NJ’s Appellate Court Offers Guidance on the Distribution of Restricted Stock in Divorce

Compensation for executives in large companies often goes beyond the standard salary and perqs (car or phone reimbursements, etc.). Executive compensation packages may also include additional forms of payment intended to either reward prior good performance or to encourage the continued good performance of the employee. One such type of compensation is known as “restricted stock units (RSUs).”

The New Jersey Appellate court recently decided a case about how this type of compensation should be evaluated and divided in a divorce. In the case M.G. v. S.M., 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 Plaintiff’s employer. Vesting occurs when the employee has complete ownership and control over the stock. Although there had been eight years’ worth of RSUs granted to Plaintiff at the time of the filing of the divorce complaint, only three of these grants were fully vested.

At trial, the judge heard testimony from Plaintiff about these stock units, including Plaintiff’s admission that Defendant was entitled to share in the value of the vested options. However, plaintiff argued that the non-vested RSUs were not distributable to defendant. Plaintiff submitted evidence that his company issued the RSUs as incentives to encourage its employees to continue to perform well at their jobs in the future, and to encourage employees to remain with the company so that their interests in the RSUs will vest. The trial court’s opinion was that all of the RSUs were “the result of pre-filing, 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. On appeal, the Appellate court investigated the appropriate method by which to value and divide these assets. The court considered various approaches to this issue, ultimately deciding to rely on guidance from a Massachusetts case that dealt with the same subject. The NJ Appellate court held that the following is the proper analysis to consider when dividing RSUs in 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 complaint, it too is subject to equitable distribution; and,
3. 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 the stock, either in whole or in part, that the RSUs were given in consideration of the future performance of the employee.

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 was 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 impacted by a divorce, contact DeTorres & DeGeorge today to schedule a consultation with one of our attorneys.