One question that comes up in divorce cases is whether stock options can be divided between the spouses. The answer is that if the stock options are classified as marital or community property, they can be divided between the spouses.

What Are Stock Options?

Stock options are a form of compensation to an employee. An employer may award stock options as compensation for past, present or future services or as an incentive to remain with the company. A stock option is the right to accept, under certain conditions and within a specified time period, the employer's offer to sell its stock at a predetermined price.

Characterization

Because a stock option is the right to purchase stock at a designated time in the future, stock options granted during the marriage often cannot be exercised until some time after the divorce. The trend is to treat stock options as marital or community property regardless of when the right to exercise the options matures, as long as the options are granted as compensation for services performed during the marriage.

In most states, characterization of a stock option as marital or nonmarital property depends on the purpose for which the option was granted and on the time of its acquisition in relation to the marriage. A stock option granted during the marriage as compensation for work performed during the marriage generally is marital property. However, a stock option granted during the marriage for work to be performed after the marriage is the employee spouse's separate property. In some states, stock options granted during the marriage are always marital property, regardless of the purpose for which they were granted.

Unvested Stock Options

Some stock options do not correspond to services performed wholly during the marriage or wholly after the marriage. Some states have concluded that these options have marital as well as non-marital components, and they apportion them between marital assets and nonmarital assets on the basis of when they vest. Other states have adopted a standard rule that applies to all unvested stock options. Some states consider stock options that are not exercisable at the end of a marriage as non-marital property. Other states have decided that stock plans granted during a marriage are wholly marital property.

Valuing Unvested Stock Options

Valuing unvested stock options is difficult because it is impossible to predict the future value of stock. The Pennsylvania Supreme Court has suggested three possible approaches:

  • A ''deferred distribution'' approach, in which the trial court retains jurisdiction to distribute the options after they are exercised
  • An ''immediate offset'' approach, in which the trial court establishes a present value for the options and distributes that value in accordance with each party's marital proportion
  • An ''in kind'' approach, in which the trial court distributes the options themselves according to each party's marital proportion

Evidence of Value

Evidence of the value of the stock options must be presented to the trial court. The value is often measured by a pricing model, which takes into account the stock price, the exercise price, the maturity date, the prevailing interest rates, the volatility of the company's stock, and the company's dividend rate. Another acceptable method of valuing options is the intrinsic value method, which determines value by subtracting the option price from the fair market value of the stock.

Questions for Your Attorney

  • What are stock options?
  • Can I be awarded part of the stock options that my spouse acquired during our marriage?
  • What happens to stock options that are for services performed both during and after the marriage?