Article
| Publication year | 2021 |
| Pages | 17 |
January, 2021
Unsettled Issue in a Divorce Suit: Should Granted, Unvested Stock Options Constitute a Marital Asset or a Separate Asset?
by Sharon A. Donovan and Kayla H. Quam
For domestic cases in Utah, the general rule is that courts equitably divide marital property and return premarital property, gifted property, or inherited property to the acquiring spouse. Property that is earned after entry of the decree of divorce is generally earmarked as the acquiring spouse’s separate property.
With stock options granted during the marriage but that do not vest until after the entry of the decree of divorce, various state court rulings have lacked consensus. In Utah, there is no reported case law that directly addresses the question of whether granted but unvested stock options are deemed an employee spouse’s separate asset or a marital asset.
This article explores that question by (1) discussing when to divide such stock options and two common methods of division; (2) examining how other state courts have addressed the issue of granted, unvested stock options; and (3) analyzing Utah cases that provide analogous reasoning that could be applicable to the issue of granted, unvested stock options in Utah courts.
Before getting into the analysis, by way of background, a stock option is defined as “the right to buy a designated stock at anytime within a specified period at a determinable price, if the holder of the option chooses.” Eric Hollowell, Divorce and Separation: Treatment of Stock Options for Purposes of Dividing Marital Property, 46 A.L.R.4th 640, § 1[a] (originally published in 1986). The grant date is defined as the date the option “becomes the employee’s property.” See Tiffany A. McFarland, Nat’l Bus. Inst., Dividing Stock Options in Divorce 1 (2018). In contrast, if a stock vests, it means it is “exercisable” or “matured,” and the employee may use the option to buy the stock. See Hollowell, supra at § 2[a].
Classifying and Dividing Granted, Unvested Stock Options
The first step in deciding whether a granted, unvested stock option should be divided in a divorce suit is to focus on classification of the stock option. One should ask:
• When did the grant of options occur: before the marriage, during the marriage, after separation, or after the date of divorce?
• When did or does the vesting occur?
• When did or do the options become exercisable?
• If the grant occurred during the marriage, was it toward the beginning of the marriage or at the end?
• Were the stock options granted to reward past work or to incentivize future work?
See McFarland, supra at 8. The last point is key. Employers offer stock options to reward past work and/or to incentivize future work. See id. If the grant of stock options is to reward past work – presumably during the marriage – the argument that the asset is a marital asset is strengthened. If the reward of the stock options is to incentivize future work – presumably after the date of the divorce – that could suggest it is one’s separate asset.
To determine whether the award was for past work or to incentivize future work, one must look to the circumstances surrounding the grant, including, but not limited to:
• Was there a letter or documentation surrounding the grant explaining the reasoning for the grant?
• When did the grant occur and under what circumstances? Was it right after a big project was completed, or does the company have a regular policy of offering the grants after x years of work with the company?
o The former could suggest it was a reward/bonus for past work (marital asset), and the latter could suggest it is an incentive to remain with the company (separate asset).
• Was it voluntarily given to the employee, or did the employee have to negotiate for it?
o Negotiation suggests the grant could be a substitute for salary, and compensation earned during the marriage is generally considered a marital asset.
• Were the options spread out over time or front-end loaded?
o The former could suggest an incentive to remain with the company, and the latter could suggest it is more a form of compensation.
• Did other co-workers in similar positions or tenure receive the same granting of options?
o If it is the employer’s policy to grant stock options after any employee has been with the company for x amount of time, this could suggest the grant is the company’s way of compensating for loyalty to the company for past work (marital asset).
See id. at 3–4.
If after conducting the above analysis, one determines the options are entirely or partially marital assets, the focus shifts to division of the asset. There are generally two ways stock options can be divided in a divorce suit: (1) net present value and (2) deferred distribution. See McFarland, supra at 9–11 (noting a third valuation method is to “reserve jurisdiction,” where the division occurs once benefits are actually paid, but the analysis is similar to deferred distribution). The pros and cons of each division method are discussed below.
Net Present Value
First, with net present value, there is an immediate distribution to the non-employee spouse based on the net present value of the future benefit after reduction for the payment of taxes. To determine the present value, one looks to the current value of the stock; projected values when the stock option vests and can be exercisable; actuarial data; and other factors.
This valuation method could be beneficial to the non-employee spouse because it reduces interaction and potential conflict with the former spouse; the non-employee spouse could start investing the proceeds so the funds begin working for him or her; and it lowers the non-employee spouse’s risk in the event the stock does not perform well in the future or the employee leaves the company before the options are exercisable.
Along those same lines, if the non-employee spouse is fearful the employee spouse would sabotage the non-employee’s claim to the granted, unvested options, it can be advantageous to obtain a n...
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