceases by reason of a Termination for Cause or
if he voluntarily resigns other than for a reason which qualifies as grounds for
an Involuntary Termination.

 

21. No Mitigation Duty. The Corporation shall not be entitled to set off any of
the following amounts against the payments or benefits to which the Executive
may become entitled under Part Three of this Agreement: (i) any amounts which
the Executive may subsequently earn through other employment or service
following his termination of employment with the Corporation or (ii) any amounts
which the Executive might have potentially earned in other employment or service
had he sought such other employment or service.

 

22. Death. Should the Executive die before he receives the full amount of
payments and benefits to which he may become entitled under Part Three of this
Agreement, then the balance of such payments shall be made, on the due dates
hereunder had the Executive survived, to the executors or administrators of his
estate.

 

23. Successors and Assigns. The provisions of this Agreement shall inure to the
benefit of, and shall be binding upon, (i) the Corporation and its successors
and assigns, including any successor entity by merger, consolidation or transfer
of all or substantially all of the Corporation’s assets (whether or not such
transaction constitutes a Change in Control), and (ii) the Executive, the
personal representative of his estate and his heirs and legatees.

 

24. General Creditor Status. The benefits to which the Executive may become
entitled under Part Three of this Agreement shall be paid, when due, from the
Corporation’s general assets, and no trust fund, escrow arrangement or other
segregated account shall be established as a funding vehicle for such payments.
Accordingly, the Executive’s right (or the right of the executors or
administrators of the Executive’s estate) to receive such benefits shall at all
times be that of a general creditor of the Corporation and shall have no
priority over the claims of other general creditors.

 

25. Notices.

 

A. Any and all notices, demands or other communications required or desired to
be given hereunder by any party shall be in writing and shall be validly given
or made to another party if delivered either personally or if deposited in the
United States mail, certified or registered, postage prepaid, return receipt
requested. If such notice, demand or other communication shall be delivered
personally, then such notice shall be conclusively deemed give at the time of
such personal delivery. If such notice, demand or other communication is given
by mail, such notice shall be conclusively deemed given forty-eight (48) hours
after deposit in the United States mail addressed to the party to whom such
notice, demand or other communication is to be given as hereinafter set forth:

 

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To the Corporation:

  

Legato Systems, Inc.

2350 West El Camino Real

Mountain View, CA 94040

Attention: Vice President of Human Resources

To Executive:

  

Noah D. Mesel

2350 West El Camino Real

Mountain View, CA 94040

 

B. Any party hereto may change its address for the purpose of receiving notices,
demands and other communications as herein provided by a written notice given in
the manner aforesaid to the other party hereto.

 

26. Governing Documents. This Agreement, together with (i) the stock option
agreements evidencing the Executive’s currently outstanding Options and any
future Option grants, (ii) his existing Proprietary Information and Inventions
Agreement, and (iii) any outstanding promissory notes of the Executive payable
to or to the order of the Corporation, shall constitute the entire agreement and
understanding of the Corporation and the Executive with respect to the terms and
conditions of the Executive’s employment with the Corporation and the payment of
severance benefits and shall supersede all prior and contemporaneous written or
verbal agreements and understandings between the Executive and the Corporation
relating to such subject matter. This Agreement may only be amended by written
instrument signed by the Executive and an authorized officer of the Corporation.
Any and all prior agreements, understandings or representations relating to the
Executive’s employment with the Corporation, other than (i) the stock option
agreements evidencing the Executive’s currently outstanding Options, (ii) his
existing Proprietary Information and Inventions Agreement and (iii) his
outstanding promissory notes payable to or to the order of the Corporation, are
hereby terminated and cancelled in their entirety and are of no further force or
effect.

 

27. Governing Law. The provisions of Agreement shall be construed and
interpreted under the laws of the State of California applicable to agreements
executed and wholly performed within the State of California. If any provision
of this Agreement as applied to any party or to any circumstance should be
adjudged by a court of competent jurisdiction to be void or unenforceable for
any reason, the invalidity of that provision shall in no way affect (to the
maximum extent permissible by law) the application of such provision under
circumstances different from those adjudicated by the court, the application of
any other provision of this Agreement, or the enforceability or invalidity of
this Agreement as a whole. Should any provision of this Agreement become or be
deemed invalid, illegal or unenforceable in any jurisdiction by reason of the
scope, extent or duration of its coverage, then such provision shall be deemed
amended to the extent necessary to conform to applicable law so as to be valid
and enforceable or, if such provision cannot be so amended without materially
altering the intention of the parties, then such provision will be stricken, and
the remainder of this Agreement shall continue in full force and effect.

 

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28. Injunctive Relief. The Executive expressly agrees that the covenants set
forth in Paragraphs 9, 10 and 18 of this Agreement are reasonable and necessary
to protect the Corporation and its legitimate business interests, and to prevent
the unauthorized dissemination of Proprietary Information to competitors of the
Corporation. The Executive also agrees that the Corporation will be irreparably
harmed and that damages alone cannot adequately compensate the Corporation if
there is a violation of Paragraphs 9, 10 or 18 of this Agreement by the
Executive, and that injunctive relief against the Executive is essential for the
protection of the Corporation. Therefore, in the event of any such breach, it is
agreed that, in addition to any other remedies available, the Corporation shall
be entitled as a matter of right to injunctive relief in any court of competent
jurisdiction, plus attorneys’ fees actually incurred for the securing of such
relief. Furthermore, the Executive agrees that the Corporation shall not be
required to post a bond or other collateral security with the court if the
Corporation seeks injunctive relief.

 

29. Arbitration. Each party agrees that any and all disputes which arise out of
or relate to the Executive’s employment, the termination of the Executive’s
employment, or the terms of this Agreement shall be resolved through final and
binding arbitration. Such arbitration shall be in lieu of any trial before a
judge and/or jury, and the Executive and Corporation expressly waive all rights
to have such disputes resolved via trial before a judge and/or jury. Such
disputes shall include, without limitation, claims for breach of contract or of
the covenant of good faith and fair dealing, claims of discrimination, claims
under any federal, state or local law or regulation now in existence or
hereinafter enacted and as amended from time to time concerning in any way the
subject of the Executive’s employment with the Corporation or its termination.
The only claims not covered by this Agreement to arbitrate disputes are: (i)
claims for benefits under the unemployment insurance benefits; (ii) claims for
workers’ compensation benefits under any of the Corporation’s workers’
compensation insurance policy or fund; (iii) claims arising from or relating to
the non-competition provisions of this Agreement; and (iv) claims concerning the
validity, infringement, ownership, or enforceability of any trade secret, patent
right, copyright, trademark or any other intellectual property right, and any
claim pursuant to or under any existing confidential/proprietary/trade secrets
information and inventions agreement(s) such as, but not limited to, the
Proprietary Information and Inventions Agreement. With respect to such disputes,
they shall not be subject to arbitration; rather, they will be resolved pursuant
to applicable law.

 

Arbitration shall be conducted in accordance with the National Rules for the
Resolution of Employment Disputes of the American Arbitration Association (“AAA
Rules”), provided, however, that the arbitrator shall allow the discovery
authorized by California Code of Civil Procedure section 1282, et seq., or any
other discovery required by applicable law in arbitration proceedings,
including, but not limited to, discovery available under the applicable state
and/or federal arbitration statutes. Also, to the extent that any of the AAA
Rules or anything in this arbitration section conflicts with any arbitration
procedures required by applicable law, the arbitration procedures required by
applicable law shall govern.

 

Arbitration will be conducted in Santa Clara County, California or, if the
Executive does not reside within 100 miles of Santa Clara County at the time the
dispute arises, then the arbitration may take place in the largest metropolitan
area within 50 miles of the Executive’s place of residence when the dispute
arises.

 

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During the course of the arbitration, the Executive and the Corporation will
each bear equally the arbitrator’s fee and any other type of expense or cost of
arbitration, unless applicable law requires otherwise, and each shall bear their
own respective attorneys’ fees incurred in connection with the arbitration. The
arbitrator will not have authority to award attorneys’ fees unless a statute or
contract at issue in the dispute authorizes the award of attorneys’ fees to the
prevailing party. In such case, the arbitrator shall have the authority to make
an award of attorneys’ fees as required or permitted by the applicable statute
or contract. If there is a dispute as to whether the Executive or the
Corporation is the prevailing party in the arbitration, the arbitrator will
decide this issue.

 

The arbitrator shall issue a written award that sets forth the essential
findings of fact and conclusions of law on which the award is based. The
arbitrator shall have the authority to award any relief authorized by law in
connection with the asserted claims or disputes. The arbitrator’s award shall be
subject to correction, confirmation, or vacation, as provided by applicable law
setting forth the standard of judicial review of arbitration awards. Judgment
upon the arbitrator’s award may be entered in any court having jurisdiction
thereof.

 

30. Counterparts. This Agreement may be executed in more than one counterpart,
each of which shall be deemed an original, but all of which together shall
constitute but one and the same instrument.

 

IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of
the day and year written above.

 

LEGATO SYSTEMS, INC.

By:

 

/s/    George I. Purnell

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Title:

 

V.P. Human Resources and CLO

 

/s/    Noah D. Mesel

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Noah D. Mesel

 

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SCHEDULE I

 

LIST OF EXCLUDED OPTIONS

 

The following Options currently held by the Executive shall not be modified
pursuant to Paragraph 14(e) of the Agreement to provide the extended twelve
(12)-month exercise period following the date of his Involuntary Termination.
Accordingly, for each of the Options listed below, the Executive shall continue
to have only until the earlier of (i) the expiration of the option term or (ii)
the end of the period specified in the applicable stock option agreement for
which that Option is to remain exercisable following the date of his termination
of employment with the Corporation, including an Involuntary Termination.

 

Grant Date

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Number of Option Shares

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Exercise Price

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