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.
T.W. Arnold
