When couples divorce, one aspect of property settlement often involves dividing stocks or stock options held in the name of one party (usually through work) but which were obtained during the marriage and therefore are considered marital property. Generally, the trial court, in awarding the other party marital shares of the stock, either orders the party with all of the stock to pay a cash value of the marital share to the other spouse as valued on the date of dissolution, or the court orders the party with all of the stock to transfer half of the shares themselves to the other party. The latter option gives the receiving party more control over the stock and to hold the shares in anticipation of the stock continuing to rise.
Sometimes, however, the court can only order the party holding the stock to transfer a marital portion in the future because the shares have not yet vested. What happens if, prior to the vesting and transfer, the stock splits?
That was the issue in a recent case in the Eastern District. In Demars v. Buntenbach, the dissolution judgment awarded husband 96 shares of unvested stock in MasterCard. Prior to the stock vesting, the stock split 10 to 1. When a stock splits, its price drops in the same proportion as the increase in shares. For example, 10 shares of stock A trading at $10 per share splits 2 to 1; the stockholder will now have 20 shares but valued at $5 per share. The value to the shareholder of the additional shares is in the future: if the stock goes up $1 in value, that increase is now twice as valuable to the shareholder because the shareholder has double the number of shares.
When the stock vested, the 96 shares the court allotted to husband became 960 shares by the time of transfer. However, wife only delivered 96 shares to husband, keeping the remaining shares from the split. Husband filed a motion for contempt, stating that the 96 shares became 960 shares before vesting and so he has a right to all 960 shares. Wife disagreed, saying the judgment specifically states 96 shares. The trial court agreed with husband ordered wife to transfer all of the 960 shares. Wife appealed, but the Eastern District agreed with the trial court, finding that because the stock split affected the value of the shares, to give husband less than the 960 shares would be to give him less than the 96 shares as ordered in the judgment. Wife argued that the court was modifying a final property judgment. The appellate court disagreed, stating that the value of the 96 shares before the split is the same as the value of the 960 shares immediately after the split, so the court did not modify the property judgment but simply enforced its terms.
If you have questions about stock splits and divorce, contact us – we can help.