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Family Law Reader

Family Law Reader

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.

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