Soft landing ahead for Brocade’s departing CEO…

Yesterday’s announcement that the chief executive of Brocade Communications Systems, Inc. (BRCD), Michael Klayko, plans to step down resulted in the company’s stock price ticking upwards about 6%, after the news rekindled some oft-bandied speculation that the company might be positioning itself for a takeover.

Klayko — who has led the company as CEO for seven years but now believes “it is the right time” to hand over the reins to a successor — agreed to stay until the new CEO starts work. But as an 8-K filed yesterday disclosed, Brocade has given Klayko a Transition Agreement with terms that make it worthwhile to stick around until his successor reports for duty.

First, here’s the part worth millions:

“If Mr. Klayko remains employed with the Company through the Successor Commencement Date, or if prior to the Successor Commencement Date, Mr. Klayko’s employment terminates for a reason other than for Cause (as defined in the Transition Agreement), he will be entitled to (i) a lump sum payment equal to $2,000,000, which is equal to 12 months’ base salary and 100% of his target cash bonus payable pursuant to the SLP, and (ii) a lump sum payment equal to the amount of the premium Mr. Klayko would be required to pay for 12 months of COBRA benefits.”

But Klayko is actually in line to get more money than that. So long as he stays until his successor starts work and continues “to perform his duties in the same professional manner as he did prior to the execution of the Transition Agreement,” Brocade Communications will pay him a lump sum of $320,000. In addition, if his successor starts sometime in fiscal 2012, Klayko will receive the rest of the salary he would have received through the end of the fiscal year, his incentive payment for the year (so long as the criteria are met), and accelerated vesting of some of his equity interests.

On the other hand, if the successor isn’t selected until sometime in fiscal 2013, Klayko will get all that plus a pro-rated bonus for FY 2013 and accelerated vesting of more time-based and performance-based equity awards, according to a very complicated formula. The company also agreed “to investigate, and to the extent possible under commercially reasonable practices, provide limited continued health insurance coverage for certain of Mr. Klayko’s children” and to pay the legal fees he incurred to negotiate the Transition Agreement.

We don’t know what the board has in mind for Brocade Communications’ future, although this Bloomberg Businessweek article quoted a source who opined that Klayko’s resignation may “streamline a sale of the company.” What we can say with more certainty, though, is that Klayko is set for a nice, soft landing whenever his last day with the company finally arrives.

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