Appellate Division Establishes Test For Distribution of Stock Awards in New Published Decision

Executive compensation in today’s workforce is increasingly comprised of stock awards, in addition to a salary, bonuses and retirement assets. As we know, such stock awards are often designed to incentivize those executives to remain with, join or perform at a certain level with a chosen company.

How are those awards then equitably distributed in a divorce matter? This issue was at the forefront of the Appellate Division’s newly published (precedential) decision in M.G. v. S.M., where the primary issue was whether the portion of restricted stock transferred to the husband employee by his employer – and which vested after the date of complaint for divorce – was subject to equitable distribution if the vesting was contingent upon the employee’s post-complaint employment efforts.

Just the Facts:

The parties were married in 1998.

In 2001, husband became employed with a large company.

Starting in August 2003 and every year thereafter until 2010, husband received a stock award from his employer. He testified that the stock vested in yearly tranches.

Husband filed a complaint for divorce on July 28, 2014.

As of the date of complaint, the husband had been granted eight stock awards, but only three had fully vested and the remainder was due to vest post-complaint in the same manner as before.

At trial, husband produced an employer policy document entitled “Overview of Stock Awards”, which provided, in pertinent part:

Stock-based compensation is a key component of our reward program . . . because it provides an ownership stake in the company's success for employees who contribute over the long term. To preserve this core element of our culture, in July 2003, [we] decided to grant employees stock awards, which represent the future right to receive shares of . . . stock when a vesting requirement is satisfied.

....

At [our company] we believe that employees who become shareholders maintain a long-term, vested interest in sustained individual excellence and the overall success of the company.

....

Each eligible employee's annual stock award grant is based on his or her impact, level, and country.

Husband testified the stock plan was a way by which the employer:

Retained employees;

Made sure employees consistently performed better “so if the year that it vests, if you don't perform well, it gives them reason to let you go and you don't get those [stocks], so you have to be consistently performing at a better level to be able to take advantage of the stocks that they give you.”

The Trial Court Decision on the Stock Award:

The awards were provided to husband as part of his compensation package.

Husband conceded wife was entitled to share in those stocks that vested as of the date of complaint.

The grant of the 2014 award – not the vesting of said award – created a marital asset with a five-year vesting schedule and uncertain value.

The 2014 award was “made in recognition of [p]laintiff’s past job performance,” which was found to be during the marriage and, as a result, were due to marital efforts. As a result, the award was subject to equitable distribution even though the award did not vest until after the complaint was filed.

Husband’s Attempt to Modify the Decision:

After entry of the final judgment of divorce, husband filed a motion seeking, in part, to modify the final judgment as it pertained to the restricted stock distribution.

In arguing the stocks were performance options and “a reward for staying” with the company and for future performance, husband provided language from his employer’s stock award agreement providing, “awardee’s rights in the [stock awards] shall be affected, with regard to both vesting schedule and termination, by leaves of absence, changes in the number of hours worked, partial disability, and other changes in awardee’s employment status as provided in the company’s current policies for these matters.”

The stock agreement further provided that the stock vesting and conversion schedule was, in part, based on the “Awardee remain[ing] continuously employed” through the vesting dates.”

The employer cover letter provided with the stock plan documents provided, “We look forward to you making a positive impact on [the company’s] future success and sharing in that success as a shareholder in our Company.”

Husband’s motion to modify the judgment was denied, as the trial court again deferred to its prior finding that “A presumption exists that stock awards result from joint, marital efforts and are thus subject to equitable distribution.” The stock agreement language was deemed insufficient to overcome this presumption.

The Appellate Division Reverses the Trial Court Decision and Remands for Further Proceedings.

Addressing the trial court’s decision on appeal, the Appellate Court established a three-part test to determine if a stock award is subject to equitable distribution:

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.

Applying its holdings to the case at hand, the Appellate Court held the trial court’s primary focus should have been on the efforts required for the stock to vest – not when the stock was awarded. In so holding, the Court noted as follows:

Post-complaint efforts were necessary to cause the stock, which had not vested as of the date of complaint, to become payable. Vesting was deemed dependent on post-complaint performance – not merely “to continue living and go to work”, but much are as a high level executive at the company where the stock plan was a “reward program” designed to “maintain a long-term, vested interest in sustained individual excellence and the overall success of the company.” Poor performance could lead to dismissal and loss of the stocks prior to vesting.

The trial judge’s conclusion that the stock award stemmed from marital effort was, thus, contrary to existing evidence and testimony.

Separately, but also of importance, was the Appellate Division’s rejection of a so-called coverture fraction analysis, which, in theory, would allocate a given stock award as “marital and non-marital based on the vesting schedule, with the numerator being the time period from the date the award was granted to the cutoff date and the denominator being the period from the date of grant to the vesting date.”

The Court also rejected application of a so-called “marital momentum” theory, whereby one’s occupational efforts could serve as a “springboard into future higher earnings.” The Court found that neither the fraction method nor momentum theory were appropriate because each presumed a marital component to a given award, which could be entirely inappropriate as seen in this case.

The Takeaway

M.G.’s establishment of a three-part test acts as a sensible roadmap for practitioners and litigants to address what can often be a complex issue. As stock awards continue to comprise a substantial portion of executive compensation packages, it also provides ways in which practitioners can creatively lawyer on their clients’ behalves to obtain a fair and just division of such assets without resort to a formula that may or may not be appropriate under a particular set of circumstances.