Court Addresses Stock Compensation in Divorce

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Divorce is almost always complicated, especially when there is a lot at stake. In today’s article, we will explore the handling of stock compensation in divorce proceedings.

Compensation for executives in medium and large corporations often goes beyond standard payroll and perquisites (the special rights that come with the position). It can also include forms of payment to reward the executive for prior performance or to encourage strong future performance. This compensation can take the form of stock options or restricted stock units (RSUs).

In New York (an equitable distribution state for purposes of dividing marital assets) stock options and RSUs acquired during the marriage are presumed to be marital property, unless the holder can prove they were acquired as a gift or inheritance or in exchange for other non-marital property. One can determine if the options were granted as a reward for past services by examining the plan documents, such as the Stock Options Plan and the Options Statement. These documents should address exercise price, expiration date and other terms, including some that may pertain to divorce.

If the stock is publicly traded, its value is based on the fair market value of the stock – the amount at which a share of stock is being traded – usually at the date of trial or the date of the legal action. Valuation of the stock of a privately held company is more problematic, and will necessitate a business valuation. When performing the business valuation, the appraiser examines a host of factors, including the type of business, prior sales of company stock, the future outlook for the company and goodwill.

The non-propertied spouse must be watchful for deception, particularly in smaller companies, where the executive can negotiate, sometimes orchestrate, their compensation package. In other words, were the stock options granted as a reward in addition to normal compensation? Or is the executive receiving the options in lieu of a raise?

The New Jersey Appellate Court recently decided a case regarding how RSU compensation should be evaluated and divided in a divorce. In M.G. v. S.M., the plaintiff’s employer had issued RSUs to the plaintiff over the course of an eight-year period. These RSUs were subject to a vesting schedule established by the employer. After a stated period of time, vesting would occur and the employee would take ownership of the stock.

Although eight years’ worth of RSUs had been granted to the plaintiff, at the time of the filing of the divorce complaint, only three years of the grants were vested. At trial, the judge heard testimony from the plaintiff about the stock units, including the plaintiff’s agreement that the defendant was entitled to share in the value of the vested units.

However, the plaintiff argued that the non-vested RSUs were not distributable to the defendant. The plaintiff submitted evidence that his company issued the RSUs to employees to incentivize future performance and encourage them to remain with the company so that their interests in the RSUs would vest. The trial court’s opinion was that all of the RSUs were “the result of prefiling, marital efforts, and are thus subject to equitable distribution,” regardless of when they vest.

There is a lack of significant guidance in the form of case law with respect to how RSUs are divided in divorce in many states. The Appellate Court explored the possible methods by which to value and divide the assets. The court ultimately deciding to rely on guidance from a Massachusetts case that dealt with the same subject. The New Jersey Appellate Court held that the following is the appropriate analysis to consider when dividing RSUs in a divorce:

  1. Where a stock award has been made during the marriage and vests prior to the date of complaint, it is subject to equitable distribution.
  2. Where an award is made during the marriage for work performed during the marriage, but becomes vested after the date of the complaint, it, too, is subject to equitable distribution.
  3. Where the award is made during the marriage, but vests following the date of complaint, there is a rebuttable presumption that the award is subject to equitable distribution, unless there is a material dispute of fact regarding whether some or all of the award was consideration for future performance.

The Appellate Court went on to state that the party who wants to exclude the assets – i.e. the party to whom the RSUs were granted – must demonstrate that they were issued for work performance after the filing of the complaint for divorce.

Based on the Appellate Court’s decision, it is likely that the plaintiff in M.G. v. S.M. will be successful in excluding at least a portion of the unvested RSUs from equitable distribution of the marital estate, as his trial testimony stated that his employer’s intent in issuing RSUs was to encourage positive future performance.

Therefore, the purpose for which the executive compensation is issued by the employer may also impact the division of those assets in divorce. If you have questions about how your executive compensation package may be valued, contact Advent Valuation Advisors today.

The case is Superior Court of New Jersey Appellate Division Docket No. A-1290-17t1, December 26, 2018. The decision is available here:

https://adventvalue.com/wp-content/uploads/2019/10/MG-vs-SM.pdf