An employee stock option gives an employee the right to buy a specified number of shares of stock in the employer-corporation at a specified price (strike price) at a specified future time. The goal is to give the employee an incentive for the stock price to go up, making the stock option more valuable. Companies generally grant stock options to reward years of service, or to induce an employee to remain with the company. Options change in value with the stock price. They are not generally assignable. For all of these reasons, stock options are difficult to characterize, value and divide as spouses go their separate ways.
In this first of a two-part discussion of stock options, I explore the issue of characterization of stock options as marital or separate property.
Characterization – Marital property in Oklahoma is property acquired by the parties during marriage through joint industry. Spouses contribute to joint industry in various ways, including maintaining the marital home, caring for children, sacrificing a career to further the career of a spouse, as well as earning income through employment. Stock options granted during marriage are considered marital property in Oklahoma. See Duty v. Duty. Stock options granted after a decree of divorce are the separate property of the employee spouse in Oklahoma. See Ettinger v. Ettinger.
It is possible that stock options granted during marriage are partly marital and partly separate property. There are several relevant dates to consider in analyzing stock options.
- Grant date – the date an employer awards a stock option to an employee
- Vesting date – the date an employee can exercise a stock option
- Expiration date – the date a vested stock option expires if not exercised by the employee
A divorce can occur at any point along this time line and affect the characterization of the stock option as partly marital and partly separate property. Consider options granted during marriage, but which vest after joint industry ends. What if the options are granted before marriage and vest during marriage?
Stock options granted but not yet vested are contingent assets. Their value will be realized in the future. Taking a cue from how courts treat retirement accounts in divorce, these contingent assets are still considered marital property, even though they require continued employment, or expire on the occurrence or non-occurrence of some future event.
The reason a company grants a stock option can also affect its characterization in divorce. One must always determine why a company grants a stock option. Is it a reward for past service? Is it an incentive to remain with the company? Is it a bonus or a form of deferred compensation? Each case is fact specific.
Parties and courts must fashion a time rule in each case to equitably allocate the marital or separate property components of each stock option award. The time rule is a ratio, or fraction, based on the number of months between various dates such as the date of marriage, date of employment, date the option is granted, date joint industry terminates, vesting date, and exercise date. It is interesting to note that in the Duty case, the Oklahoma Court of Civil Appeals affirmed an award to the wife of one-third of husband’s stock options. Neither the trial court or appellate court explained how it arrived at the one-third figure, except to note that the husband had to continue to work after the marriage to make the options vest.
In part two of this topic, I will explore the valuation and division of stock options in an Oklahoma divorce.