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Are STOCK OPTIONS COMMUNITY PROPERTY?

Q. How are stock options treated if I decide to dissolve my marriage?


A. Stock options are commonly used to attract or retain key employees with incentives outside the basic salary structure. Whether you are dissolving a marriage or a RDP (registered domestic partnership), valuing and dividing stock options can be tricky.

The simplest situation is where the stock options were earned before separation. In such cases they are clearly CP. But often there is a question of when these benefits were in fact "earned" because employee services that generate them are sometimes contributed over long periods. These may include a pre-marriage period (when time, skill, and efforts of either party are always SP) and they may extend for some time past the date of physical separation (and so be SP). The question when stock options were earned becomes quite fact specific and depends a lot on what the employer intended and what kind of options they are. In re Marriage of Hug (1984) 154 Cal.App.3d 780, 201 Cal.Rptr. 676.

Stock options that are earned during the marriage, but vest afterwards, generally belong to the community. They are treated as deferred compensation, like certain types of pensions. Usually an employee is granted the right to buy stock, now or in the future, at a fixed price. They may be forced to sell that stock back to the company if they leave. What controls whether the options are characterized as community or separate is when they are granted and when they vest. If they do not vest at all, as where a minimum number of years of service by the employee are required which is not met (even where the employee-spouse quits after separation and so blows them up), they are neither separate or community property - instead, they are not viewed as a property interest at all. In those cases they were a "mere expectancy" that never matured.

In cases where an employee must work for the company for a fixed number of years to be eligible, but the spouses or RDP's separate before those years have been served, the options have both community and SP attributes. To the extent that they result from post-separation efforts too, they must be apportioned between CP and SP. As with how interests in pensions are commonly evaluated, courts tend to follow a "time-rule". The time rule looks like this:

DOG to DOS
__________ X / of Shares Exercisable = C/P shares
DOG to DOV

DOG = Date of Grant
DOS = Date of Separation
DOV = Date of Vesting

Stock options that are granted after the DOS are usually treated as the separate property of the recipient, even where some of the employee's contributions occurred before. This is because of the importance of what the employer intended to the analysis.

This Blog is intended just to give you some sense of the law over these potentially complex questions. As with everything, different facts can lead to different outcomes and stock options are complicated financial devices.

Also, stock option disputes sometimes involve claims of fraud - as where a small closely held company or family business tries to funnel or manipulate how when the options are granted or vest in an effort to favor one spouse over another.

Perhaps the only practical way that a former spouse or partner may learn that stock options exist or when they vest or are exercised is by the self-disclosure of the employee. The law is clear that spouses and domestic partners are required by their fiduciary obligations to make these disclosures. Refusals to disclose can have severe consequences under Family Code section 1101.



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