In a divorce, awards of stock are frequently the largest assets in the marital estate. It is no surprise then that how these accounts are divided can be controversial and highly contested. This kind of division of assets in divorce can often be complex, particularly if the stock awards have not yet vested and their value is as yet unknown. In one recent case of first impression, MG v SM, there was an issue of whether or not certain restricted stock, which would vest after the complaint of the divorce, would be subject to division in a divorce if the vesting is contingent upon the party in question’s employment efforts after the complaint.
The parties married in 1998, the plaintiff became a principal consultant for a major multi-national corporation. From August 2003 through August 2010, the employer gave plaintiff an annual stock award, which would vest in yearly clusters. By way of example, the plaintiff noted that in 2003, he received 490 shares. Starting in 2011, 174 shares each year would begin to vest. The same schedule applied to all subsequent stock awards. According to plaintiff’s testimony, this was so the company could ensure continuous high-performance of the employees. So, if in the year the stock award was going to vest and the employee had performed poorly, the company had the option to terminate their employment, along with their rights in the stock.
When the plaintiff filed his complaint for divorce in July of 2014, just three of his eight stock awards had fully vested. When considering the division of assets in divorce, the plaintiff’s position was that the stocks which had already vested should be eligible for equitable distribution to his spouse, but not the ones which had not yet vested. The court disagreed. The judge ruled that the defendant could share the stocks which had vested as of the date of filing as well as the awards which would vest after the complaint.
The rationale was that the awards were given based on past job performance, which occurred during the marriage. Citing Pascale v. Pascale, the judge noted that a presumption exists that stock awards result from joint, marital efforts. Thus, the awards would be subject to equitable distribution. The plaintiff requested a modification of the judgment regarding the distribution of the restricted stock, arguing that the vesting of the awards would be based on his performance after he filed his complaint, and so were not subject to equitable distribution. When the judge denied his motion, he appealed.
Plaintiff argued that the trial judge was incorrect because he ignored the evidence which demonstrated that stock awards vesting were contingent upon his post-complaint efforts. He claimed that Pascale should not apply because it did not deal with the vesting of awards, but rather the award of the stock itself. The appellate court agreed that the considerations of the instant case differed from those in Pascale, and also found that it was clear that post-complaint efforts at the plaintiff’s job were required to secure the vesting of stock awards. The fact that he was a high-level corporate employee in a large, competitive company would indicate that his performance involved much more than merely showing up to work, as the defendant claimed. Therefore, the court determined that the judge did not adequately handle the unvested stock awards.
The next question for the court was how the distribution of division of assets in divorce in question should be achieved. The court considered a ‘coverture fraction analysis’ as well as ‘marital momentum’. Coverture fraction considers the vesting schedule and characterizes the stock as marital or non-marital based on that. The numerator is the time period from the date the award was granted up to the cut off date. The denominator is the period from the date the award was granted to the vesting date. The concept of marital momentum recognizes that as one’s career, experience and education progresses, so do the professional benefits, growing in size and value years after the initial earnings.
Ultimately, the court held that neither method was proper in determining whether the unvested stock was attributable to the marriage because each method assumes that there is a marital component within the asset. Instead, the court looked outside New Jersey, to a case out of Massachusetts (Baccanti v Morton, 752 N.E.2d 718). There, the Supreme Judicial Court of Massachusetts found that most courts in the country consider stock options as marital property only to the extent they are derived from efforts during the marriage. The court then provided an approach to determine whether, and to what extent, stock options with vesting plans should be included in the division of the marital estate.
Essentially, the question is whether the options were awarded for employee efforts before, during or after the marriage – why were the stock options given to that employee? The judge should look to the plan, literature of the employer, testimony from the employee or employer, and even expert witnesses, as applicable. The court should also consider external circumstances around the grant, like the intentions and purpose of the grant – whether it is to induce a certain employee behavior or act as an award.
The burden of proof is on the person who wishes to exclude the options from the marital estate. They must show that the options were provided for future services, which were performed after the marriage is dissolved. The essential approach is as follows:
- If a stock award is made during the marriage and it vests before the complaint is filed, then it is subject to equitable distribution.
- If the award is made during the marriage for work performed during the marriage, but it vests after the complaint is made, it is still subject to equitable distribution (this is a rebuttable presumption).
- There must be a material dispute of fact that the stock – whether in whole or in part – is awarded for future performance.
- The party who does not want to include the stock in the marital estate carries the burden of proof to rebut the presumption and must use objective evidence to prove that the stock will vest on future services rather than as deferred compensation.
Based on this approach, the appellate court found that the plaintiff in the instant case easily rebutted the presumption, and the stocks are not subject to equitable distribution and remanded back to the trial court to use the approach in redistributing the estate. If you have any questions about divorce and equitable distribution, contact the Law Offices of Peter Van Aulen at (201) 845-7400 for a free initial consultation.