In the 2001 case of Toni Baccanti v. George I. Morton, 434 Mass 787 the Massachusetts Supreme Court considered the question of whether a Probate Judge abused his discretion in dividing marital property in a divorce proceeding particularly with regard to unvested stock options that the couple had.
Summary of the Case:
In Baccanti v. Morton, the wife, Toni Baccanti, quit her full-time job and worked part-time to care for the couple's behaviorally challenged son. Husband kept his full-time job and was given stock options by his employer. The couple had been together for nine years prior to filing for divorce in Massachusetts. There was no prenuptial arrangement.
The Court looked at MGL c. 208, s.34 to determine if unvested stock options are property that can be included in the marital estate, reasoning that although the law does not expressly address stock options, it does mention both vested and unvested benefits. The Court determined that only the portion of unvested stock that "reflects efforts spent during the union" can be regarded as a divisible marital asset. So, for each unvested stock option award, regardless of how far into the vesting period the employee partner was at the time of the divorce, the portion of the stock option award that can be treated as an asset and divided between the divorcing spouses is the portion of the stock option award that can be treated as an asset and split between the divorcing spouses.
A Little Background: What are stock options vs RSUs?
Stock options have become an increasingly common type of compensation because they provide a simple method for businesses to pay their workers based on the success of the company. They also have a number of drawbacks, including the fact that stock options only pay out if the value of the company rises is the first of these limitations. Secondly, if the share price falls, the stock option may become essentially worthless. Employees who "sell" their stock options do not earn the full share price in the deal, unlike RSUs. For example, if a person receives 500 stock options with a three-year vesting period, the holder will be able to “sell” the stock after three years. The selling proceeds are limited to the rise in value of the stock over the previous three years. Stock options can be a mixed bag. Since employees have the “option” of keeping or selling the instrument for several years, businesses that experience a share price drop may face a secondary problem: employees may immediately sell off thousands of stock options, compounding whatever issues caused the price drop in the first place. Furthermore, since workers appear to accumulate stock options over time, employers are often confronted with cases in which employees leaving the company cash in hundreds of thousands of dollars in stock options all at once.
An employee who receives an RSU owns a portion of the business. If the stock of the company is trading at $100 per share, the RSU held by the employee is worth $100. The RSU's only restriction is its expiration date: most RSUs pay out after 1 to 5 years. When the vesting date comes, the RSU “sells” immediately, and the employee earns the full share price for the number of unvested RSUs he or she owned. Finally, unlike a private stock sale, RSU payouts are viewed as taxable W-2 compensation for the employee in the year they are paid.
Stock options and RSUs are treated very similarly in a divorce. There is a vesting period for each type of compensation, and each pays an employee as taxable W-2 income. In some cases, RSUs are easier to account for in a divorce because unlike stock options most RSUs pay out on a set schedule. RSUs are arguably a more stable "asset" than stock options because they reflect a guaranteed reward that is dependent solely on the spouse's continued employment. Stock options, on the other hand, require an increase in stock price to have value.
In either case, given the broadly similar intent and tax treatment of payouts from each instrument, nothing in Massachusetts case law indicates that RSUs should be handled differently than stock options in a divorce case.
Baccanti Case Details:
Toni Baccanti and George I. Morton were married for approximately twelve years before their divorce was finalized in June 1999. Mr. Morton appealed the Probate Judge’s decision claiming that the Probate Judge had abused his discretion by improperly dividing marital assets pursuant to the factors of G. L. c. 208, s. 34. In pertinent part, G. L. c. 208, s. 34 states “In fixing the nature and value of the property . . . to be so assigned, the court . . . shall consider the length of the marriage, the conduct of the parties during the marriage, the age, health, station, occupation, amount and sources of income, vocational skills, employability, estate, liabilities and needs of each of the parties and the opportunity of each for future acquisition of capital assets and income. . . The court shall also consider the present and future needs of the dependent children of the marriage." Furthermore under G. L. c. 208, s. 34 the judge’s decision regarding marital assets must be apparent and slowly naturally from the given facts of the marriage. As part of their review of the Probate Judge’s decision the Massachusetts Supreme Court pointed out that during the time of their marriage both parties worked however Toni Baccanti only had partial employment as she stayed home to raise these couples adopted son and was his primary caretaker.
Analysis by the Court:
The Massachusetts Court ultimately decided that the Probate Judge did not abuse his discretion when dividing marital property as property division in the Massachusetts divorce proceeding is about recognizing each party’s contribution to the marital partnership and this includes the raising of children as well as making money to support the family. It is also important note that when coming up with a equitable and equal division of marital property under G. L. c. 208, s. 34 a judge “may assign to either husband or wife all or any part of the estate of the other.” Also important in the analysis of this case is the fact that the Probate Judge came to the conclusion that both Ms. Baccanti and Mr. Morton contributed to the marriage equally.
The Supreme Court was also quick to point out that there are no hard and fast rules Massachusetts as to the division of property and that a Probate Judge has a wide discretion in determining how best to divide the marital assets.
The court also rejected the husband’s argument that the judge abused his discretion in refusing to give credit to the husband’s testimony during the divorce proceedings pointing out that judges are not required under Massachusetts law to give credit to a party’s testimony in a divorce proceeding.
Most interestingly however, the Massachusetts Supreme Court’s analysis in this case is a matter of first impression for Massachusetts. The issue being, whether or not unvested stock options are to be included in the marital property which will be divided and if so to what extent they should be included in the marital estate. The matter hinges on statutory interpretation particularly of G. L. c. 208, s. 34 . The Court noted that in pertinent part the statute states that “the court may assign to either husband or wife all or any part of the estate of the other, including but not limited to, all vested and nonvested benefits, rights and funds accrued during the marriage and which shall include, but not be limited to, retirement benefits, . . . pension, profit-sharing, annuity, deferred compensation and insurance." We interpret a statute consistent with the legislative intent and in order to effectuate the purpose of its framers.” The court also determined that when engaging in interpretation of similar statutes previously it had not “been bound by traditional concepts of title or property. Instead, we have held a number of intangible interests (even those not within the complete possession or control of their holders) to be part of a spouse's estate for purposes of s. 34." the Supreme Court also pointed out that it could possibly compare employee stock options to retirement benefits which it had previously determined to be part of marital property which could be divided.
Ultimately, the Massachusetts Supreme Court found that granting employees stock options had become increasingly prevalent and they were indeed similar to a retirement plan or pension fund which traditionally have been considered part of the marital estate therefore to exclude the stock options from the marital estate would deprive spouse of the opportunity to benefit from assets they had contributed to during the marriage even though like retirement funds or pensions the asset had not vested yet. However, the Supreme Court was uncertain as to the extent to which employee stock options should be included in the marital estate, determining that “[t]he key question, [to be determined], in assigning one spouse's employee stock options is what, if any, portion of the options is to be considered marital property and what, if any, portion is to be considered nonmarital property because the options relate to a period subsequent to the marriage.”
Therefore, like many Courts when deciding an issue of first impression the Massachusetts Supreme Court next turned to its sister states for guidance as to how to handle the unvested stock options. The Court found that the in the minority of states unvested stock options could be included in the marital estate in their entirety.
In contrast, most states “have held that stock options are marital property only to the extent that they reflect efforts expended during the marriage.” Under this logic, the key determination in whether a stock is included in the marital estate is the purpose for which the stock was granted. If the stock was given for past or current work being done it is part of the employee’s compensation and is therefore considered party of the marital assets. However, if the stock is given as a bonus or incentive for future services such as an incentive to stay with the company, the stock options are not considered part of the marital estate, and therefore remain the full property marital partner who received the stock option.
Although the Massachusetts Supreme Court agreed with the majority of states on how stock options should be viewed, they did not agree with the majority of states on the definitions of marital property stating that there may be cases where stock options become vested or investable shortly after the dissolution of the marriage and therefore this spouse who does not own the stock option loses out on their contribution to the stock options. The court ultimately concluded that judges have discretion under G. L. c. 208, s. 34 to decide whether to include future stock options in the marital estate but must take into account whether one spouse has initiated divorce proceedings in part to get access to the future stock options when dealing with cases in which the inclusion of future stock options are contested.
The Court placed the burden of proof that future stock options should not be included in the marital estate on the party contesting their inclusion. In addition to proving the stock was given for future services to be rendered, the party contesting the stock’s inclusion in the marital estate must also prove “that the non-employee spouse did not contribute to the employee spouse's ability to acquire the options at issue and, for that reason, the value of the options either in whole or in part should not be considered part of the marital estate. In placing the burden on the party contesting the stock’s inclusion in the marital estate, the Court reasoned that “the party to whom the options are issued is in a better position to obtain information regarding the circumstances surrounding the grant, and thus should bear the burden of proof on this issue.”
Finally, the Massachusetts Supreme Court applied this new rule to the stock options granted to Mr. Morton during his marriage to Ms. Baccanti to determine whether or not they were to be included in the marital estate.
The court ultimately concluded that the Probate Judge did not abuse his discretion in including the unvested stock options in the marital estate and that the stock options were to in fact be included in the marital estate because Mr. Morton did not argue during the trial portion of his divorce that the stock options were given for future services to be rendered. The court also determined that even if he had made the argument during trial the record could not support it.
If you are considering a divorce in Massachusetts, and are unsure of how your stock options or RSU's will be divided, call Mavrides Law at 617.723.9900, or email us at firstname.lastname@example.org to schedule a consultation.
All content provided on this blog is for informational purposes only. You should not act upon any such information without first seeking qualified professional counsel on your specific matter. Mavrides Law makes no representations as to the accuracy or completeness of any information on this site. Mavrides Law will not be liable for any errors or omissions in this information nor for the availability of this information. These terms and conditions of use are subject to change at any time and without notice. Communication of information by, in, to or through this Website and your receipt or use of it (1) is not provided in the course of and does not create or constitute an attorney-client relationship, (2) is not intended as a solicitation, (3) is not intended to convey or constitute legal advice, and (4) is not a substitute for obtaining legal advice from a qualified attorney.