|
April 2004
Stock Options: The Purpose
Doctrine Under Attack?
Laura W. Morgan
This past month, the Missouri Court of Appeals decided Clance
v. Clance. In this case, the husband was awarded
stock options one day after the parties were divorced. The
court conceded that the stock options’ purpose was to
reward the husband for past work, i.e., efforts that took
place entirely during the marriage. It concluded nonetheless
that the stock options were not marital property, because
the stock options did not fit the definition of marital property
in that there was no enforceable right to the options acquired
during the marriage. This decision does damage to the well-settled
“purpose doctrine” used by courts to determine the
classification of stock options.
Options that Vest During the
Marriage
When a spouse acquires stock options during the marriage
and the options vest prior to the applicable valuation date,
these options are marital property, even if they haven’t
been exercised. Sommers v. Sommers, 1997 WL 328035
(Minn. Ct. App. 1997); Johnson v. Johnson, 1998 WL
835562 (Tenn. Ct. App. 1998); Charriere v. Charriere,
7 S.W.3d 217 (Tex. Ct. App. 1999); Donohue v. Donohue,
1997 WL 374817 (Va. Ct. App. 1997).
Because stock options may be awarded for past, present, or
future employee services, stock options that vest during the
marriage but are for services rendered before the marriage
are separate property. Demo v. Demo, 101 Ohio App.
3d 383, 655 N.E.2d 791 (1995); Willets v. Willets,
247 A.D.2d 288, 668 N.Y.S.2d 623 (1st Dep’t
1998).
Options that are Unvested During
the Marriage
In most jurisdictions, classifying unvested or unmatured
options requires a finding of fact regarding the purpose behind
the option. As stated in Bornemann v. Bornemann,
245 Conn. 508, 752 A.2d 978, 985 (1998),
In determining when unvested stock options were earned,
or will be earned, the purpose for which the options were
granted must be considered. Stock options may be awarded for
a variety of purposes — including to compensate the employee
for past or present services, or to provide an incentive for
future services, that may or may not relate in whole or part
to the period of the marriage.
The leading case on this issue of classification is In
re Marriage of Hug, 154 Cal. App. 3d 780, 201 Cal. Rptr.
676 (1984). In that case, the court recognized that while
stock options are most often awarded to employees as a means
of providing incentive for future services to the company,
they may also be awarded to attract valuable employees and
defer compensation for present services, or to reward valuable
employees for past services. 154 Cal. App. 3d at 786, 201
Cal. Rptr. at 680-81. Thus, when a spouse receives employee
stock options during the marriage, but the options will not
vest or mature until after the divorce, the options may be
entirely marital, entirely separate, or hybrid, i.e., part
marital and part separate, depending on the purpose behind
the grant. This approach has been adopted in most jurisdictions.
The trial court must therefore find as a matter of FACT the
purpose of the stock options. As stated in DeJesus v.
DeJesus, 90 N.Y.2d 643, 687 N.E.2d 1319, 1324 (1997),
The trial judge must first determine, based on competent
evidence, whether and to what extent the stock plans were
granted as compensation for the employee’s past services
or as incentive for the employees future services.
In order to do this, the DeJesus court stated,
[R]elevant factors would include whether the stock plans
are offered as a bonus or as an alternative to fixed salary,
whether the value or quantity of the employee’s shares is
tied to future performance and whether the plan is being
used to attract key personnel from other companies.
90 N.Y.2d at 652, 687 N.E.2d at 1324. See also In
re Marriage of Taraghi, 159 Or. App. 480, 977 P.2d 453
(1999) (concluding, based on documents relating to Intel stock
plan, that company intended to compensate employees for both
past and future services).
Once the court has determined the purpose behind the stock
option grant, the court can then ascertain whether the options
are marital, separate, or hybrid in nature. Resolving the
issue depends at least in part on the timing of the grant
and the vesting schedule. Obviously, stock options granted
at the end of the marriage for future services only are the
owning spouse’s separate property. Warren v. Warren,
2 Ariz. App. 206, 407 P.2d 395 (1965); In re Marriage
of Nelson, 177 Cal. App. 3d 150, 222 Cal. Rptr. 790 (1986);
Hopfer v. Hopfer, 59 Conn. App. 452, 757 A.2d 673
(2000); Raphael v. Raphael, No. C-980696, 1999 WL
1043726 (Ohio Ct. App. November 19, 1999). But stock options
granted at the end of the marriage for the purpose of compensating
for past services may be entirely marital property. Petersen
v. Petersen, 1993 WL 332475 (Del. Fam. Ct. April 15,
1993); Goodwyne v. Goodwyne, 639 So. 2d 1210 (La.
Ct. App. 1994). In fact, New Jersey has explicitly stated
this rule in Pascale v. Pascale, 140 N.J. 583, 660
A.2d 485 (1995), where the court held that employee stock
options obtained as a result of efforts expended during the
marriage are subject to equitable distribution.
|
