Don’t be caught off-guard in the new world of post-O’Brien v. O’Brien jurisprudence! Use these tips to prepare yourself to advise clients with substantial non-cash compensation.
By Vincent J. Fiorentino & Alexandra I. Mililli, Financial Advisors
O’Brien v. O’Brien (SC 19635) sent shudders through the halls of family law offices in 2017, adding uncertainty to the ability of one party in a divorce to preserve capital assets in the face of severe and sudden market volatility.
During the pendency of the divorce action, Michael J. O’Brien (Plaintiff) executed three stock transactions without Kathleen E. O’Brien’s (Defendant) consent or a court order. Michael executed these transactions in light of his concerns about the volatility of the stock market and the need to preserve the current value of the stocks. At the remand trial, Kathleen presented expert testimony showing that the value of the stocks and options had increased by approximately $3.5 million since the time of the transactions. Since this represented a significant loss to the marital estate, the court awarded approximately two-thirds of the marital property to Kathleen in compensation.
The court’s decision seems to allow one spouse to second-guess otherwise prudent investment decisions with the benefit of hindsight. Using O’Brien v. O’Brien as a backdrop, here are six ways divorce attorneys can better prepare themselves when advising clients with substantial non-cash compensation after court-issued mandatory orders have been entered.
Highly-compensated individuals may have a laundry-list of deferred compensation awards that could be convertible into common stock going out over many years. This type of compensation could result in transactions that may not be legally allowed during the divorce process. As evidenced in O’Brien v. O’Brien, this scenario provides a fertile environment for mistakes to be made.
Successful executives at public companies often accumulate some or all of the following types of performance-based income: Incentive or Employee Stock Options (ISO/ESOs), Employee Stock Purchase Plans (ESPPs), and Restricted Stock Options (RSOs). Understanding your client’s award compensation in a divorce proceeding is critical; if you are not confident that you understand the nuances of non-cash compensation, bring in an experienced financial expert who deals with these issues every day. Deferred compensation is sometimes daunting to keep track of, so it may require careful management by you and your staff.
Stock option exercise patterns for eligible employees may vary, but more typically fall into an annual, semi-annual, or quarterly schedule. What might be the consequences of a client executing the sale of stock from newly acquired stock options without your counsel? Divorces often take months or even years to run their course. In the case of O’Brien v. O’Brien, the court ultimately ruled that selling marital assets without permission might come with a heavy penalty. Anticipating future dates when awards become vested is a starting point for discussion with your client.
3. Alert Your Client to Upcoming Vesting Dates
It might be prudent to proactively contact and advise your client as to pending vesting schedule items. At the very least you will have performed due diligence, and in the process provided timely and critical counsel to otherwise uninformed clients. Your client may need direction about what not to do to avoid a negative directive from the court.
4. Create a Strategy for Turbulent Markets
In the case where your client has accumulated a substantial amount of a single stock – and will be subject to greater risk – what will this person’s behavior be if sudden and unexpected market volatility comes into play?
Is your client the type who might “shoot first and ask questions later,” perhaps establishing an irreversible transaction that may later be judged as ill-advised? Do you have a playbook by which these situations might be anticipated or avoided?
5. Consider Seeking an Early Motion to Liquidate
Since it can take many months to get a court-approved modification for the purpose of liquidating concentrated positions, would it make sense to file early in anticipation of delay? A well-scrutinized schedule of option exercises can provide adequate lead-time to map out a strategy for the best possible result.
6. Get Spousal Approval if Possible
In lieu of a time-consuming and costly court motion, would direct spousal approval (in writing, of course) be a viable option in this case? Both parties could benefit in the end. Available research reports and advice from a financial advisor may go a long way toward building a case of action.
O’Brien v. O’Brien was more than a “shot-across-the-bow” in cases of highly-compensated individuals who may be left feeling powerless when capital markets enter periods of significant instability and shrinking deferred compensation values.
The nexus of volatile markets, highly concentrated positions, and the stressful process of divorce could create ripe opportunities for otherwise well-intentioned individuals to make mistakes. Don’t be caught flat-footed in the new world of post-O’Brien v. O’Brien jurisprudence.
Vincent J. Fiorentino and Alexandra I. Mililli are financial advisors with The Fiorentino Group at UBS Financial Services in Stamford, CT. Vincent is also the founding member of the Greenwich Chapter of the National Association of Divorce Professionals, whose mission is to provide high-level support to individuals going through a divorce. Alex focuses on helping women in transition, specializing in financial issues involving divorce, widowhood, empty-nesting, career transition, and caregiving. financialservicesinc.ubs.com/team/fiorentino
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Family Lawyer Magazine
Spring 2019 Issue
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