Securing What’s Rightfully Hers: Ann’s Journey to Financial Justice

A Narrative Story of Sweere v. Gilbert-Sweere, 534 N.W.2d 294 (Minn. Ct. App. 1995)

Ann Gilbert* felt her stomach drop when she learned about the $200,000 her ex-husband had quietly pocketed from their company stock sale. After their 1992 divorce, she thought everything had been settled fairly. The decree clearly stated that if Ricky sold his shares in Pierce Companies within eighteen months, she would receive half of the proceeds after certain deductions. She had trusted the process, believing their agreement would protect her financial future.

When Ricky Sweere* sold the stock back to Pierce Companies just two months after their divorce, Ann discovered he had received $1.55 million total—but claimed only $1.35 million counted toward their shared proceeds. The missing $200,000? Ricky insisted it was separate payment for agreeing not to compete with the company, money that belonged to him alone.

Ann felt a familiar knot of anxiety in her chest. Throughout their marriage, she had watched Ricky build his career as executive vice president of Pierce Companies, knowing that the 1,728 shares they owned together—25% of the company—represented their shared investment in their future. Now it seemed like that security was slipping away through a legal loophole she hadn’t anticipated.

The lower court had sided with Ricky, accepting his argument that the $200,000 was purely personal compensation for his promise not to compete. Ann felt frustrated and unheard, but she refused to give up. She knew something wasn’t right about this arrangement.

Her persistence paid off when the Minnesota Court of Appeals carefully examined what the non-compete agreement actually covered. The court discovered that Ricky’s agreement included five different promises: not to reveal trade secrets, not to keep company property, not to solicit customers, not to recruit employees, and not to compete. Only one of these promises—the competition restriction—truly limited Ricky’s personal future earnings.

Ann felt a wave of relief and validation when the court ruled in her favor. The judges recognized that most of the $200,000 payment was actually securing the transfer of company assets and goodwill that rightfully belonged to the marital estate. The court ordered a new hearing to determine exactly how much of that money should be shared with Ann.

Finally, Ann felt heard and protected. The legal system had recognized that her financial security mattered, and that complex business arrangements couldn’t be used to hide marital assets from fair division.

*This story is based on the true facts of the appellate court’s decision, but the personal experiences and emotions described are a fictional representation to bring the case to life.

Question: How is income treated in a divorce? Can it be considered both income and property?

Answer: Equity-based awards compensate employees based on changes in the market value of a company and the overall success of the company. If the company is successful, this compensation can be significant while not requiring the company to deplete its cash resources. As a result, many start-up companies use equity-based awards to attract and retain talent.

Question: Do equity-based awards give you ownership in the company?

Answer: Some equity-based awards can give you ownership in the company, especially in private companies where ownership is limited, and they might be converted to cash when the company is sold.

Equity-based awards also provide for the transfer of ownership, in some cases based upon performance. These awards may be used by privately-held corporations, partnerships, and limited liability companies (LLCs) where ownership is restricted. Typically, the awards will be converted to cash upon an exit event, but continued ownership and participation in management may also be desired. Most public companies grant some form of equity-based award. In this case, the shares received are often sold by the employee shortly after receipt, thus, the employee ultimately receives cash and eliminates any ongoing market risk.

Question: What is a stock option?

Answer: A stock option gives you the right to buy company shares at a set price by a certain date, but you don’t get voting rights or dividends until you actually buy the shares.

An option is a right to buy shares (or other equity interests, such as partnership interests or LLC member- ships) at a stipulated price on or before a specific date. The option holder can choose whether or when to exercise the option. If the shares subject to the option have a value at least equal to the option exercise price, the option holder may want to exercise the option and purchase the shares. During the life of the option (from vesting until the option expires or is exercised), the option holder has no rights as a shareholder regarding matters such as voting, dividends, or liquidation.

Question: What is restricted stock?

Answer: Restricted stock gives you actual company shares that you can’t sell right away, but you do get voting rights and dividends while you wait for the restrictions to end.

In a restricted stock award, the recipient receives shares of stock, but cannot transfer or sell the shares. Restricted stock will be subject to forfeiture unless and until the stated contingencies are met. Usually, the recipient does not pay for the shares. In some cases, the company may have the right to repurchase the shares for a fixed price if the risks of forfeiture are not met. While the shares are subject to risk of forfeiture, the recipient has voting and dividend rights.

Question: What are restricted units?

Answer: Restricted units are like restricted stock but for LLCs, where you get membership interests that you can’t transfer until certain conditions are met.

Restricted units are similar to restricted stock awards but are issued by LLCs. In this context, the recipient receives membership interests in the LLC, but cannot transfer or sell the membership interests until the risks of forfeiture have lapsed. For purposes of this discussion, references to restricted stock will include restricted units.

Question: What is a restricted stock unit (RSU)?

Answer: An RSU gives you the right to receive company shares later when certain conditions are met, but you don’t get any shareholder rights while you’re waiting.

Under a restricted stock unit (RSU), the recipient receives the right to receive shares of stock (or, in the case of an LLC, membership interests) when certain conditions have been met. Thus, the issuance of the stock or units does not occur on the date the award is granted, but occurs at some later date. While the RSUs are subject to forfeiture, the recipient does not have any rights as a shareholder.

Question: What is a stock appreciation right (SAR)?

Answer: A SAR lets you receive cash or stock based on how much the company’s stock value has increased since you got the award, and you can choose when to use it.

A SAR is the right to receive a cash payment or shares of stock based upon the change in the value of the underlying stock from the date of grant to the date of exercise. Like an option, the recipient can choose whether or when to exercise the SAR.

Question: What determines your rights with equity-based compensation?

Answer: Your rights are determined by the contract you signed and the company’s compensation plan, which spell out exactly what you can and can’t do with your award.

All types of awards are essentially contractual arrangements between the issuer and the award recipient. Depending on the terms of the award, that contractual relationship may result in an ownership interest. In all cases, the provisions of the award agreement and the governing plan (if any) pursuant to which the award was granted define the rights of the award recipient.

Question: Who can get equity-based compensation awards?

Answer: Companies typically give these awards to employees, directors, officers, and independent contractors like consultants, and they’re given as payment for services to the company.

Awards made under equity-based compensation plans are governed by the terms of the plan. Typically, these plans provide that awards may be granted to specific categories of individuals, including employees, directors (whether employees or not), officers, and independent contractors (such as sales and marketing representatives, outside accounting and service providers, and consultants). Equity-based compensation awards are granted for services to the issuer. Contractual rights that are economically similar and given for non-compensatory purposes are typically called “warrants” (as opposed to “options”), although this terminology is not mandated. Warrants are often given as a means of providing added compensation to lenders or vendors, or are used to permit a later and more accurate measurement of the value of a business being sold or financed.

Question: What rules govern equity-based compensation awards?

Answer: The rules come from several sources in order of importance: corporate and tax laws, company governing documents, the compensation plan, and your individual award agreement.

Most (but not all) equity-based compensation awards are made pursuant to some form of written plan. Such plans serve multiple purposes, principal among which are imposing common terms and simplifying award agreements. The following authorities govern the rights of the award recipient (in order of authority), if applicable: corporate and tax laws (and others); corporate or other entity-governing documents; the plan pursuant to which the award was granted; and the award agreement. Many issuers adopt multiple plans, depending sometimes on the categories of potential recipients, sometimes on changes to laws and rules, or as existing plans approach expiration. However, most plans authorize the grant of many types of awards.

Question: Who is eligible to receive equity-based compensation?

Answer: Eligibility depends on your relationship with the company, how long you’ve worked there, whether you’re full-time or part-time, and your position in management.

Most plans limit eligibility for awards. The nature of the award recipient’s relationship to the issuer may limit eligibility, both generally and by the specific type of grant. Eligibility may be tied to length of employment, status as full- or part-time, or rank in management. Eligibility requirements may prevent participation, limit participation to certain types of awards, or impose limitations on sizes of awards. If the plan does not expressly limit eligibility, the company may develop internal policies for determining who is eligible to receive awards.

Question: What does “vesting” mean?

Answer: Vesting means you have to meet certain conditions, usually staying employed for a certain time, before you can actually use or benefit from your equity award.

Vesting requires that the recipient satisfy certain conditions before enjoying the benefits of the award. The most common vesting condition is continued employment or service to the issuer through the vesting date. On each vesting date, limitations on a portion of the award are removed. Awards may be forfeited (in other words, fail to vest) if specified conditions change or if these conditions remain unmet by a stated date. Vesting requirements are stated at the grant date, although they may be later waived or relaxed.

Question: What are common vesting schedules?

Answer: Common vesting schedules include getting one-third of your award each year for three years, or getting one-third after the first year and then small monthly portions for two more years.

Some common vesting patterns include: one-third of the award will vest on each of the first three anniversaries of the date of grant; one-third will vest on the first anniversary of the date of grant and 1/36th will vest on each month thereafter for 24 months; and the entire award will vest on a stated anniversary of the date of grant.

Question: Can vesting happen faster than originally planned?

Answer: Yes, vesting can be sped up based on performance goals like hitting sales targets or if the company gets sold.

Vesting dates may be subject to acceleration based on measurable factors (such as performance goals) or specified events. Examples include performance targets based on sales, gross profit, or net profit figures, the market value of the issuer’s stock, or a sale of the company.

Question: Are equity awards given for past work or future work?

Answer: Equity awards can be given for past work, future work, or both, with the past work portion usually vesting immediately and the future work portion requiring you to stay employed.

Awards may be granted as compensation or incentives for future services, as compensation for past services, or a combination of both. Generally, when an award is granted for past services, some portion of the award will be vested immediately, while the portion granted for future services will be subject to vesting conditions. However, there may be wide variation of the importance and weight assigned to past and future services in determining the amounts and terms of options and the vesting schedule.

Question: Do companies clearly explain whether awards are for past or future work?

Answer: Most companies don’t clearly explain whether awards are for past or future work, and even company board members might have different opinions about the same award.

Most awards are granted without a clear articulation of the weighting of past and future services as bases for the award. Members of the governing board or committee granting an award may have differing views as to the same award. Some companies are consistent in this weighting, while others are more ad hoc.