Equitable Distribution of Equity Income: M.G. v. S.M., _ N.J. Super. _ (App. Div. 2018
Generally, individuals going through a divorce are aware that their assets and debts acquired during the marriage will be divided. Most have acquired assets such as a home, car, bank accounts, and retirement accounts. But increasingly, individuals have more complex assets, including restricted stock options.
Indeed, today, “executive compensation [is often] achieved through means other than salary and retirement assets . . . [with] ‘[m]any companies favor[ing] stock-based compensation plans to entice, retain, motivate, and attract their employees.’” M.G. v. S.M., _ N.J. Super. _ (2018) (quoting Donna Pironti & Mitchell Benson, Performance Awards Through Employee Stock Compensation Plans: Tax and Divorce Issues, A.B.A. Sec. of Fam. L.: Fam. Advoc., Fall 2018, at 17).
Frequently, to advance the aforementioned goals, companies award stock options, which “contain vesting features that are triggered during a period set by the employer.” Ibid. In other words, although an individual is awarded the stock, the stock does not vest until a date in the future.
So how will a court divide an asset, which has not exactly been acquired during the marriage? The Appellate Division addressed just this scenario in a recent published opinion, M.G. v. S.M., _ N.J. Super. _ (2018).
In M.G., the Appellant was awarded stock options from his employer from August 2003 until August 2010, which would vest in annual tranches on a rolling basis eight years after the award was made. Id. at *2. At the time the complaint for divorce was filed, Appellant had been granted eight stock awards, of which only three were fully vested. Ibid.
The remainder of Appellant’s stock options would vest beginning in August 2014 and every year thereafter. Ibid. Appellant contended vesting was dependent on his future employment performance, and produced documentation from his employer also stating the stock represented “a reward program . . . because it provides an ownership stake in the company’s success for employees who contribute over the long term.” Id. at *3.
However, Respondent contended all of Appellant’s stock should be equitably distributed. Id. at *5-6.
In considering Appellant’s stock awards, the trial court found “the [restricted stock units] awarded to [Appellant] up to and including the August 2014 award are the result of pre-filing, marital efforts, and are thus subjected to equitable distribution.’” Ibid. The trial judge based this finding on Pascale v. Pascale, 140 N.J. 583 (1995), which held “stock options awarded after the marriage has terminated, but obtained as a result of efforts expended during the marriage should be subject to equitable distribution.” Ibid.
However, the Appellate Division disagreed with the trial judge’s conclusion and reliance on Pascale, which it stated did not apply to the facts of this case. The Appellate Division clarified that unlike in Pascale, “the analytical framework is not when the stock was received, but rather, the efforts required for it to vest.” Id. at *13.
Relying heavily on a Supreme Court of Massachusetts decision, Baccanti v. Morton, 434 Mass. 787 (Mass. 2001), the Appellate Division adopted the following suggested rubric for stock awards:
- Where a stock award has been made during the marriage and vests prior to the date of complaint it is subject to equitable distribution;
- Where an award is made during the marriage for work performed during the marriage, but becomes vested after the date of complaint, it too is subject to equitable distribution; and
- Where the award is made during the marriage, but vests following the date of complaint, there is a rebuttable presumption the award is subject to equitable distribution unless there is a material dispute of fact regarding whether the stock, either in whole or in part, is for future performance. The party seeking to exclude such assets from equitable distribution on such grounds bears the burden to prove the stock award was made for services performed outside of the marriage. That party must adduce objective evidence to prove the employer intended the stock to vest for future services and not as a form of deferred compensation attributable to the award date. Such objective evidence should include, but is not limited to, the following: testimony from the employed spouse; testimony of the employer’s representative; the stock plan; any employer correspondence to the employed spouse regarding the award; and the employed spouse’s stock plan statements from commencement of the award and nearest the date of complaint, along with the vesting schedule.
[Id. at *22-23.]
The take-away: equity income which vests as a result of efforts put forth during the marriage is subject to equitable distribution – equity income which vests as a result of efforts put forth after the marriage is not.