By: Jessica A. When proceeding through a divorce case in Colorado, there are sometimes unique property items that raise special questions when it comes to the treatment of those items for division purposes. For example, trusts, business interests, PERA accounts, etc. Another property item that has unique qualities is stock grants or stock options in a divorce.
Depending on the status of those items, they may not even be considered a property item that is up for discussion. If the stock options are vested, they are considered property and would then be divided as any other property item i. If the stock options are not vested, though, additional inquiries need to be made in order to determine whether the stocks are marital property or not. Unfortunately, the inquiry is not as straightforward as whether the stock options are vested. Unvested stock options can still be considered marital property subject to division.
The main inquiry relates to the purpose for which the stock options were granted.
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If the stocks were granted for past performance, i. That is not the end of the inquiry, though, as obviously those stocks must be given a value before they can be divided. The party retaining the stock options will argue the value should be zero since the options are not vested and cannot be presently exercised.
Employee Stock Options And Divorce
The party not retaining the options, and seeking an equalization payment or property off-set for the stocks, will likely argue they should be valued based on the stock price for the options at the date of divorce, regardless of whether they can be exercised or not. In so holding, the court impressed a constructive trust on the husband, in favor of the wife, for a portion of the options.
The court reasoned that imposition of a constructive trust would result in the most equitable outcome to the parties without creating undue financial and business liabilities. It should be noted that all of the options were granted during the course of the marriage. Although not specifically stated, however, it appears that some or all of the options were not fully vested because they were subject to divestiture under certain circumstances.
See section below regarding determining distributive shares. Present Valuation Method. The Present Valuation Method is another commonly-used mode of distribution. Under this method, the non-employed spouse must receive his or her share of the current value of the options in either cash or a cash equivalent. This method should account for mortality discounts, interest, inflation and any applicable taxes. Out-of-state matrimonial courts differ on the preferred method of stock option distribution depending on the nature of the options.
Transfer to the non-employee spouse, if available, is the preferable distribution method because it effects a clean break between the parties.
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This method negates any need for further communication between the parties and eradicates the need to implement valuation methodologies. Transfer of stock options, however, is rarely permitted by employee stock option plans. Therefore, some courts have devised alternative distribution methods. One such method allows the parties to hold the options as tenants-in-common.
Another alternative allows the non-employee spouse, upon furnishing the requisite capital, to order his or her portion of the options exercised. This latter option is similar to the constructive trust solution devised in the Callahan decision.
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The aforementioned alternatives are not an exhaustive list of distribution methods devised by courts. In fact, trial courts are accorded and often use broad discretion in tailoring approaches to the facts of individual cases. As a practice point, please note that when distributing options in kind, parties should be advised against violating insider trading rules. The New Jersey Approach. Pascale , N. Basically, New Jersey courts hold that assets or property acquired after the termination of the marriage, but as a result of efforts expended during the marriage, will generally be included in the marital estate and are, therefore, subject to equitable distribution.
The problem is telling the difference. Pascale v.
Pascale is the seminal New Jersey case regarding stock option distributions. In Pascale , the parties were married on June 19, ; a divorce complaint was filed on October 28, In , while still married, Mrs. As of the trial date, Mrs. Pascale had acquired and owned 20, stock options, all of which were awarded by her employer between April 14, and November 15, Seven thousand, three hundred of those options were granted subsequent to the filing of the divorce complaint.
The dispute arose in response to two sets of options granted on November 7, , one for 4, shares and another consisting of 1, shares. The disputed options were awarded approximately ten days after the wife filed for divorce. In addition, she asserted that the remaining 4, shares were also excluded from the marital estate because they were issued in anticipation of increased employment responsibilities resulting from a promotion. The trial court, however, held that neither of the two blocks of options could be excluded from the marital estate.
Therefore, both were subject to equitable distribution. However, the Appellate Division found that only one of the two sets of options constituted part of the marital estate. However, the Appellate Division found that the remaining 1, options were granted in recognition of past employment performance and were, therefore, properly included in the marital estate notwithstanding the date of complaint rule. In reversing the appellate court, the Supreme Court focused on N.
Painter , 65 N. Landwehr , N. The court further noted that obvious inequity [. How would the New Jersey Supreme Court have held if it determined that a block of options resulted from both pre and post marital efforts?
Thus, such common problems often result in murky dilemmas for litigants and their attorneys. Although New Jersey has only two reported decisions regarding stock options, to wit, Callahan and Pascale , there has been one unreported New Jersey Appellate Division Case which has also addressed the issue.
AT1 argued June 3, and decided on June 24, The Klein court addressed the stock option award which was made two months after the Complaint for Divorce was filed.
Division of Stock Options and Restricted Stock Units in Colorado Divorce
The defendant further argued that he had to remain employed at Warner-Lambert in order to exercise the options. The Klein Appellate Court then went on to address the most prevalent issues when distributing equitable distribution of stock options, to wit, the distribution of unvested stock options. Moore v Moore NJ , The Klein Court noted that there were no reported decisions in New Jersey applying this concept to unmatured stock options, but note that the cases related to pension benefits are analogous.
This writer agrees with the analogy to distribution of retirement benefits, but emphasizes such retirement benefits are only divided after applying an appropriate coverture fraction to assure that only the marital portion of the retirement benefit is distributed. In essence, the defendant received no relief either by way of the distributable portion of the options subject to distribution, the valuation of those options, or his spouses entitlement therein based upon the fact that these options were not exercisable as of the date of the complaint and his continued post complaint employment was required for these options to continue to exist.
There would seem to be some inequity in this result. To date, New Jersey has not yet adopted a bright-line rule to determine how unvested options should be distributed. The Out-of-State Approach. The majority of states, like New Jersey, treat unvested stock options as property that is subject to distribution in marital dissolution proceedings. See Garcia v. Mayer, N. MacAleer , A. Berrington , A. Many jurisdictions first consider whether the options were granted for past, present or future services.
However, most courts have learned that employee stock options are usually not granted for any one reason.
Instead, the majority of courts have realized that options are often granted for a conglomeration of reasons including compensation for past, present and future services. As a result, when dealing with unvested options, many courts sought to develop or adopt a structured scheme useful to determining the distributable share of such options. The most prevalent time rule fraction evolved from a formula implemented by the California Court of Appeals in In re Marriage of Hug , Cal.
In Hug , the trial court expressed the options that were part of the marital estate in terms of a fraction.
Dividing Stock Options and Restricted Stock Units in Divorce
The denominator was established by first determining the difference, in months, between commencement of employment and the date when the first option was exercisable. This factor was then multiplied by the number of shares that could be purchased on the date that the option was first exercisable. The remaining options were determined to be the separate property of the husband, the employed spouse.
The husband in Hug agreed that the options were subject to division according to the time rule; however, he contended that the trial court used an erroneous formula. He argued that the proper time rule should incorporate the date when the option was granted rather than the date that he commenced employment because the options were not granted as an incentive to accept such employment. He further argued that each annual option was a separate and distinct option granted as compensation for services rendered during that year. Thus, he argued that the options were his own separate property because they each accrued after the date of separation.
The Hug court examined the various reasons why corporations confer stock options to employees and found that no single characterization could be given to employee stock option grants. Thus, the court determined that whether they are properly characterized as compensation for past, present, or future services, or all three, is fact specific. Various versions of coverture factors have since evolved as courts addressed different factual circumstances.
A recent Connecticut case, Wendt v. Wendt , undertakes a lengthy analysis of the competing arguments and most commonly used coverture factors. See generally Wendt , WL DeJesus , 90 N. The DeJesus court laid out the following four-step procedure to guide courts in dividing such options:. Determine the portion of shares issued for past and future services;[25]. This would be the marital portion;.
Determine the portion granted as an incentive for future services; the marital share of that portion will be determined by a time rule; and. Calculate the portion found to be marital by adding:. The sum result will then be divided between the parties using the equitable distribution criteria. The DeJesus court was persuaded that the Miller type analysis best accommodated the tensions that often arise when attempting to determine how options should be distributed in lieu of unclear or competing reasons for the grant.
For example, the highest court of New York found that the Miller analysis properly distinguished between portions of stock plans acquired during the marriage versus those acquired outside of the marriage. In addition, the court found that the Miller analysis also sufficiently differentiated between stock plans designed to compensate for past services and those designed to compensate for future services. However, notwithstanding the complexity of these methods, the danger of rigidity and resulting unfairness from a formalistic application of such approaches still exists.
This issue was addressed by an Oregon court in In re Powell , P. In general, in a divorce proceeding, stock options may be classified by courts as either an asset subject to equitable distribution or qualified as an income stream for the purpose of calculating spousal support and child support Michael J. Bar J. The question of which classification is most appropriate is one which courts are grappling with at present with increasing frequency as stock options become a standard means of reward and incentive for many executives in the United States.