Employee Stock Options and Divorce

By Staff Writer

With the increase of technology and financial planning-savvy companies and litigants, more and more divorce cases involve the issue of stock options. An increasing number of employers are beginning to offer company stock options as a form of employee benefit. In many states, these stock options may be considered a marital asset which must be divided between the employee and non-employee spouse in the event of a divorce.

So that you can understand your potential entitlement to share in your spouse’s stock options, or your obligation to share these benefits with your estranged spouse, you must have a grasp on the general nature and definition of stock options. At its most basic level, a stock option is simply the right to purchase a specified number of shares of stock for a specified price at a specific time. The specified price is known as the “grant price” and is most often the market price at the time the stock option is granted to the employee.

Courts vary in how they distribute stock options. How the options are to be divided depends largely on whether they are vested or unvested and whether they may be transferred. If the options can simply be transferred to the non-employee spouse, the Court may simply order a certain percentage of the options to be transferred in this manner. Because stock option plans rarely permit such transfers, however, the division of stock options is usually more complex.

The division of stock options becomes more complex when the employee spouse argues that some of the options are unvested or are separate property. The majority of states do consider unvested stock options to be property subject to distribution in marital dissolution proceedings. In many states, the Court will first determine whether the options were granted for past, present or future services. Options that are granted for future services are generally considered separate property while options granted for past or present services are generally considered marital property. This is because, to the extent that they are granted for services rendered during the marriage, stock options constitute a form of compensation earned by the employed spouse during the marriage. Sometimes, however, options are granted for mixed reasons or requires continued employment past the termination date of the marriage before the employee spouse becomes vested. Many states use a specific fraction for purposes of determining the percentage of these options which represent marital property.

If stock options are an issue in your divorce, in order to ascertain how they are to be divided, it will be necessary to determine the nature of the options and, if they are not transferable, to have the options valued. You should speak with your attorney in detail to determine your potential entitlement to share in your spouse’s stock options.