Ruberg, Parry, and the classification of unvested stock options.

• Author: Doupe, Reuben A.
• Position: Florida

In Parry v. Parry, 933 So. 2d 9 (Fla. 2d DCA 2006), the Second District Court of Appeal completed a methodology for the classification of marital and nonmarital employment stock options that began in Ruberg v. Ruberg, 858 So. 2d 1147 (Fla. 2d DCA 2003). This article provides a step-by-step roadmap for the calculation of the marital and nonmarital portions of employment-related stock options.

Step One: Employee Compensation Options or Market Options

* What are Stock Options? One must first understand what stock options are in order to understand how to properly classify them. Stock options are contracts that allow the holder/owner to purchase shares of stock in the future at a stated price, the strike price. Common sense dictates that if the stock is valued higher than the strike price, then the holder will likely exercise the option and purchase the stock at a price under value, then sell the same shares at market value and make a profit. (1) In contrast, if the market value of the stock decreases to a value below the strike price, the holder will probably not exercise the options. In this case, the "underwater options" will remain unexercised until the value increases or they expire.

Employment stock options are generally issued subject to a vesting period. (2) While the options are unvested, the owner cannot exercise them and they are subject to market fluctuations without control. Once the options "vest," they become freely exercisable. This type of future vesting is used by employers to retain employees, as the options will generally be terminated if the employment ceases prior to the vesting date.

* What are Restricted Stock? Restricted stock, which were also at issue in Ruberg and Parry, are unvested shares of stock given to an employee as equity compensation. Restricted stock differ from stock options in that once the shares vest, they are owned entirely by the employee, without the requirement of exercising an option to purchase the stock. (3) Moreover, unlike stock options, there is no cost to the employee with restricted stock awards. Although each restricted stock grant is different, generally, once restricted stock vests, the employee has complete ownership rights of the stock. Restricted stock is only used for employment compensation, and there is no market for them. The restricted stock document, or the general employee compensation plan under which the shares are issued must be carefully reviewed to accurately understand the employee's rights to the shares.

* Market Options or Employment-related Options? The first step in the Ruberg-Parry methodology is to determine whether you are dealing with employment-related stock options and restricted stock. Employment-related stock options are received by an employee as an incentive or compensation from the employer. The methodology discussed herein is not appropriate for market stock options unrelated to employment, which are sold and traded as other market investments. For purposes of equitable distribution of marital assets, market options would not be treated any differently than any other stock or investment asset acquired during the marriage. It is only the employment-related stock options or restricted shares that are subject to the Ruberg/Parry methodology.

Step Two: Ruberg and the "Primary Purpose Test"

In 2003, the Second District Court of Appeal addressed the classification of employment-related unvested stock options head on. In Ruberg, the husband was granted significant stock options as employment incentives from his employer, Intermedia. (4) At the time of the divorce filing, the husband owned 675,301 vested stock options and restricted shares of stock. The trial court ruled that all vested stock options and restricted shares were marital. The husband also held 299,370 unvested stock options and 170,482 unvested restricted shares which the trial court awarded to him as his nonmarital property.

The wife appealed the classification of the unvested restricted shares and stock options as nonmarital property, asserting that all of the stock options, vested or unvested, were deferred compensation and, therefore, marital under F.S. [section] 61.075(5)(a)(4). In affirming the trial court's decision, the Second District established the "primary purpose test." (5)

The sole objective of the "primary purpose test," as stated in Ruberg, is to determine whether restricted shares and stock options are deferred compensation. (6) "The dispositive issue is whether the grant was made in consideration for actions undertaken during the marriage and before the applicable cutoff date." (7) The Ruberg court reasoned that in order to make this determination, the trial court must view the option grants or restricted shares at the point in time that the grant was made and determine whether the grant was made to compensate for past or future services.

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