A Possible Shift in the Law on Division of Future Financial Benefits in Divorce

As a general rule, all assets acquired during the marriage are presumed to fall within the pot for equitable distribution in a divorce, but there are exceptions. One of those exceptions is the receipt of employment related stock options or restricted stock units, which “vest” or become available for distribution after the divorce filing and are tied to the spouses “post-divorce employment work efforts.”

This issue was recently addressed by the Minnesota’s Supreme Court and examined by a recent New Jersey Appellate Court decision. In both cases, the reasoning of the court signals a potential shift in how future financial benefits will be treated for equitable distribution in a divorce.

In the Minnesota Supreme Court case, the issue focused on how the former husband’s future “earnout” payments (from the sale of his business) should be treated for equitable distribution. In that case, during the marriage, husband and his business partners bought a company. (Gill v. Zwakman Gill, 919 N.W.2d 297, Oct 2018). Several years later, husband and wife separated, and the year after their separation, husband and his partners sold the company to Unilever for:

(1) An upfront payment of $180 million; and

(2) Two future potential “earnout” payments, ranging from $0 to $170 million

Several months after finalizing the sale, husband filed for divorce. Under the terms of the sales agreement to Unilever, the future “earnout” payments would only be made if the company generated above a threshold level of revenue each year. If the company generated more than the threshold revenue amount, the amount in excess of that threshold would be used to determine the earnout payments to husband and his former partners.

Separate from the agreement to sell their business to Unilever, husband entered into a separate employment agreement with Unilever as the company’s CEO, and in turn he was paid a salary of $362,500 in 2015 and $375,625 in 2016.

Minnesota, like New Jersey, classifies assets as marital or separate based largely on timing - that is, when the asset was acquired. If an asset is acquired during the marriage and before the court’s valuation date, then that asset is presumed to be marital in nature, subject to equitable distribution as part of the marital estate.

The trial court in that matter determined the husband’s share of the $180 million upfront payment was subject to equitable distribution but that the potential future earnout payments (ranging from $0.00 to $170,000,000.00) were not subject to equitable distribution. The trial court held: (1) husband’s share of the upfront payment reflected husband’s prior work completed during the marriage; and (2) the potential future “earnout” payments would compensate husband for his future work, which future work was unconnected to the marriage.

The Minnesota Court of Appeals disagreed and reversed the trial court, ruling that the marital estate included all consideration received in the sale of husband’s interest in the business, and since the husband’s separate sales contract was put in place before the divorce was finalized, husband’s share of the future “earnout” payments should also be included in the pot for distribution. The Court of Appeals

ignored the fact that the potential “earnout” payments were tied to the future post-divorce performance of the company.

The Minnesota Supreme Court agreed with the Court of Appeals, ruling that although the amount of the future “earnout” payments were uncertain, husband’s right to receive those earnout payments was acquired at the time of the sale of the company, which occurred before the divorce was filed.

The linchpin to the Minnesota Supreme Court’s reasoning was that the future potential “earnout” payments were not tied to husband’s post-sale contributions to the company’s revenue stream or success but based on other factors unconnected to the husband directly.

The Minnesota Supreme Court focused on the fact that husband’s entitlement to share in the “earnout” payments was not tied to his personal post-sale performance. It acknowledged that the result may have been very different had husband’s entitlement to share in the future “earnout” payments been tied to husband’s personal post-divorce performance, which issue was addressed in the recent New Jersey Appellate Court decision of M.G v. S.M.

In M.G. v. S.M., the New Jersey Appellate Division determined that the unvested portion of husband’s restricted stock award did not fall within the pot for equitable distribution. (M.G. v. S.M., 199 A.3d 318 (App. Div. 2018).)

According to the NJ court, the husband’s unvested portion of the restricted stock award was acquired during the marriage, but did not vest until after the divorce complaint was filed and was contingent upon husband’s post-divorce employment efforts for the company. In other words - If husband failed to meet the specific future work requirements set by his employer, those stock options would be revoked.

As a general statement, the law in New Jersey treats unvested stock options and unvested restricted stock units (granted during the marriage but vesting after the divorce filing) as marital assets subject to equitable distribution because their receipt was the result of efforts expended during the marriage since same is a form of deferred compensation “earned during the marriage.”

In M.G. v. S.M., although the husband’s restricted stock award was granted to him during the marriage, the restricted stock award would not vest until after the couple’s divorce and husband was only entitled to receipt of them if he could meet specific future work requirements set by his employer post-divorce. If husband failed to meet these specific future work requirements, those stock options would be revoked.

Similar to the Minnesota Supreme Court case, the New Jersey Appellate Court focused on the requirements set by the employer for the restricted stock to vest. The stock award in M.G. v. S.M. was specifically subject to husband’s future employment efforts and not simply for mere continued employment. Therefore the wife was not entitled to share in those unvested stock options for equitable distribution purposes. It is the same logic as addressed by the Minnesota Supreme Court in its ruling but in reverse.