Appeals Court upholds division of husband’s closely held securities

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The wife in a divorce was entitled to a 50-percent share of her husband’s closely held securities obtained in connection with his employment, notwithstanding the husband’s argument that the division of those assets should have been apportioned in his favor under existing Supreme Judicial Court precedent, a panel of the Appeals Court has determined.

The case involved a judgment of divorce nisi in the marriage of Karim Suwwan De Felipe and Leila El-Youssef Suwwan that addressed the distribution of “nonvoting common shares” and “investor entity units” that the husband obtained as an employee of Fidelity Research & Management Co. after filing for divorce in 2020.

A Suffolk Probate & Family Court judge awarded the wife 50 percent of the disputed NVCs and IEUs. At the lower court and on appeal, the husband argued that under the “modified time rule” formula adopted by the SJC in its 2001 decision in Baccanti v. Morton, the wife should have received a lesser percentage of his equity compensation.

The Baccanti court ruled that stock options are a marital asset to be divided between divorcing spouses with “non-vested” options apportioned according to a vesting percentage.

In affirming the lower court, the Appeals Court panel found Baccanti inapposite based on the differences between stock options and the complex financial instruments at issue in the case before it.

“The Baccanti analysis advanced by the husband was flawed because it did not consider the different consequences of vesting for stock options and NVCs,” Judge Robert E. Toone Jr. wrote for the panel. “As the [trial] judge explained, unlike stock options, NVCs ‘represent an actual purchase of equity in Fidelity, along with the present right to benefit in the financial successes of the company.’ In other words, there is no delay in receiving the income stream generated by NVCs. Thus, even while unvested, the husband’s 2020 NVCs ‘demonstrated significant gain and potential for dividends or distributions of IEUs.’”

The panel further affirmed the trial judge’s order that distribution from the assets in dispute be on an “if and when received” basis.

“The husband contends that this ‘if and when received’ distribution ‘will leave the parties financially entangled, possibly for decades,’” Toone wrote. “Any such entanglement, however, results from the alienation restrictions imposed on the assets by Fidelity, along with the parties’ failure to provide a net present value for the assets.”

The 20-page decision is Suwwan De Felipe v. El-Youssef Suwwan, Lawyers Weekly No. 11-071-25.

Equitable result?

The wife’s counsel, Stephen A. MacKenzie of Boston, said in an email that the affirmance of the lower court’s decision reinforced the necessity of a “nuanced, fact-specific analysis over routine application” of a rule to achieve an equitable result.

While many practitioners default to applying the Baccanti time-rule formula based on an asset being unvested, we believe the Appeals Court’s decision in this matter underscores a crucial distinction.

— Stephen A. MacKenzie, Boston

MacKenzie acknowledged that the disposition of equity compensation is a “frequent and intricate challenge” in complex divorce matters.

“While many practitioners default to applying the Baccanti time-rule formula based on an asset being unvested (partially or otherwise), we … believe the Appeals Court’s decision in this matter underscores a crucial distinction: The existence of an unvested asset with a vesting schedule does not, by default, mandate a Baccanti calculation,” MacKenzie wrote.

The husband’s attorney, Nancy F. Baskin of Newton, attributed the Appeals Court’s decision not to apply the Baccanti time-rule formula to the NVCs in her client’s case to the specific characteristics of the NVCs and what the panel perceived as their differences from the options at issue in Baccanti.

“I think the decision will invite more litigation regarding the application of Baccanti to all unvested assets,” Baskin said. “Ultimately, the appellate court considered this issue to be a matter of the trial court’s discretion and did not find the allocation of this asset to be an abuse of that discretion.”

I think the decision will invite more litigation regarding the application of Baccanti to all unvested assets.

— Nancy F. Baskin, Newton

Sharon family law attorney Kristin N. Weberg said disputes over property division such as the one in Suwwan De Felipe tend to arise when an asset is not clearly labeled as something practitioners are most familiar with.

“If it’s not called a [restricted stock unit], or it’s not called a stock option, it’s becoming increasingly common to have these types of disputes,” Weberg said. “What I hear from my clients is that there’s a lot of discussion at the corporate level as to how to standardize executive compensation, but as divorce attorneys we’re not seeing that yet.”

Weberg explained that such disputes boil down to how the asset will be divided based on whether it falls into the category of a marital asset or it is an “incentive instrument.”

“What this case shows us as practitioners is that we need to look at the function of the compensation and the purpose of the compensation to determine whether or not it’s a reward for work that has already been done during the marriage or whether it is an incentive for future labor,” Weberg said.

Judgment of divorce nisi

According to court records, the parties married in 2006 and have one minor child. The husband began working as a research analyst and portfolio manager for Fidelity Research & Management Co. in 2015 and continues to be employed by the company.

The husband filed for divorce in September 2020, asserting an irretrievable breakdown of the marriage. The wife later filed a counterclaim for divorce. Following an extended trial conducted over multiple days in 2022 and 2023, the trial judge entered his findings and a judgment nisi in April 2024.

The judgment provided for the equitable distribution of marital assets, which included several homes, multiple cars and a sailboat. In addition, the trial court equally divided the husband’s Fidelity retiree health plan as well as his Fidelity brokerage and 401(k) accounts.

The trial court also divided the husband’s NVCs and IEUs. NVCs convey an ownership interest in Fidelity without a right to vote on the company’s business decisions. Fidelity is not a publicly traded company. Accordingly, Fidelity sets the net asset value for shares internally.

Fidelity confers the right to purchase NVCs to a small group of highly valued employees, providing them with low-interest loans to purchase NVCs, with the loan being paid off at the time the assets vest. NVCs remain unvested for three years and then vest at a rate of 20 percent a year for five years.

The husband became eligible for and purchased 20,000 NVCs in December 2020, three months after filing for divorce.

At the same time the husband made his purchase of NVCs, he used a low-interest loan from Fidelity to purchase 575,000 IEUs, which are stocks in companies owned or partially owned by Fidelity. In addition to select employees having the opportunity to invest in IEUs when they purchase NVCs, IEUs may be distributed to NVC owners in lieu of or in addition to cash dividends.

The owners of IEUs receive intermittent dividends at the discretion of the individual companies, which set the net asset value of the shares they issue. Meanwhile, IEUs are fully vested when issued and can only be transferred to authorized holders or assignees upon repayment of the Fidelity loans.

In 2022, the husband made additional purchases of NVCs and IEUs, but the trial judge in distributing marital assets did not assign to the wife any interest in those assets.

However, the judge assigned the wife a 50-percent interest in the 2020 NVCs and 2020 IEUs, while also making her responsible for 50 percent of the outstanding loan balances for those assets.

In the absence of the husband’s ability to assign the wife’s interests to her or to a trust for her benefit, the trial court’s judgment ordered the husband to hold the 2020 NVCs and IEUs for the wife’s benefit until either he left Fidelity or until the wife directed him to sell the shares on her behalf.

Further, the court’s judgment included a so-called “if and when received” provision, requiring the husband to pay the wife dividends or distributions on the NVCs and IEUs held for her benefit.

No abuse of discretion

In Baccanti, the SJC adopted the time-rule formula, which calculated the number of unvested stock options subject to division in that case by multiplying the total by “a fraction whose numerator represents the length of time that the employee owned the options prior to dissolution of the marriage (i.e., the length of time that the employee owned the options prior to and during the marriage), and whose denominator represents the time between the date the options were issued and the date on which they are scheduled to vest.”

In Suwwan De Felipe, the husband’s accountant applied the Baccanti time-rule formula to render an expert opinion at trial that 12,616 of the 20,000 2020 NVCs were “unvested and therefore not subject to division.”

But the Appeals Court panel found that there was ample evidence to support the trial court’s determination that the Baccanti time-rule formula should not be applied. Specifically, Toone cited evidence that the husband’s unvested 2020 NVCs generated dividends in the amount of $202,248 in 2021 and $214,096 in 2022, with the shares themselves appreciating in value from $1,879,220 at the time of purchase to $2,891,076 at the end of trial.

“To be sure, under the terms of Fidelity’s operating agreement, an owner of NVCs generally cannot realize such appreciation in value (by transferring the shares or selling them back to Fidelity) until they vest, and in order for the 2020 NVCs to vest, the husband must remain employed during the graduated vesting period,” Toone wrote. “Nevertheless, given the income that NVCs can generate even when unvested, it would not have been equitable to determine which portion should be included in the marital estate based on a formula designed for the entirely contingent value of unvested stock options.”

Toone observed that the SJC itself in Baccanti recognized that “one formula will not necessarily work in every case” and that other methods of apportionment might be appropriate in a given case.

In that regard, Toone noted that the trial judge said she would consider a division through offset or payment from the husband had the parties presented “a calculation of the present value of the NVCs that more fully captured” their benefits.

“No such calculation was offered, however,” Toone wrote. “Given these circumstances, we conclude that the judge’s decision to include the 2020 NVCs (but not the 2022 NVCs) in the marital estate and assign to the wife a fifty-percent interest in those assets, as well as a fifty-percent responsibility for the associated loan, was prudent and not ‘plainly wrong and excessive.’”