The Baccanti Formula: Understanding Its Application in Massachusetts Divorce Cases

In Massachusetts divorce proceedings, the division of complex assets such as stock options and restricted stock units (RSUs) present unique challenges for both parties and their attorneys. The landmark case of Baccanti v. Morton, 434 Mass. 787 (2001), established a framework for addressing these assets, particularly when they have not yet vested at the time of divorce. This article explores the Baccanti Formula, its applications, and its significance in Massachusetts divorce cases.

The Origin and Purpose of the Baccanti Formula

The Baccanti Formula emerged from the Supreme Judicial Court’s decision in Baccanti v. Morton, where the court addressed the complex issue of how to treat unvested stock options in divorce proceedings. The court held that unvested stock options may be included in the marital estate and divided as part of the equitable division of assets, even though they represent a contingent future benefit.

The formula was developed to provide a systematic method for determining what portion of unvested stock options should be considered marital property subject to division. It recognizes that stock options granted during a marriage may serve multiple purposes, including compensation for past services, present services, and incentives for future employment.

How the Baccanti Formula Works

The Baccanti Formula employs a time-based approach to determine the marital portion of unvested stock options. The basic calculation involves:

The number of unvested shares is multiplied by a fraction whose numerator represents the length of time that the employee owned the options prior to dissolution of 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.

This can be expressed as:

Marital Portion = Unvested Shares × (Time from Grant to Divorce ÷ Time from Grant to Vesting)

The resulting product represents the number of shares subject to division as part of the marital estate.

Burden of Proof and Presumptions

A significant aspect of the Baccanti decision is the establishment of a presumption that all unvested stock options granted during the marriage are marital property. The court placed the burden of proof on the party challenging the inclusion of stock options in the marital estate.

If the party with the burden of proof establishes that the options were given in whole or in part for future services to be performed after dissolution of the marriage, then the Baccanti Formula is applied to determine the appropriate division. Without such evidence, the court may treat all unvested options as marital property subject to division.

Application to Different Types of Equity Compensation

While the Baccanti case specifically addressed stock options, Massachusetts courts have applied similar principles to other forms of equity compensation, including restricted stock units (RSUs). Like stock options, RSUs often feature in executive compensation packages and may have vesting schedules that extend beyond the date of divorce.

For unvested RSUs, the implications in divorce settlements revolve around treating them as either future income or marital property. Massachusetts divorce laws generally consider these units as part of the divisible marital assets, subject to the same time-based analysis as stock options.

Valuation Date Considerations

The date of valuation under the Baccanti Formula can significantly affect the number of unvested stock options available for division. In Ludwig v. Lamee-Ludwig, 91 Mass. App. Ct. 36, 40 (2017), the Appeals Court held that the lower court did not abuse its discretion by valuing unvested stock options as of the date closest to the hearing on the contested issues, rather than on the date the parties separated, which was approximately six months earlier.

This highlights the importance of presenting the court with evidence to support a finding regarding the appropriate valuation date. The timing can have substantial financial implications, particularly in volatile markets or for rapidly growing companies.

Distribution Methods for Unvested Options

Since determining a present value for unvested stock options can be difficult, the Baccanti court noted that it is often more appropriate to divide these assets if and when the payments are received. This “if and when” approach recognizes the contingent nature of unvested options and addresses the practical challenges of valuation.

Under this approach, the non-employee spouse receives their share of the options only if and when the employee spouse exercises the options or receives the stock. This method accounts for the possibility that options may never vest due to termination of employment or other factors.

Practical Considerations for Attorneys and Clients

When dealing with unvested stock options or RSUs in a Massachusetts divorce, several practical considerations should be kept in mind:

First, comprehensive discovery is essential. Attorneys should request detailed information about all equity compensation, including grant documents, vesting schedules, and company policies regarding termination of employment.

Second, expert assistance may be necessary. Financial experts can help value these complex assets and determine the appropriate application of the Baccanti Formula to the specific circumstances of the case.

Third, tax implications must be considered. The exercise of stock options and vesting of RSUs have tax consequences that should be addressed in the divorce agreement to ensure an equitable division.

Fourth, the divorce agreement should include provisions for what happens if the employee spouse leaves the company before options vest or if the company is acquired or goes public.

Recent Developments and Refinements

While the Baccanti Formula provides a framework for dividing unvested equity compensation, courts have recognized that it might not be applicable in all cases. The Supreme Judicial Court noted in Baccanti that specific factors of each case must be taken into account when applying the formula.

In Wooters v. Wooters, 74 Mass. App. Ct. 839 (2009), the Appeals Court addressed a situation where a divorce agreement was silent on the issue of future stock options. The court held that income derived from stock options could be treated as income for support purposes, adding another dimension to how these assets are handled in divorce proceedings.

Similarly, in Ludwig v. Lamee-Ludwig, 91 Mass. App. Ct. 36, 39 (2017), the Appeals Court affirmed that alimony provisions of the parties’ separation agreement should be applied to income the husband realizes from unvested stock options that were not subject to equitable division of marital assets.

The Intersection with Cavanagh v. Cavanagh

The treatment of equity compensation in divorce cases has been further complicated by the recent decision in Cavanagh v. Cavanagh, 490 Mass. 398 (2022), which expanded the definition of income for support calculations. The court held that employer contributions to retirement accounts and health savings accounts, as well as interest and dividends, constitute income to be used to calculate child support.

This expanded definition raises questions about how income from stock options and RSUs should be treated for support purposes, particularly when those same assets have already been divided as property under the Baccanti Formula. Attorneys must now navigate this potential overlap carefully to avoid double-counting these assets.

Conclusion

The Baccanti Formula provides a structured approach to dividing equity compensation that may not fully vest until after the marriage has ended. By recognizing that unvested stock options and similar assets may be included in the marital estate while also acknowledging their contingent nature, the formula strikes a balance between the interests of both spouses.

However, the application of the formula is not mechanical. It requires careful consideration of the specific circumstances of each case, including the purpose of the equity grants, the length of the marriage, the vesting schedule, and the contributions of each spouse to the marital partnership.

For individuals facing divorce with unvested stock options or RSUs at stake, consulting with a Massachusetts family law attorney who understands these assets is essential. With proper guidance, these assets can be divided fairly, ensuring that both parties receive their equitable share of the marital estate in accordance with Massachusetts law.