Opções de ações divórcio nj

Opções de ações, divórcio e o uso do Callahan Trust em NJ.
Embora frequentemente pensemos na remuneração do emprego como pagamento, salário ou talvez um salário e bônus ou comissão, cada vez mais residentes e empresas de Nova Jersey oferecem uma remuneração em termos de salário mais opções de ações ou outro tipo de compensação diferida. As opções de ações ou outras compensações diferidas, como o nome sugere, significam que a compensação não está disponível imediatamente, mas estará disponível após um período de tempo especificado. A divisão desses ativos no divórcio pode ser difícil. Continue lendo para obter informações sobre como os ativos podem ser tratados em um divórcio e ligue para os Escritórios de Advocacia de Peter Van Aulen para discutir como essas regras podem se aplicar aos fatos e circunstâncias específicas do seu caso.
Opções de ações como propriedade conjugal.
Em termos de divórcio, a compensação diferida ou opções de ações que são ganhas antes do divórcio é tratada como um bem conjugal e está sujeita a distribuição equitativa no divórcio.
Se a compensação diferida tiver sido adquirida, ou seja, o período de tempo especificado e a remuneração já estiver disponível, o ativo será tratado com relativa facilidade. Os tribunais normalmente determinam o valor da compensação e exigem 1) que ela seja retirada (ou, no caso de opções de ações, as opções sejam exercidas), ou 2) o tribunal pode determinar o valor da compensação e outorgá-la ao cônjuge empregado e ter ativos equivalentes concedidos ao outro cônjuge.
Se a compensação diferida ainda não tiver sido adquirida, é aí que as coisas ficam complicadas; como ainda não foi adquirido, ainda não há um ativo tangível para distribuir. Como o casal está se divorciando durante o período de tempo especificado em que a indenização é diferida, o cônjuge não empregado pode não ter o direito de ter o valor total da indenização dividido no divórcio, mas sim a parte da indenização que foi obtida durante o pagamento da indenização. casamento.
No caso de compensação diferida não aplicada, uma vez que o ativo não pode ser transferido diretamente para o cônjuge não empregado, o empregado pode manter o ativo em um trust construtivo, chamado Callahan Trust, para o outro cônjuge. No caso de opções de ações, o cônjuge empregado deve exercer a opção de comprar ações em nome do cônjuge não empregado. Um Callahan Trust é assim chamado por causa do caso de 1976 em Nova Jersey que determinou como opções de ações que ainda não foram adquiridas devem ser tratadas em um divórcio.
Alternativamente, como com a compensação adquirida, o tribunal pode determinar o valor da compensação e adjudicá-lo exclusivamente ao cônjuge empregado e atribuir os ativos equivalentes ao cônjuge não empregado para compensar esse prêmio. No caso de opções de ações, isso pode não ser uma boa opção, uma vez que as opções de ações podem não ter uma alternativa equivalente.
A distribuição eqüitativa das opções de ações e outras compensações diferidas devem ser cuidadosamente tratadas para garantir justiça. Se você está considerando um divórcio, por favor, ligue para Peter Van Aulen, um advogado de divórcio NJ em (201) 845-7400 para uma consulta gratuita abrangente em escritório.

Artigo do divórcio.
O p ç õ e sd e m e n taç ã o d e p ro b le m a s.
R OBERT J. CHALFIN, CPA, JD E PAUL GAZALEH, CPA.
Hoje, mais do que nunca, os advogados de divórcio devem ser proficientes no reconhecimento, entendimento e resolução de disputas decorrentes da distribuição de planos de ações de funcionários. Essa necessidade resulta da crescente dependência das empresas em planos de opções para compensar, recompensar e reter funcionários de todos os níveis. A popularidade dos planos de opções de ações é evidente a partir da vasta gama de empresas que os implementam. [1] Por exemplo, empresas de empresas de alta tecnologia, grandes empresas de capital aberto e empresas de capital fechado que não são de alta tecnologia concedem opções de ações. Com efeito, as opções de ações estão substituindo os típicos pacotes de remuneração baseados em dinheiro. Tal implementação ampla deste esquema de compensação tem implicações óbvias para a distribuição de ativos e prêmios de suporte incidentes ao processo de divórcio.
As empresas estão emitindo planos de opções de ações com mais frequência e para uma maior diversidade de funcionários do que nunca. Tradicionalmente, os planos de opções de ações eram usados ​​para recompensar a alta gerência e os funcionários "chave", ao mesmo tempo em que ligavam (algemas de ouro) os interesses desses funcionários aos interesses da empresa e de outros acionistas. Um número crescente de empresas, no entanto, agora considera todos os seus funcionários como "chave". Como resultado, a popularidade dos planos de opções de ações de base ampla cresceu significativamente desde o final dos anos 80. Esses planos agora se aplicam a todos ou à maioria dos funcionários em mais de um terço das grandes empresas dos Estados Unidos. Isso mais que dobra a taxa existente em 1993. Uma pesquisa de 1997 com 1.100 empresas públicas [2] descobriu que 53% dos entrevistados ofereciam opções a todos os funcionários. Além disso, o estudo relatou que 51% das empresas com uma força de trabalho de 500 a 999 ofereceram opções a todos os empregados, contra 30% numa pesquisa similar de 1994 [3] e 31% em 1991 [4]. Além disso, 43% das empresas com uma força de trabalho de 2.000 a 4.999 ofereciam opções a todos os funcionários em comparação a 10% em 1994. Quarenta e cinco por cento das empresas com 5.000 ou mais funcionários também informaram oferecer opções a todos os trabalhadores em comparação a 10% em 1994 Consulte a Ficha Informativa de Opções de Ações do Funcionário, (visitada em 10 de junho de 1999) & lt; http: \\ nceo \ library \ optionfact. html). [5]
Esta tendência não mostra sinais significativos de desaceleração; portanto, os advogados matrimoniais devem estar preparados para tratar das questões singulares decorrentes da propriedade e distribuição de planos de opções de ações de base ampla. Este artigo explicará a natureza básica das opções de ações para funcionários, como elas são avaliadas, tributadas e, por fim, distribuídas em processos de divórcio.
O que é uma opção de ações para funcionários?
Não há dúvida de que “opções de ações” são ativos sujeitos a distribuição equitativa. No entanto, para dizer simplesmente que eles são ativos não fornece orientação suficiente para o litigante matrimonial. Devemos primeiro entender a natureza básica e a definição de uma opção de ações. Basicamente, uma “opção de compra de ações” é “o direito de comprar um número específico de ações por um preço especificado em horários específicos, geralmente concedido à administração e funcionários chave”. O preço pelo qual a opção é concedida é chamado de “concessão”. " preço; esse é geralmente o preço de mercado no momento em que as opções são concedidas. Black Law Dictionary (5ª ed. 1979). Veja também Treas. Reg. §1.421-7 (a) (1) (1978); I. R.C. §1234 (a) (1998) [6]
Geralmente, as opções de ações são incentivos para estimular os esforços dos principais funcionários, bem como tentativas de reter esses funcionários.
Um detentor de opções pode perder seu direito de exercer a opção, independentemente de a opção de ações ser concedida por dinheiro, serviços passados, como um incentivo para serviços futuros, ou por nenhuma consideração. Essa ocorrência rara ocorre quando o detentor da opção tenta se exercitar fora dos termos da opção. Isso raramente se torna um problema em litígios de divórcio; no entanto, não deixa de ser algo para se ter em mente para evitar perdas econômicas severas para qualquer uma das partes e / ou uma potencial reclamação por negligência de um advogado.
Se a opção (seja um NQSO ou ISO) é "ativamente negociada em um mercado estabelecido" o código considera a opção de ter um "valor de mercado justo prontamente determinável". [7] Se não houver "valor justo de mercado prontamente determinável" no momento da concessão, o beneficiário reconhece renda no momento da opção ou: (1) tornar-se "substancialmente investido" ou (2) não está mais sujeito a um "risco substancial de confisco". [8] Qualquer lucro é um ganho de capital a curto prazo, tributável a taxas de rendimento ordinárias. [9] O código estabelece quatro condições necessárias para uma opção que não é "ativamente negociada em um mercado estabelecido". para satisfazer o & quot; valor de mercado justo prontamente determinável & quot; padrão: (1) a opção é transferível pelo oponente (2) a opção é exercível imediatamente na íntegra quando concedida (3) não pode haver nenhuma condição ou restrição sobre a opção que teria um efeito significativo em seu valor justo de mercado, e (4) o valor de mercado do privilégio de opção é prontamente determinável. [10] Todas as quatro condições devem ser atendidas. Como essas condições raramente são satisfeitas, a maioria das opções de ações não-estatutárias não qualificadas não negociadas em um mercado estabelecido não tem um valor prontamente determinável. [11]
Existem diferentes tipos de opções de ações e como elas são tributadas?
Geralmente, existem duas categorias básicas de opções de ações: (1) opções de ações de incentivo (comumente referidas como "ISO's") que são opções qualificadas ou estatutárias e (2) opções de ações não qualificadas (que são comumente referidas como "NQSO's"). ”). Simplificando, a diferença entre os dois tipos de opções resulta de seus requisitos de conformidade com o Internal Revenue Code no momento da concessão. Esses requisitos, em última análise, afetam como as opções são tributadas. Veja I. R.C. §422 A (b) (1998). [12]
Um funcionário não realizará qualquer rendimento tributável mediante a concessão ou exercício de um OIS. Pelo contrário, o imposto só é devido quando o estoque resultante de um ISO exercitado é vendido. Se o empregado vender as ações dentro de dois anos após a outorga da opção e dentro de um ano após o exercício da opção, o lucro será realizado em um montante igual ao menor (1) o excesso do valor justo de mercado das ações em a data de exercício sobre o preço da opção, ou (2) o excesso do valor realizado na alienação sobre o preço da opção. Se o indivíduo detiver as ações por dois anos após a concessão do OIS e um ano após o exercício do OIS, a diferença entre o preço de venda e o preço da opção será tributada como um ganho de capital ou uma perda. Se a ação for vendida após o período de dois anos / um ano, esse ganho também será um item alternativo de preferência mínima tributária sujeito à alíquota de 26/28%.
Os NQSOs são tratados de forma diferente. O titular “funcionário” de uma opção não estatutária reconhecerá renda no momento da concessão se a opção tiver um “valor justo de mercado prontamente determinável”. O indivíduo não obterá renda no momento da concessão, no entanto, se o a opção não é transferível e não tem um “valor justo de mercado prontamente determinável”. Quando a opção de ações não qualificadas é exercida, o indivíduo é tributado às taxas de renda ordinárias sobre a diferença entre o valor justo de mercado da ação e o preço de exercício da opção. Quando o indivíduo vende as ações, um ganho ou perda de capital será incorrido sobre a diferença entre o valor recebido pela ação e sua base tributária. Normalmente, a base fiscal é igual ao valor justo de mercado no momento do exercício da opção. O ganho de capital será a longo prazo ou a curto prazo, dependendo da duração do período em que as ações são detidas após o exercício.
Pode, portanto, ser apropriado tributar as opções de ações de executivos para fins de distribuição eqüitativa. As opções de ações executivas devem ser exercidas e vendidas porque têm uma data de vencimento fixa. O imposto resultante é, portanto, inevitável e deve ser considerado ao determinar como os ativos devem ser distribuídos. Além disso, pode haver situações em que a transferência de opções restritas de ações para um cônjuge não empregado possa resultar em incidente de responsabilidade fiscal para uma transferência de acordo com uma Sentença de Divórcio. [13]
Como as opções de ações são avaliadas?
Vários métodos são reconhecidos como ferramentas valiosas para aliviar a dificuldade de determinar o valor presente das opções de ações. Em 1995, a profissão contábil reconheceu formalmente que as opções de ações executivas têm valor além de seu valor intrínseco. Por volta da mesma época, o Financial Accounting Standards Board (FASB) também afirmou que “a opção de ações de um empregado tem valor quando é concedida, independentemente de: (a) o empregado exercer a opção e comprar ações com valor superior ao empregado paga por ele ou (b) a opção expira sem valor no final do período de opção. & quot; Veja a Declaração de Normas Contábeis Financeiras No. 123, ¶75, Financial Accounting Standards Board, outubro de 1995; veja também Les Barenbaum, Ph. D., Questões sobre Avaliação de Ações para Funcionários. [14] Portanto, a profissão reconheceu o Black-Scholes Option Pricing Model como um método apropriado para calcular o valor das opções de ações executivas. Portanto, os dois modos de avaliação mais populares são os métodos “valor intrínseco” e “Black-Scholes”. Veja a Declaração de Normas Contábeis Financeiras No. 123, ¶78, Financial Accounting Standards Board, outubro de 1995. Ver também Barenbaum supra p. 4
O método do valor intrínseco calcula o valor da opção de compra determinando a diferença entre o preço de exercício da opção e o valor justo de mercado da ação. Por exemplo, se você tem a opção de comprar ações "x" por US $ 5 e as ações estão atualmente sendo negociadas a US $ 27 por ação, o valor intrínseco da opção é US $ 22 (US $ 27 - US $ 5). Esse método, no entanto, não considera o valor do direito do detentor de comprar as ações em uma data posterior por um preço predeterminado. Também não considera a volatilidade do estoque subjacente, bem como as vantagens e desvantagens de tal volatilidade. Além disso, o método do valor intrínseco não leva em conta as vantagens e desvantagens resultantes da incapacidade do titular da opção de receber os dividendos da ação. Por fim, esse método não calcula ou considera a diferença de valor entre o custo de compra do estoque e o custo de perda de juros sobre os fundos de aquisição.
O Método Black-Scholes leva em conta as considerações financeiras e de mercado que são ignoradas pelo método do valor intrínseco. A distinção mais importante entre os dois métodos, portanto, é que o Método Black-Scholes é responsável pela volatilidade do mercado. Se a volatilidade for excluída do cálculo, opções de duas empresas muito diferentes, com taxas de crescimento variáveis, podem resultar no mesmo valor. Por exemplo, supondo que os preços das opções e os valores justos de mercado sejam os mesmos, opções de uma empresa de serviços públicos de crescimento mais lento, como PSE & G, podem resultar no mesmo valor de opções de uma empresa de computadores de crescimento mais rápido, como a Microsoft. Não é necessário um salto de imaginação para perceber que omitir a volatilidade do mercado a partir de determinações de valor pode ser enganoso. O Método Black-Scholes diferencia esses tipos de empresas e, portanto, evita essas percepções errôneas, enquanto o método intrínseco não o faz.
A fórmula de Black-Scholes (mostrada abaixo) é complexa e contém muitos componentes variáveis. A fórmula é:
A explicação dessas designações de letras para as variáveis ​​na fórmula de Black-Scholes são:
C = prêmio de chamada teórica.
S = preço atual da ação.
t = tempo até a expiração da opção.
K = preço da ação da opção.
r = taxa de juros sem risco.
N = distribuição normal padrão cumulativa.
e = função exponencial.
o = desvio padrão dos retornos das ações.
ln = logaritmo natural.
A parte inicial do cálculo determina o benefício esperado resultante de uma compra definitiva do estoque. A última parte do cálculo determina o valor presente de pagar o preço de exercício no futuro. A diferença entre os dois é o valor justo de mercado da opção.
Um problema subjacente ao Método Black-Scholes, entretanto, é que ele exige hipóteses sobre a volatilidade das ações, taxas futuras de dividendos e juros perdidos. Assim, uma alteração em qualquer uma das premissas subjacentes afetará o valor da opção conforme calculado de acordo com esse método.
A tabela a seguir fornece um resumo de como uma alteração em uma das premissas afetará o valor das opções de ações calculadas pelo Método Black-Scholes.
Um equívoco comum na avaliação de opções de longo prazo é que o valor de uma opção é melhor representado por seu valor intrínseco. Veja id. Na verdade, com base nos vários fatores Black-Scholes, opções de ações que estão "fora do dinheiro", o que significa que o preço de exercício excede o valor de mercado atual, na verdade são negociadas com vários valores em dólar. Por exemplo, uma opção de ações da Dell Computer com um preço de exercício de US $ 50,00 e um valor de mercado de US $ 37,3125 em 24 de maio de 1999 foram negociados por US $ 8,75. Isto é assim, embora a opção foi quase US $ 13,00 fora do dinheiro quando a opção foi avaliada. A disparidade no valor deve-se ao otimismo dos investidores de que um aumento nas ações da Dell ocorreria para que o valor das ações excedesse US $ 58,75 antes do vencimento da opção. Veja id.
Como as opções de ações são distribuídas em assuntos matrimoniais?
Geralmente, os métodos implementados para distribuir opções de ações se enquadram em uma das duas categorias:
1. Distribuição Diferida no Exercício das Opções (Confiança Construtiva);
2. Apresentar avaliação com compensação em relação a outros ativos.
(Qual parte das opções deve ser concedida ao cônjuge não empregado quando o cônjuge empregado afirma que uma parte das opções é de propriedade não conjugal é um problema que muitas vezes surge em qualquer um dos métodos de distribuição. Essa questão, no entanto, é abordada em a próxima seção deste artigo.)
Método de Distribuição Diferida.
O Método de Distribuição Adiada é o método mais comumente implementado para distribuir opções. Além disso, este método foi utilizado em um dos primeiros casos de Nova Jersey que tratam de opções de ações incidentes ao divórcio. Veja Callahan v. Callahan, 142 N. J. Super. 325, 328 (cap. Div. 1976). O tribunal de Callahan determinou que as opções adquiridas durante o casamento estavam sujeitas a distribuição equitativa, mesmo que (1) as opções fossem potencialmente termináveis; (2) o marido teve que fazer um gasto para exercer as opções; e (3) as opções estavam sujeitas a vários regulamentos da SEC. [15] Veja id. em 327-29. Ao fazê-lo, o tribunal deixou uma confiança construtiva no marido, em favor da esposa, por uma parte das opções. Veja id. em 329. O tribunal argumentou que a imposição de uma confiança construtiva resultaria no resultado mais equitativo para as partes sem criar passivos financeiros e comerciais indevidos. Veja id. Deve-se notar que todas as opções foram concedidas durante o curso do casamento. Veja id. em 327. Embora não especificamente indicado, no entanto, parece que algumas ou todas as opções não foram totalmente adquiridas porque estavam sujeitas a alienação sob certas circunstâncias. Veja id. em 330. Isto pode ser porque a esposa foi concedida somente 25% das opções em sua maturação. Veja id. n. 1. (Veja a seção abaixo sobre a determinação de ações distributivas).
Apresentar o método de avaliação.
O presente método de avaliação é outro modo de distribuição comumente usado. Segundo este método, o cônjuge não empregado deve receber sua parte do valor atual das opções em dinheiro ou equivalente em dinheiro. Este método deve contabilizar descontos de mortalidade, juros, inflação e quaisquer impostos aplicáveis. A falha do Método de Avaliação Presente, entretanto, é que tal distribuição pode se tornar injusta se o cônjuge empregado não puder exercer as opções ou as opções forem “sem valor” (o custo da opção excede o valor justo de mercado) na data em que tornar-se exercível.
Os tribunais matrimoniais de fora do estado diferem quanto ao método preferencial de distribuição das opções, dependendo da natureza das opções. Por exemplo, um método diferente pode ser implementado dependendo de as opções serem adquiridas ou não investidas e / ou transferíveis ou vendáveis. A transferência para o cônjuge não empregado, se disponível, é o método de distribuição preferível, porque afeta a separação entre as partes. Esse método nega qualquer necessidade de comunicação adicional entre as partes e elimina a necessidade de implementar metodologias de avaliação. A transferência de opções de ações, no entanto, raramente é permitida pelos planos de opções de ações para funcionários. Portanto, alguns tribunais elaboraram métodos de distribuição alternativos. Um desses métodos permite que as partes mantenham as opções como inquilinos em comum. Outra alternativa permite que o cônjuge não empregado, ao fornecer o capital necessário, ordene sua parte das opções exercidas. Esta última opção é semelhante à solução de confiança construtiva concebida na decisão de Callahan. As alternativas acima mencionadas não são uma lista exaustiva de métodos de distribuição concebidos pelos tribunais. Na verdade, os tribunais de julgamento são concedidos e geralmente usam ampla discrição na adaptação de abordagens aos fatos de casos individuais. [16]
Como ponto de referência, observe que ao distribuir opções em espécie, as partes devem ser avisadas contra violar as regras de informações privilegiadas. Por exemplo, pode ser uma violação se o cônjuge participante manifestar sua intenção de exercer opções para o cônjuge não participante. Outra preocupação em relação à distribuição de opções em espécie é que elas podem se extinguir se o emprego do indivíduo for rescindido, voluntária ou involuntariamente.
Determinar a parcela distributiva do cônjuge não empregado.
O que acontece quando o cônjuge empregado argumenta que algumas ou todas as opções são perdidas ou de outra forma “não foram adquiridas durante o casamento” e, portanto, não podem ser distribuídas ao outro cônjuge?
A abordagem de Nova Jersey.
Os tribunais de Nova Jersey, ao abordarem as opções de ações incidentes ao divórcio, enfatizam a necessidade de equilibrar a "necessidade de determinação incorporada na regra da data de reclamação [17] com a necessidade de flexibilidade inerente à distribuição equitativa". Ver Pascale v. Pascale, 140 N. J. 583, 612 (1995). Enquanto a maioria dos outros tribunais estaduais que trataram dessa questão determinam a parte das opções de ações sujeitas à distribuição, empregando a abordagem “fórmula de regra de tempo” (explicada abaixo), os tribunais de Nova Jersey lançaram as bases de maneira mais geral. Basicamente, os tribunais de New Jersey consideram que os bens ou bens adquiridos após o término do casamento, mas como resultado de esforços despendidos durante o casamento, geralmente serão incluídos no estado civil e estão, portanto, sujeitos a distribuição equitativa. Veja id. no 469. No entanto, a lei de New Jersey reconhece que os bens adquiridos após a dissolução de um casamento, resultantes apenas dos esforços pós-reclamação, constituem a propriedade separada do cônjuge empregado. Veja id. em 470. O problema está dizendo a diferença.
Pascale v. Pascale é o caso seminal de Nova Jersey em relação às distribuições de opções de ações. Em Pascale, os partidos se casaram em 19 de junho de 1977; uma queixa de divórcio foi apresentada em 28 de outubro de 1990. Ver id. em 588. Em 1987, quando ainda era casado, a Sra. Pascale recebeu a opção de comprar 5.000 ações de seu novo empregador. Veja id. Em 607. A partir da data do julgamento, a Sra. Pascale tinha adquirido e possuía 20.069 opções de ações, todas as quais foram concedidas pelo seu empregador entre 14 de abril de 1987 e 15 de novembro de 1991. Ver id. Sete mil e trezentas dessas opções foram concedidas após a apresentação da queixa de divórcio. Veja id.
A disputa surgiu em resposta a dois conjuntos de opções outorgadas em 7 de novembro de 1990, uma para 4.000 ações e outra consistindo de 1.800 ações. As opções disputadas foram concedidas aproximadamente dez dias depois que a esposa pediu o divórcio. [18] Veja id. A Sra. Pascale argumentou que as 1.800 opções não estavam sujeitas a distribuição porque foram "emitidas em reconhecimento ao desempenho passado". Identidade. Além disso, ela afirmou que as 4.000 ações remanescentes também foram excluídas da propriedade conjugal porque foram emitidas em antecipação ao aumento das responsabilidades trabalhistas resultantes de uma promoção. Veja id. A sra. Pascale contava com as cartas de transmissão de sua empresa para sustentar seus argumentos. Veja id. O tribunal, no entanto, considerou que nenhum dos dois blocos de opções poderia ser excluído do estado civil. Portanto, ambos estavam sujeitos a distribuição equitativa. [19] Veja id. em 608.
No entanto, a Divisão de Apelação concluiu que apenas um dos dois conjuntos de opções constituía parte do estado civil. Veja id. (citando Pascale v. Pascale, 274 N. J. Super. 429, 437-40 (App. Div. 1994)). O tribunal de apelação opinou que as 4.000 ações concedidas em reconhecimento à promoção foram “mais apropriadamente”. . . projetado para realçar esforços futuros do emprego 'e não deve ter sido incluído na propriedade marital. & quot; Identidade. em 603 (citando Pascale, 274 N. J. Super. em 439). No entanto, a Divisão de Apelação concluiu que as 1.800 opções restantes foram concedidas em reconhecimento ao desempenho do emprego anterior e, portanto, foram devidamente incluídas na propriedade conjugal, apesar da data da regra de queixa. Veja id.
Ao reverter o tribunal de apelação, a Suprema Corte enfocou o N. J.S. A. 2A: 34-23 e o princípio de que “a pobreza claramente se qualifica para distribuição” quando é “atribuível à despesa de esforço de qualquer dos cônjuges” durante o casamento. ”Id. 609 (citando Painter v. Painter, 65 N. J. 196, 214 (1974)). A posição da Suprema Corte deixou claro que o fator determinante, nos casos de distribuição de opções de ações, é se os ativos resultam dos esforços conjuntos das partes apresentadas “durante o casamento”. Ver id. Para refutar a presunção de que as opções resultam de um esforço conjunto, a parte que procura a exclusão do ativo tem “o ônus de estabelecer tal imunidade [de distribuição equitativa] quanto a qualquer ativo em particular”. (citando Landwehr v. Landwehr, 111 N. J. 491, 504 (1988)).
Consequentemente, o tribunal de Pascale concluiu que as opções de compra de ações concedidas após o término do casamento, "mas obtidas como resultado de esforços despendidos durante o casamento, deveriam estar sujeitas a distribuição eqüitativa". Identidade. em 610. O tribunal observou ainda que a iniqüidade óbvia [. . .] pode resultar de aplicações inflexíveis da data da regra de reclamação. Veja id. [20] A Suprema Corte aparentemente concordou com a determinação do tribunal de que os prêmios de promoção e compensação da esposa eram atribuíveis, em parte, aos esforços conjuntos das partes durante o casamento. Veja id. em 610.
Como a Suprema Corte de Nova Jersey teria se determinou que um bloco de opções resultaria de ambos os esforços pré e pós-casamento? Como os tribunais devem se manter se o propósito da concessão das opções não for claro ou indeterminável? O que deve orientar as decisões do tribunal se as opções não forem utilizadas e exigirem que o futuro emprego seja integralmente aplicado? Essas circunstâncias geralmente existem; no entanto, os tribunais de New Jersey ainda não desenvolveram padrões claros para resolver tais disputas. Assim, esses problemas comuns geralmente resultam em dilemas obscuros para litigantes e seus advogados.
Embora Nova Jersey tenha apenas duas decisões relatadas sobre opções de compra de ações, a saber, Callahan e Pascale, houve um caso não declarado da Divisão de Apelação de Nova Jersey, que também tratou do assunto. A saber, o caso de Linda Klein contra David Klein no Boletim No. A-5019-97T1 argumentou em 3 de junho de 1999 e decidiu em 24 de junho de 1999. Nesse caso, o marido acusado apelou da sentença do tribunal de 50% de todos os seus opções de ações para o autor. A Divisão de Apelação rejeitou os argumentos do réu e confirmou a decisão do Tribunal de Primeira Instância. O réu obteve um cargo de advogado sênior da equipe com Warner-Lambert em 1979, onde continuou empregado até a data da decisão do Tribunal de Apelação. O tribunal de Klein dirigiu-se ao prêmio de opção de ações de 1992, que foi feito dois meses depois de a Reclamação para o Divórcio ter sido registrada. O Tribunal de Apelação concluiu que o Juiz de Julgamento tinha “base suficiente ... para descobrir que a concessão era baseada no serviço do réu fornecido à companhia durante o casamento”. Esta conclusão foi apoiada pelo texto da Carta Grant Warner-Lambert, que afirmou que a concessão "reflete suas contribuições extremamente valiosas para o sucesso desta corporação". (página 4,5).
O réu argumentou que a sentença do Tribunal de Primeira Instância relacionada às opções concedidas em 1989, 1990 e 1991 (antes do registro da queixa para o divórcio) era “não-consolidada” porque não era exercível na data da reclamação. O Tribunal de Apelação observou que, na data da denúncia, 25% das opções outorgadas em 1989, 50% das opções concedidas em 1990 e 75% das opções concedidas em 1991, não podiam ser exercidas. O réu argumentou ainda que ele tinha que permanecer empregado na Warner-Lambert, a fim de exercer as opções. Na época do julgamento em 1996, entretanto, todos, exceto os últimos 25% das opções outorgadas em outubro de 1992 eram exercíveis, e os últimos 25% eram exercíveis no momento em que o juiz leu sua decisão no registro em novembro de 1996. O Tribunal de Apelação de Klein passou a abordar as questões mais comuns ao distribuir a distribuição eqüitativa das opções de ações, a saber, a distribuição de opções de ações não investidas. Em apoio à afirmação da decisão do Tribunal de Primeira Instância, o Tribunal de Apelação em Klein reiterou a premissa bem estabelecida de que “o direito de receber benefícios que se acumulam ao cônjuge depois de um divórcio ou sujeito a distribuição equitativa se estiverem relacionados com os esforços conjuntos de as festas". Moore v Moore 114 NJ 147,154 (1989). O Tribunal Klein observou que não houve decisões relatadas em Nova Jersey aplicando este conceito a opções de ações não vencidas, mas observe que os casos relacionados a benefícios de pensão são análogos. (Id. Pg. 6) Como muitos tribunais estaduais, a Corte de Apelações de Klein passou a analogizar o conceito de distribuição de opções de ações não investidas com o conceito de distribuição de benefícios de pensão.
No entanto, como com os outros casos de Nova Jersey, é a opinião deste autor de que o tribunal não considerou adequadamente os esforços pós-reclamação que o cônjuge empregado era obrigado a gastar ao distribuir as opções. Esse autor concorda com a analogia com a distribuição de benefícios de aposentadoria, mas enfatiza que tais benefícios de aposentadoria são divididos apenas após a aplicação de uma fração de cobertura apropriada para assegurar que apenas a parte conjugal do benefício de aposentadoria seja distribuída. Embora o Tribunal Klein tenha concluído que “pode haver poucas dúvidas na Carta Grant, os termos do plano dão uma série de possíveis subsídios. e a presidência anual de uma concessão, que as opções pretendiam recompensar o trabalho do réu no ano em que a concessão era concedida; o fato de estarem presumivelmente sujeitas a desinvestimento se o réu não continuasse a trabalhar após a queixa de divórcio significava que tribunal não considerou um fator chave na distribuição desses ativos. A conclusão do tribunal de que “o fato de que os benefícios não puderam ser recebidos a menos que anos adicionais de trabalho fossem concluídos não faz diferença na inclusão das opções de ações no estado civil” (página 8) é um desvio significativo da conclusão de a maioria dos outros estados nestas nações que abordaram esta questão.
Em essência, o réu não recebeu nenhum alívio por meio da parte distribuível das opções sujeitas a distribuição, a avaliação dessas opções, ou seus cônjuges direitos com base no fato de que essas opções não eram exercíveis a partir da data da denúncia e seu emprego continuado após reclamações era necessário para que essas opções continuassem a existir. Parece haver alguma iniquidade nesse resultado. É a opinião do autor de que a fração de cobertura adotada pela maioria dos estados é o método mais apropriado e justo de resolver essa desigualdade.
Até hoje, Nova Jersey ainda não adotou uma regra clara para determinar como as opções não investidas devem ser distribuídas. Em vez disso, a análise de New Jersey, ao contrário de outros estados, [21] repousa quase inteiramente em determinações subjetivas.
A maioria dos estados, como Nova Jersey, trata as opções de ações não investidas como propriedade que está sujeita a distribuição em processos de dissolução conjugal. Ver Garcia v. Mayer, 122 N. M. 57 (Ct. App. 1996), citado em Wendt v. Wendt, 1998 WL 161165, em * 119 (Conn. Super. 1998); ver também, MacAleer v. MacAleer, 725 A.2d 829 (Pa. Super. 1999) Em MacAleer, o tribunal de apelação da Pensilvânia determinou que as opções de ações concedidas durante o casamento, mas não exercíveis até depois da data da separação, constituíam assunto de bens conjugais para distribuição em processo de divórcio. Veja id. em 831. O tribunal observou que os benefícios resultantes do emprego durante o casamento são matrimoniais, porque esses benefícios, como benefícios de pensão, foram "recebidos em vez de uma compensação adicional que teria" foram utilizados durante o casamento para adquirir ativos adicionais ou elevar o padrão de vida conjugal. Identidade. 832 (citando Berrington v. Berrington, 598 A.2d 31, 34-35 (1991)). A lógica do tribunal, em grande medida, é semelhante à lógica e às participações da maioria dos outros tribunais estaduais. Veja id. em 833.
Muitas jurisdições consideram primeiro se as opções foram concedidas para serviços passados, presentes ou futuros. No entanto, a maioria dos tribunais descobriu que as opções de ações para funcionários geralmente não são concedidas por nenhum motivo. Em vez disso, a maioria dos tribunais percebeu que as opções são muitas vezes concedidas para um conjunto de razões, incluindo a compensação por serviços passados, presentes e futuros. Como resultado, ao lidar com opções não investidas, muitos tribunais procuraram desenvolver ou adotar um esquema estruturado útil para determinar a parcela distribuível de tais opções. [22]
"Fator de Cobertura" ou "Frações de Regras de Tempo"
Como afirmado anteriormente, a maioria dos tribunais de fora do estado usa um “fator de cobertura” ou “fração de regra de tempo” para determinar quanto, se houver, das opções de ações não constituídas constituem propriedade conjugal. A fração de regra de tempo mais prevalente evoluiu de uma fórmula implementada pelo Tribunal de Apelações da Califórnia em In re Marriage of Hug, 154 Cal. Aplicativo. 3d 780 (Cal. Ct. App. 1984). Em Hug, o tribunal de julgamento expressou as opções que faziam parte do estado civil em termos de uma fração. Veja id. em 782. Por exemplo, o tribunal declarou que o numerador representava a diferença em meses entre o início do emprego do cônjuge com a empresa e a data da separação das partes. Veja id. The denominator was established by first determining the difference, in months, between commencement of employment and the date when the first option was exercisable. See id. This factor was then multiplied by the number of shares that could be purchased on the date that the option was first exercisable. The remaining options were determined to be the separate property of the husband, the employed spouse. See id. at 782-83. [23]
The husband in Hug agreed that the options were subject to division according to the time rule; however, he contended that the trial court used an erroneous formula. See id. at 784. He argued that the proper time rule should incorporate the date when the option was granted rather than the date that he commenced employment because the options were not granted as an incentive to accept such employment. See id. He further argued that each annual option was a separate and distinct option granted as compensation for services rendered during that year. See id. Thus, he argued that the options were his own separate property because they each accrued after the date of separation. See id.
The Hug court examined the various reasons why corporations confer stock options to employees and found that no single characterization could be given to employee stock option grants. See id. at 786. Thus, the court determined that whether they are properly characterized as compensation for past, present, or future services, or all three, is fact specific. See id. Therefore the trial court concluded that, given the facts of that particular case, the two-year period of employment preceding the company's distribution of options contributed, at least in part, to the underlying reasons for the grant at issue. [24] See id. The appellate court held that the lower court's determination was supported by ample evidence in the record. See id. at 789.
Various versions of coverture factors have since evolved as courts addressed different factual circumstances. A recent Connecticut case, Wendt v. Wendt , undertakes a lengthy analysis of the competing arguments and most commonly used coverture factors. See generally Wendt , 1998 WL 161165.
Interestingly, the Connecticut court rejected the wife’s expert’s valuation methodologies, the Black-Scholes Method, in favor of the “intrinsic value” method. See id. at 249. The Wendt court noted that the "intrinsic value" methodology resulted in the wife receiving a 10% increase in distribution over the distribution granted under the Black-Scholes model. See id.
New York recently joined the majority of states holding that “stock option benefit plans provided by a spouse’s employer constitute marital property for the purposes of equitable distribution, where the plans come into being during the marriage but are contingent on the spouse’s continued employment with the company after the divorce.” See DeJesus v. DeJesus , 90 N. Y.2d 643 (1997). Therefore, New York’s highest court unanimously joined the majority of jurisdictions that use a time rule to divide such contingent resources. The DeJesus court laid out the following four-step procedure to guide courts in dividing such options:
1. Determine the portion of shares issued for past and future services; [25]
2. Determine the shares related to compensation for past services to the extent that the marriage coincides with the period of the titled spouse’s employment, up until the time of the grant. This would be the marital portion;
3. Determine the portion granted as an incentive for future services; the marital share of that portion will be determined by a time rule; e.
4. Calculate the portion found to be marital by adding:
Eu. that portion that is compensated for past services; e.
ii. that portion of the future services deemed to be marital after application of the time rule.
The sum result will then be divided between the parties using the equitable distribution criteria. See id. at 652-53.
This method was borrowed from Marriage of Miller , a Colorado Supreme Court case. The DeJesus court was persuaded that the Miller type analysis best accommodated the tensions that often arise when attempting to determine how options should be distributed in lieu of unclear or competing reasons for the grant. See id. at 651. For example, the highest court of New York found that the Miller analysis properly distinguished between portions of stock plans acquired during the marriage versus those acquired outside of the marriage. See id. In addition, the court found that the Miller analysis also sufficiently differentiated between stock plans designed to compensate for past services and those designed to compensate for future services. See id.
However, notwithstanding the complexity of these methods, the danger of rigidity and resulting unfairness from a formalistic application of such approaches still exists. This issue was addressed by an Oregon court in In re Powell , 934 P.2d 612 (Or. Ct. App. 1997). Powell emphatically stated that “no one rule will produce a just and proper result in all cases and no one rule will be responsive to the many different reasons why stock options are granted.” Id. at 615. This reasoning echoes the earlier New Jersey Supreme Court's rationale in Pascale .
Can Stock Options Be Viewed As Income To The Employee For Support Purposes?
In general, in a divorce proceeding, stock options may be classified by courts as either an asset subject to equitable distribution or qualified as an income stream for the purpose of calculating spousal support and child support Michael J. Mard & Jorge M. Cestero, Opções de Ações no Divórcio: Ativos ou Renda? , 74 Fla. Bar J. 62 (2000). The question of which classification is most appropriate is one which courts are grappling with at present with increasing frequency as stock options become a standard means of reward and incentive for many executives in the United States. Identidade .
The difficulty in reaching a judicial determination of the unexercised stock option as a property asset versus an income asset lies in the fundamentally difficult nature of valuing stock options. First, “at the time of its grant, the stock option does not have a readily ascertainable value.” Jack E. Karns & Jerry G. Hunt, Should Unexercised Stock Options Be Considered “Gross Income” Under State Law For Purposes Of Calculating Monthly Child Support Payments? , 33 Creighton L. Rev. 235 (2000). The most common valuation methodologies were set forth in the preceding sections of this article. Second, stock options have a dual nature. Maard, supra at 62. As previously noted, options have some characteristics of a property asset because the options represent the right to purchase an ownership interest in the underlying corporation’s stock. Identidade . This ownership interest under certain circumstances is alienable. Identidade . On the other hand, options also have characteristics of income because by definition as well as by intent, options permit the owner to earn the appreciation in value of the stock before its actual purchase. Identidade . Also, in most instances, options are paid out to employees as a form of compensation. Identidade . The options may take the form of deferred compensation for past services, current compensation for present services, or compensation advanced for future services. Identidade . citing Seither v. Seither , 24 Fla. Law Weekly D2816 (Fla.2d DCA.1999).
Nevertheless, in dissolution proceedings today courts must answer the question of whether stock options are “gross income” subject to income tax, thereby included in alimony and child support calculations versus “personal property” subject to capital gains treatment and equitable distribution Strong arguments exist for both types of classifications. Precedent favors the property classification. Yet, a new trend has begun to emerge in this country whereby some courts are classifying stock options as income for support purposes. The following will synopsize the classification trend among the courts in the United States broken down by circuit.
State courts in the First Circuit continue to abide by the more common approach of treating unvested stock options as property subject to division. No cases have been published construing stock options as income for calculating support State appellate courts in the Second Circuit have likewise held that stock options, both exercisable and nonexercisable, owned on the date of dissolution were property subject to distribution. Taylor v. Taylor , 57 Conn. App. 528 (2000); Bornemann v. Bornemann , 245 Conn. 508 (1998). Interestingly, however, on the trial level, courts have considered as income the funds received through the redemption of stock options awarded at the time of dissolution for purposes of assessing whether there had been a substantial change in circumstances in a post judgement application to modify alimony and child support. Denley v. Denley , 38 Conn. App. 349 (1995). On appeal however, the plaintiff argued that the funds received from the exercise of stock options was simply a conversion of an asset. Identidade . The appellate court agreed. Identidade . The Denley Court explained that “the mere exchange of an asset awarded as property in a dissolution decree, for cash, the liquid form of the asset, does not transform the property into income.” Id .
In the Third Circuit however, some state supreme courts have held that profits realized from the exercise of the employee stock options, unexercised at the time of dissolution, but taxed as ordinary income when exercised, were properly treated as income when calculating a post judgment modification of a child support obligation. Kenton v. Kenton , 571 A.2d 778 (1990). The Supreme Court of Delaware analogized the profits realized from the exercise of stock options to a "bonus” properly included in a parent’s net income for support purposes. Identidade . Additionally, the Superior Court of New Jersey, Appellate Division held that employee payments to deferred annuity plans and other similar types of deferred compensation should be included in determining a party’s adjusted gross taxable income for purposes of calculating child support. Schwartz v. Schwartz, 328 N. J. Super. 275 (App. Div. 2000) citing Pressler, Current N. J. Court Rules , comment on Appendix IX-B at 2108; Connell v. Connell , 313 N. J. Super. 426, 433-43 (App. Div. 1998).
State court cases in the Fourth Circuit are following the more traditional approach holding that both unvested and vested options whether exercised or not are property subject to equitable distribution. Chimes v. Chimes , 131 Md. App. 271 (2000). These courts treat stock options similar to “a pension that has not yet vested.” Moreover, legislatively, deferred compensation plans which may include stock option plans have been codified as requiring treatment as a pension or retirement benefit subjecting same to division as marital property. Dietz v. Deitz , 17 Va. App. 203, 213-14 (1993).
No state court cases in the Fifth Circuit have been reported wherein stock options were treated as income for purposes of calculating child support or spousal support. In Brewer v. Brewer , the court articulated the rule of law in Texas with regard to the treatment of stock options in dissolution matters. Brewer v. Brewer , 20000 Tex. App. Lexis 3546 (2000). The Brewer Court quoting Bodin v. Bodin , explained that “Unvested stock options [are] a community asset subject to consideration along with other property in the division of the community estate. “ Id . quoting Bodin v. Bodin , 955 S. W.. App. 1997).
The Sixth Circuit is making legal headlines however, due to the case of Murray v. Murray , 128 Ohio App. 3d 662 (1999). The Murray case is thought to be the first case in the United States deliberately treating an executive’s unexercised stock options as income for child support purposes. Debra Baker, Stock Options Declared Income to be Factored into Child Support Calculations , 85 A. B.A. J . 32 (Oct. 1999). In the Murray case, the wife moved to modify child support on the ground that her ex-spouse’s income had increase, in part from the increase in value of his stock options. Identidade . citing Murray v. Murray , 128 Ohio App. 3d 662 (1999). The husband argued that the appreciation in value of his options should not be considered because it was nonrecurring income. Identidade . The court held that where employees have complete discretion to exercise the options, the appreciation in stock value should be included as gross income even if the employee chooses not to exercise the options in each year. Identidade .
The Murray Court rejected the argument that the appreciation was non-recurring because the employee can exercise the option on an annual basis. Identidade . The ABA Family Law Section’s position is that this decision extends the theory that executives may not reduce child support payments using business decisions as a shield or by refusing to exercise stock options. Identidade . The Murray Court reasoned that since the employee had complete discretion to exercise the options, “the option then becomes an investment choice, and its value may be imputed as part of appellant’s “gross income”.” Murray v. Murray , 128 Ohio App. 3d 662 (1999) citing Sizemore v. Sizemore , 1994 Ohio App. Lexis 4596 (Oct. 14, 1994). The court in Murray continued to explain, “If we were to hold that executive stock options were not to be included in “gross income” …, an employee receiving such options would be able to shield a significant portion of his income from the court, and deprive his children of the standard of living they would otherwise enjoy. This would be in direct contradiction with the very purpose of the child support statute, the child’s best interest. Murray v. Murray , 128 Ohio App. 3d 662, 669 (1999) Thus, parents in the state of Ohio, and perhaps other states before long, may not shelter income from their children, intentionally or unintentionally, by postponing the exercise of stock options until the children are grown. See Id . It should be noted however, that some legal scholars believe the result in Murray is wrong. Jack E. Karns & Jerry G. Hunt, Should Unexercised Stock Options Be Considered “Gross Income” Under State Law For Purposes of Calculating Monthly Child Support Payments? , 33 Creighton L. Rev. 235 (Feb. 2000).
At present, however, the trend in the Sixth Circuit is to consider the value of stock options as income for support purposes. In fact, in Tennessee, in Stacey v. Stacey , 1999 Tenn. App. Lexis 668, the court held that stock options represented potential income and the value of the options should have been treated as income and factored into the original support obligation. Identidade . The Stacey Court reasoned “It is clear that Husband received a substantial increase in the amount of his disposable income as a result of the [eventual] exercise of his stock options, and there is nothing in the record to suggest that he will not continue to receive this in the future.” Id . Thus, this circuit leads the movement in the options as income trend.
With respect to state court cases in the Seventh Circuit, no cases construing stock options as income have been reported. The court in Hahn v. Hahn , 655 N. E.2d 566 (1995) explained the posture of the Indiana courts. Indiana construes “…[O]nly those stock options granted to an employee by his or her employer which are exercisable upon the date of dissolution or separation which cannot be forfeited upon termination of employment as marital property.” Hahn v. Hahn , 655 N. E.2d 566 (1995)
Likewise, in the Eighth Circuit, the Supreme Court of Nebraska recently held that stock options are a form of deferred compensation, vested or unvested, which constitute property subject to distribution in a dissolution matter if determined to be marital. Michael J. Mard & amp; Jorge M. Cestero, Opções de Ações no Divórcio: Ativos ou Renda? , 74 Fla. Bar J. 62 (2000) citing Davidson v. Davidson , 578 N. W.2d 848 (1998).
On the other hand, the state courts in the Ninth Circuit are following the new trend. California courts have made clear that spousal support and child support obligations should be based in part on income from the exercise of future stock options. Kerr v. Kerr , 77 Cal. App.4 th 87 (1999). “In fashioning an order for additional spousal support, based on compensation from the exercise of future stock options, the court properly intended to address the disparity in the parties’ present financial positions. contrary to Richard’s argument, Deedee will not be receiving a portion of his separate property if he exercises a stock option. Rather, any income Richard receives upon exercising an option is properly considered for purposes of setting [spousal] support. Identidade . at 94. “This additional income is part of his overall employment compensation and must be used to calculate child support.” Id . at 96 citing In re Marriage of Ostler & Smith , 223 Cal. Aplicativo. 3d 33 (1990). Thus, courts are making clear that as stock options become a more common form of compensation so too must support awards encompass a wide variety of income streams.
Similarly, recent state court cases in the Tenth Circuit have held that the proceeds from a non-custodial parent's exercise of his/her options constitutes income for purposes of determining child support. See In re Marriage Campbell , 905 P.2d 19, 20 (Colo. Ct. App. 1995). The Campbell Court explained however, that “for purposes of child support, the father’s income, as derived from the exercise of the stock options, is limited to the difference between his purchase price of the optioned stock and the price at which he then sold it.” Id . Also, in the case of In re Marriage of Zisch , 967 P.2d 1999 (Colo. app. 1998), the court followed Campbell , and held that when presented with a motion to modify child support, a court “should initially include the amount of the gain as a component of the recipient’s gross income for the year in which the gain was received.” In re Marriage of Zisch , 967 P.2d 1999 (Colo. app. 1998).
Moreover, a recent state court case in the Eleventh Circuit held that it was not error for the trial court to treat the husband’s stock options as income for both alimony and child support purposes. Seither v. Seither , 1999 Fla. App. Lexis 16816 (Dec. 15, 1999). That same court earlier suggested that stock options can be considered as income for alimony purposes. Identidade . citing Milo v. Milo , 718 So. 2d 343 (Fla.2d DCA 1998).
Whether a court will consider stock options awarded to an employed spouse as income for purposes of fixing of support should be viewed as a function of regularity of past awards and confidence in expected future awards. For example, a spouse who has been employed by a company for 15 years and has only received one award of stock options, should not have those options included in his pool of income upon which support should be fixed. However, another spouse who has been employed for a similar period of time and routinely, year after year, received option awards, can likely expect to receive future awards, and therefore, expect same to be included in is available pool of income for purposes of fixing support. In such an analysis it would be critical to determine how the parties treated prior option awards when the vested. Did they exercise the options, sell the stock and utilize the funds to pay ongoing lifestyle expenditures or did they keep the options, stock or proceeds thereof for investment purposes? In other words, it is necessary to determine what funds the parties actually relied upon in maintaining their lifestyle. However, remember that even “savings” is a component of lifestyle.
In short, opinions analyzing the treatment of stock options recognize that the circumstances under which options are granted and the particular nature of the options themselves may vary so widely that no single formula or set of factors can effectively deal with them under all circumstances. Seither v. Seither , 1999 Fla. App. Lexis 16816 (Dec. 15, 1999). See DeJesus , 665 N. Y.S.2d 36; In re Marriage of Hug , 154 Cal. Aplicativo. 3d 780. Nevertheless, a number of decisions have emerged from around the United States with interesting, yet inconsistent results. Thus, over the next decade, as family law litigation focuses more on the treatment of stock options so too will the courts focus on achieving a more evenhanded approach that aims to eliminate manipulation of the system, intentional or otherwise.
There is unquestionably a growing trend among the courts of this nation to subject unvested or non-exercisable stock options granted during a marriage to distribution. Further, options are also being viewed as income for purposes of fixing support obligation. As this trend continues, it is critical that matrimonial attorneys become familiar with these unique types of assets and tailor their discovery demands accordingly.
The key factor in determining how such assets should be distributed focuses on an inquiry as to the purpose for which the options were granted, i. e., whether the options were granted for past, present or future performance.
Since an accepted method of dividing unvested options is a form of coverture or time rule formula, matrimonial practitioners must be aware of the various forms of such fractions and the factors that can modify the fraction. Such factors include, but certainly are not limited to, the following: (1) when the option was granted, (2) whether the option was granted for past or future performance (if “past” how far back), (3) whether the option was granted in lieu of other compensation, (4) whether the option was a qualified incentive stock option or non-qualified stock option, (5) the options' expiration date, (6) the tax effect of the grant of the option, (7) the tax effect of exercising the option, (8) whether or not the option has a “readily ascertainable fair market value,” (9) whether or not the option is transferable, (10) whether or not the option is restricted property, (11) the extent to which the option is subject to risk of forfeiture, and (12) any other factors that the parties or court may deem fair and equitable considerations.
The majority of employee stock options are non-transferable and cannot be secured; therefore, matrimonial attorneys should specifically tailor their language when drafting agreements concerning such assets. These agreements should include: (1) a list of all options granted and an explicit description of which options are marital and which are not, (2) if a Deferred Distribution Method is employed, a description of whether and under what terms the non-owner can compel the owner to sell options after they vest, (3) provisions for payment of the “strike price” by the non-employed spouse and taxes resulting from the exercise of the options, (4) a description of how and when distribution is to be made to the non-owner spouse, and (5) precise notification and document exchange provisions. See Barenbaum supra p. 4
The matrimonial attorney involved in a case concerning stock options, especially when representing the non-employed spouse, should be sure to obtain the following information and documents: (1) a copy of the stock option plan, (2) copies of any correspondence or internal memoranda issued by the company at the time of the grant of any stock options, (3) a schedule of granted options during the employee's period with the company, (4) the date of each option granted, (5) the number of options granted at each date, (5) the exercise price of options granted at each date, (6) the expiration date of each set of options granted, (7) the date of vesting for each set of options granted, (8) the date and number of options exercised, (9) all short term or long term employee incentive plans covering the employed spouse, (10) all Employment Agreements between the employed spouse and his or her employer, (11) all company plans, handbooks and option award letters related to stock options granted, (12) copies of the firm’s 10K and 8K for the entire period that the employed spouse is with the company, (13) dates of promotions and positions held by the employee, (14) a brief job description of each position, (15) the salary history of the employee which indicates all forms of compensation, (16) the grant date of exercised options, and (17) copies of any corporate minutes or proxy statements referencing the award of options. These documents provide the core information from which option values can be calculated and agreements intelligently reached concerning their distribution. See Barenbaum supra p. 4
As we proceed in the 21 st Century, it is clear that matrimonial attorneys will need to become as knowledgeable as possible regarding this unique kind of asset. Hopefully, this article has given some insight into the complexities involved when dealing with Employee Stock Options and Divorce.
[1] Recognize, however, that some business and financial experts have criticized the growing prolific use of stock options in today’s economy. See “What You Need To Know About Stock Options” by Brian J. Hall published in the March-April 2000 issue of Harvard Business Review.
[2] Study conducted by Share Data, Inc. and the American Electronics Association.

In a New Jersey Divorce, What Happens With My Stock Options From My Employer?
As I have discussed in numerous blogs, marital assets are subject to equitable distribution. The court will look to see what assets were acquired during the marriage, in addition to assets acquired before the marriage yet significantly enhanced in value during the marriage. However, clients still frequently ask me what are considered assets anyways? When you typically think of an “asset”, tangible physical property comes to mind. Yet, what about things such as ownership interests in companies? Do they count as assets subject to equitable distribution as well? The New Jersey divorce case of Callahan v. Callahan addressed that issue in 1976 and it has been the law of our state throughout my career as a New Jersey divorce attorney. Let’s explore.
In Callahan , the parties divorce on November 13, 1975. The final judgment of divorced was initially entered in favor of the defendant husband on the legal grounds of cruelty. However, once the plaintiff petitioned the court, the judgment was amended to provide for a dual judgment of divorce. Additionally, the plaintiff wife asked the court to distribute property that her ex-husband owned that was not brought to the court’s attention when equitable distribution was first decided.
The defendant was an executive at an international corporation and had stock options in the company. At the time the parties divorced, the defendant owned the following options, which he acquired all throughout his marriage to the plaintiff: 1,500 shares at $23 a share, expiring February 1975; 500 shares at $34 a share, expiring May 1979; 500 shares at $29 a share, expiring February 1981; and 1,500 shares at $32 a share, expiring February 1981. The defendant first exercised his option on February 21, 1975 when the price was 33 ¾. He exercised the option is full with a $34,500 loan from Chase bank.
Upon hearing that the plaintiff wanted his stock options to be considered marital property for purposes of equitable distribution, the defendant stated to the court that they were not in fact property subject to distribution. The defendant claimed that owning stock options in a company was equivalent to owning the right to acquire an asset in the future. This point was significant to his argument because he stated that the options were not in fact assets and therefore not property. Furthermore, the defendant argued that pursuant to the company’s policy the options were not transferable other than by will.
When the issue was brought before the court, the court looked to Blitt v. Blitt , 139 N. J. Super . 213 (Ch. Div. 1976) for guidance. The court reasoned that the assets in Blitt were very similar to the ones at issue. Both of them constituted a form of compensation earned by the spouse during the marriage. Additionally, in both situations the assets were tied to respective plans that placed restrictions on the enjoyment of the assets. The defendant in the case argued that his stock options were different than other assets because it would be an expenditure to him to exercise the option. Yet, the court disagreed and held that the fact that an expenditure was required wasn’t crucial to the decision. Therefore, the court decided that the options were indeed subject to equitable distribution.
Once the court determined that the stock options were distributable, it faced an even greater challenge; how to distribute them. The court decided to bring up the idea of a constructive trust; a devise commonly used in wills and trusts law. It quoted a Supreme Court of New Jersey case stating when a constructive trust could be utilized— “there may be a constructive trust where the retention of the property or the beneficial interest would constitute an unconscionable advantage by the holder of the legal title, even though its acquisition was not wrongful. Where the property has been acquired in such circumstances that the holder of legal title may not in good conscience retain the beneficial interest, equity holds him accountable as trustee.”
After deciding to implement the constructive trust, the court granted the plaintiff a 25% ownership of each remaining option with the defendant to act as the trustee. By appointing the defendant as trustee of the constructive trust, the court would avoid fraudulent activity on the part of the defendant toward the plaintiff.
On many cases that I have handled as a New Jersey divorce attorney, I have worked with my client’s family and wills and trusts lawyer, accountants and Wall Street experts and insiders to better understand your unique situation.
If you or a loved one are considering a divorce in New Jersey with assets such as the stock options described above, I invite you to reach out to my office to discuss the situation in detail.

Stock options divorce nj

As the stock market continues to rise, divorce attorneys are involved in more and more cases involving stock options. The grant of stock options to key employees is now common in high technology companies and is becoming popular in many other industries as part of an overall equity compensation strategy. Larger, publicly traded companies such as Pepsico, Starbucks, Travelers Group, Bank of America, Merck and the Gap now give stock options to almost all of their employees. Many non-high tech closely held companies are joining the ranks as well.(1)
Traditionally, stock option plans have been used as a way for companies to reward top management and "key" employees and link (golden handcuff) their interests with those of the company and other shareholders. More and more companies, however, now consider all of their employees as "key." As a result, there has been an increase in the popularity of broad-based stock option plans, particularly since the late 1980's. More than a third of large United States companies now have broad-based stock option plans covering all or a majority of their employees--more than double the rate that existed in 1993. In a 1997 survey of 1,100 public companies conducted by Share Data, Inc. and the American Electronics Association, it was found that 53% of respondents provide options to all employees. In companies having 500 to 999 employees, the study found that 51% offer options to all employees, as compared to 30% in Share Data's 1994 survey and 31% in Share Data's 1991 survey. Forty-three percent of companies with 2,000 to 4,999 employees offer options to all, as compared to 10% in 1994. Forty-five percent of companies with 5,000 or more employees offer options to all, compared to 10% in 1994.
Since this trend shows no apparent sign of slowing down, matrimonial attorneys must be ready to address the unique issues that arise therefrom. This article will explain the basic nature of employee stock options, how they are valued, taxed and ultimately distributed incident to divorce.
There is no question that "stock options" are assets subject to equitable distribution.(2) However, simply to say that they are assets is not enough to guide the matrimonial litigator. We must first understand the basic nature and definition of a stock option. Basically, a "stock option" is "the right to purchase a specified number of shares of stock for a specified price at specified times, usually granted to management and key employees.(3) The price at which the option is provided is called the "grant" price and is usually the market price at the time the options are granted.(4)
Generally, stock options are an incentive to stimulate the efforts of key employees and to strengthen the desire of employees to remain in the employment of the corporation. Such incentives do not apply to retired employees.(5) Stock option plans can be a flexible way for companies to share ownership with employees, reward them for performance, and attract and retain a motivated staff. For growth-oriented smaller companies, options are a great way to preserve cash while allowing employees a piece of future growth. They also make sense for public firms whose benefit plans are well established, but who want to include employees in ownership. (Note: By issuing stock options, a company potentially dilutes the value of existing shares.)
Whether a stock option is granted for money, for past services, as an incentive for future services, or for no consideration at all, an option holder must exercise the option within its terms or he is subject to the loss of his/her right to do so.(6) In an option contract "time is of the essence."(7) Generally, expiration provisions and stock option agreements are strictly enforced. The courts reject the inevitable breach of contract and forfeiture claims that employees, former employees and other stock option holders press when they fail to timely exercise their options.(8) Although this rarely becomes an issue in divorce litigation, it is something to keep in mind in order to avoid severe economic loss to either party or a potential malpractice claim.
Generally, stock options come in two basic categories:
incentive stock options (commonly referred to as ISO's) which are qualified or statutory options and non-qualified stock options (which are commonly referred to as NQSO's).
Simply put, the difference between an ISO and a NQSO turns on its compliance with specific Internal Revenue Code requirements at the time of grant which ultimately effects how the option is taxed.(9)
Incentive stock options are granted to individuals for reasons connected to their employment. As a result they may only be granted to employees. They must also be approved by the shareholders of the corporation and granted at fair market value.
NQSO's, on the other hand, may be granted to both employees and independent contractors, and their beneficiaries.
An employee will not realize any taxable income upon the grant or exercise of an ISO. Concomitantly the corporation is not entitled to a deduction upon the exercise of the option. If the employee sells the stock within two years after the option is granted and within one year after the option is exercised, ordinary income will be realized in an amount equal to the lesser of 1) the excess of the fair market value of the shares at the date of exercise over the option price, or 2) the excess of the amount realized on the disposition over the option price. If the individual holds the shares for two years after the grant of the ISO and one year after exercise of the ISO, the difference between the sale price and the option price will be taxed as a capital gain or a loss. If the stock is sold after the two-year/one-year period, that gain will also be an alternative minimum tax preference item subject to the 26/28 percent tax rate.
Regarding a NQSO, the holder "employee" of a non-statutory option must recognize income at the time the option is granted if the option has a "readily ascertainable fair market value" at the time of grant.(10) If the option is not transferable and does not have a "readily ascertainable fair market value," no income will result to the individual upon the granting of the option. When the non-qualified stock option is exercised, the individual is taxed at ordinary income rates on the difference between the fair market value of the stock and the exercise price of the option. When the individual sells the stock, a capital gain or loss will be incurred on the difference between the amount received for the stock and its tax basis. Typically the tax basis is equal to the fair market value at the time of the exercise of the option. The capital gain would be either long term or short term depending on the length of the time the shares were held after exercise.
If the option is "actively traded on an established market" the code considers the option to have a "readily ascertainable fair market value."(11) If there is no "readily ascertainable fair market value" at the time of the grant, the optionee recognizes income at the time of the option either:
becoming "substantially vested" or is no longer subject to a "substantial risk of forfeiture".(12)
Any profit is a short term capital gain, taxable at ordinary income rates.(13) The code establishes four conditions necessary for an option that is not "actively traded on an established market" to meet the "readily ascertainable fair market value" standard:
the option is transferable by the optionee the option is exercisable immediately in full when granted there can be no condition or restriction on the option that would have a significant effect on its fair market value, and the market value of the option privilege is readily ascertainable.(14)
All four conditions must be met. Since these conditions are seldom satisfied, most non-qualified, non-statutory stock options not traded on an established market, do not have a readily ascertainable value.(15)
There is another factor to consider that can apply to both incentive and non-qualified stock options. Some companies are offering options with a reload feature. A reload option provides for automatic grants of additional options whenever an employee exercises previously granted options.(16)
If the stock that is received upon the exercise of the option is restricted property, the taxation is deferred until the restrictions lapse. Frequently employees receive restricted stock for services. The stock is not freely transferable and is subject to a risk of forfeiture based on the individual's performance or continued employment for a period of time. Pursuant to Internal Revenue Code Section 83(b), an individual can elect to recognize the fair market value of the shares, ignoring the restrictions, as income at the time of the award; if a Section 83(b) election is made, the holding period for capital gains purposes commences at the time of the election, otherwise the holding period begins to run at the conclusion of the restriction.
Based upon the foregoing, it may be appropriate to tax effect executive stock options for purposes of equitable distribution. This is because executive stock options have a fixed expiration date and therefore must be exercised and sold. The resulting tax is inevitable and therefore should be considered.
There are various methods to arrive at a present value for stock options. The two most popular are the "intrinsic value" and the "Black-Scholes" method.(17) In 1995 the accounting profession formally recognized that executive stock options have value beyond their intrinsic value. In addition, the Black-Scholes Option Pricing Model was recognized as an appropriate method to calculate the value of executive stock options by the accounting profession.(18) Interestingly, the Financial Accounting Standards Board (FASB) specifically stated that, "an employee's stock option has value when it is granted regardless of whether, ultimately (a) the employee exercises the option and purchases stock worth more than the employee pays for it or (b) if the option expires worthless at the end of the option period.(19)
In the intrinsic value method, the value of the stock option is equal to the difference between the option exercise price and the fair market value of the stock. For example, if you had an option to purchase stock "x" for $5, and the stock was currently trading for $27 per share, the intrinsic value of the option would be $22 ($27 - $5 = $22). However, the intrinsic value method does not consider the value to the holder of having the right to buy the stock at some point into the future at a predetermined price. It also does not consider the volatility of the underlying stock as well as the incumbent advantages and disadvantages of same. Moreover, it does not consider the advantages and disadvantages of the option holder not receiving the stock's dividends as well as the opportunity cost of purchasing the stock and forgoing the lost interest on the acquisition funds.
One method that considers the above-referenced items is the Black-Scholes Method. The most important distinction between the Black-Scholes Method and the intrinsic value method is the component for volatility. Without considering volatility in the calculation, options from two very different companies could have the same value. For example, assuming the option price and the fair market value are the same, the options from a slower growing utility company such as PSE&G could have the same value as the option from a faster growing computer company such as Microsoft. The Black-Scholes Method will differentiate between these two types of companies. The intrinsic method will not.
The Black-Scholes formula (shown below) is complex and contains many variable components.
The explanation of these letter designations for the variables in the Black-Scholes formula are:
C = theoretical call premium.
S = current stock price.
t = time until option expiration.
K = option stock price.
r = risk free interest rate.
N = cumulative standard normal distribution.
e = exponential function.
o = standard deviation of stock returns.
ln = natural logarithm.
The first part of the calculation determines the expected benefit of purchasing the stock outright. The second part of the calculation determines the present value benefit of paying the exercise price in the future. The difference is the fair market value of the option.
However, an underlying problem with the Black-Scholes Method is that it makes assumptions concerning the volatility of the stock, future dividend rates, and lost interest. A change in these underlying assumptions can affect the value of the option calculated pursuant to this method.
The following table provides a summary of how a change in one of these assumptions will affect the value of the stock options calculated under the Black-Scholes Method:
A common misconception in the valuation of long term options is that an option value is best represented by its intrinsic value.(20) In fact, based on the various Black-Scholes factors, stock options which are "out of the money," i. e., the strike price exceeds the current fair market value, are actually traded with various dollar values. For example, a Dell Computer stock option with a strike price of $50.00 and a market value of $37.3125 as of May 24, 1999 traded for $8.75. This is so even though the option was almost $13.00 out of the money when the option was valued.(21) The disparity in the value is due to investor optimism that the Dell shares would rise and be worth more than $58.75 before the expiration of the option.
Generally, the methods to distribute stock options usually fall into two categories:
Deferred Distribution Upon Exercise of Options (Constructive Trust); Present Valuation with off-set against other assets.
(Where one party argues that a portion of the stock options are non-marital, then an issue arises as to what portion of the stock options whether distributed through method 1 or 2 above, should be granted to the non-employee spouse. This is dealt with in more detail under the next section of this article.)
The Deferred Distribution Method is likely the most common manner in which options are distributed and was utilized in one of the earliest New Jersey cases dealing with stock options incident to divorce, to wit: Callahan v. Callahan. In that case, the trial court ruled that stock options acquired by a husband during the course of the marriage were subject to equitable distribution notwithstanding the fact that the options would terminate if the husband left the company within a certain period of time and the fact that they were subject to various SEC regulations. The court impressed a constructive trust on the husband in favor of the wife for a portion of the stock options owned by him in order to best effect the distribution of property between the parties without creating undue financial and business liabilities. It should be noted that all of the options were granted during the course of the marriage. However, although not specifically stated, it appears that some or all of the options were not fully vested since they were subject to divestiture under certain circumstances. This may have been why the wife was awarded only 25% of the options when they matured."(22) (See section below regarding determining distributive shares.)
The second mode of distribution is the Present Valuation Method. In this method, the stock options must be valued with the non-employed spouse receiving her share of the marital portion in cash or cash equivalent. Such a method should use discounts for mortality, interest, inflation and any applicable taxes. The downside of this "off-set method" is that it may become inequitable in the event that the employee spouse is either unable to exercise the options or, on the date they become exercisable, they are "worthless" (i. e., the cost of the option exceeds the fair market value.)
A review of out-of-state authority indicates that matrimonial courts differ on the method of distribution of stock options depending upon the nature of the options themselves, whether they are vested or unvested, transferable or salable. If the options are able to be transferred to the non-employee spouse, that is the preferred method of distribution, since it effects a clean break between the parties; there is no need for further communication between the parties and there is no need to use valuation methodologies. However, transfer of stock options is rarely permitted by employee stock option plans. Some courts have devised other methods, including but not limited to allowing the parties to be tenants-in-common, or allowing the non-employee spouse to order the employee spouse to exercise his or her respective portion of the options, upon furnishing the capital to do so. This is similar to the constructive trust solution devised in the Callahan case previously discussed. Trial courts are accorded broad discretion in fashioning an approach to fit the facts of the individual case. (Caveat: all of these methods still assume that there is no exclusion of options based upon the argument that they are unvested or were otherwise not earned during the marriage.)
As a practice point, please note that when distributing options in kind, consideration should be given that neither party violates any insider trading rules. For example, it may be a violation if the participating spouse advises the non-participating spouse that he or she intends to exercise his options in the near future. Another concern about the distribution of options in kind is that they can lapse if the individual's employment with the company is terminated, either voluntarily or involuntarily.
What happens when the employed spouse argues that some of the options are unvested or were otherwise "not acquired during the marriage" and therefore not distributable to the other spouse?
New Jersey courts have made it clear that it is necessary to balance the need for definitiveness embodied in the date of complaint rule (i. e., the cutoff date for determining which assets are subject to distribution) with the need for flexibility inherent in equitable distribution when addressing stock options incident to divorce.(23) Whereas courts of many other states have employed the "time-rule formula"(24) approach to determine what portion of stock options should be subject to distribution (see below), New Jersey courts have laid the groundwork in a more general fashion. Basically, assets or property acquired after the termination of the marriage, but as a reward for or result of efforts expended during the marriage, normally will be includable in the marital estate and thus, subject to equitable distribution.(25) The law in New Jersey recognizes that assets acquired by gainful labor during the marriage or as a reward for such labor are distributable while assets acquired after dissolution due solely to the earner's post-complaint efforts constitutes the employed spouse's separate property.(26)
The seminal case in the State of New Jersey regarding the distribution of stock options is the Supreme Court case of Pascale.(27) In that case, the parties were married on June 19, 1977. A complaint for divorce was filed on October 28, 1990. The wife began her employment with the Liposome Company on April 14, 1987 at which time she was immediately granted the option to purchase 5,000 shares of stock in said company. As of the date of trial, the wife owned 20,069 stock options awarded between April 14, 1987 and November 15, 1991. 7,300 of the stock options were granted after the complaint for divorce was filed.(28)
There were two blocks of stock options in dispute (i. e., 4,000 and 1,800), both granted on November 7, 1990. These were granted approximately ten days after the wife filed for divorce. (There was no indication of whether the options were vested in whole or in part, however, it is assumed that these options were "unvested".) Her position was that these options were not subject to distribution because the 1,800 were issued in recognition of past performance and the 4,000 options were awarded in recognition of a job promotion that imposed increased responsibility on her in the future.(29) The wife relied on the transmittal letters from her company to support her arguments. The trial court found that neither of the two blocks of options granted on November 7, 1990 could be excluded from equitable distribution and were to be divided equally.
However, the Appellate Division found that one of the two sets of options awarded on November 7, 1990 should have been included in the marital estate while the other should have been excluded.(30) The Appellate Division based that decision on its interpretation of the facts, finding that the block of 4,000 options granted in recognition of a promotion in job responsibility and an increase in salary was "more appropriately . . . designed to enhance future employment efforts" and should not have been included in the marital estate.(31) However, as to the block of 1,800 options, the Appellate Division found that these options were granted in recognition of past employment performance.(32) Therefore, these options were properly includable in the marital estate notwithstanding the date of complaint rule.(33)
In reversing the Appellate Court, the Supreme Court in Pascale concentrated on N. J.S. A. 2A:34-23 and the guiding principles enunciated in Painter v. Painter, that "property clearly qualifies for distribution when it is attributable to the expenditure of effort by either spouse during the marriage."(34) The Supreme Court in Pascale made it clear that the focus in these cases becomes whether the nature of the asset is one that is the result of efforts put forth "during the marriage" by the spouse jointly, making it subject to equitable distribution. To refute such a presumption, the party seeking exclusion of the asset must bear "the burden of establishing such immunity [from equitable distribution] as to any particular asset."(35)
The Pascale court concluded that "stock options awarded after the marriage is terminated but obtained as a result of efforts expended during the marriage should be subject to equitable distribution. The inequity that would result from applying inflexibility to the date of complaint rule is obvious."(36) Note that no distinctions were made as to vested or unvested options. Therefore, it appears that the Supreme Court agreed with the goals sought to be achieved by the Appellate Division, but did not agree with their conclusions based on the record below. The Supreme Court gave greater weight to the "credible finding" made by the trial court after listening to many days of testimony that the promotion came about as a result of the excellent service that the wife had provided to the company during the marriage.
Query, what would the NJ Supreme Court have done if it determined that a block of options were awarded for a mix of pre and post marital efforts? What if there is no clear indication as to why the options are granted? What if the options are unvested and require future work effort to fully vest? These circumstances often exist and are where things get murky. New Jersey has not adopted a clear and precise method to determine what portion of options which have yet to be fully earned should be distributed. New Jersey's approach provides for a much more subjective analysis (and room for advocacy) than in other states which utilize various formulaic approaches including a coverture factor or time-rule usually taking into account vesting schedules.
Like New Jersey, the majority of states in this country do consider unvested stock options to be property subject to distribution in marital dissolution proceedings.(37) Such was the recent ruling of the appellate court in Pennsylvania in the case of MacAleer.(38) The Pennsylvania Appellate Court addressed the issue of whether stock options granted to a spouse during the marriage, but not exercisable until after the date of separation, constitutes marital property to be divided during the divorce. That court's reasoning parallels, to a large degree, the majority of the other states which hold that unvested stock options are marital property. Analogizing their prior decisions determining that unvested pensions were subject to distribution, the court noted that benefits resulting from employment during marriage are marital, since these benefits are received in lieu of higher compensation which would have been utilized during the marriage to acquire other assets or to raise the marital standard of living.(39) Only a handful of states have specifically held otherwise. These states are Indiana, Colorado, Illinois, North Carolina, Ohio and Oklahoma.(40) North Carolina and Indiana do not divide unvested stock options on the basis of the state's statutory definition of "property."(41) Oklahoma does not consider unvested stock options to be marital property based on the common law foundation of the state's statutory scheme. These states award the unvested stock options to the employee spouse as separate property not to be considered for equitable distribution. These decisions are distinguished upon the fact that they are heavily influenced by statutes which define property in those jurisdictions. However, the remaining states which have addressed the issue, do find unvested stock options to be marital property and generally follow the same procedure for determining how much, if any, of the options constitute marital property.
Many jurisdictions, like New Jersey, view the first consideration to be a determination of whether the options were granted for past, present or future services. However, most courts have learned that employee stock options are not usually granted for any one reason, and could be compensation for past, present and future services. As a result, these courts sought some structure to determining the distributable share.
Most out-of-state courts which have addressed distribution of unvested stock options use a "coverture factor" or "time rule fraction" to determine how much, if any, of the unvested stock options constitute marital property. The most prevalent time rule fraction has evolved from that which was used by the California Court of Appeals in Hug.(43) The trial court in Hug found that the number of options that were community property were a product of a fraction; the numerator was the period in months between the commencement of the spouse's employment by the employer and the date of separation of the parties, and the denominator was the period in months between commencement of employment and the date when the first option is exercisable, multiplied by the number of shares that can be purchased on the date that the option is first exercisable. The remaining options were found to be the separate property of the husband.(44)
The husband in Hug agreed that the options were subject to division according to the time rule; however, he contended that the trial court used an erroneous formula(45). He argued that the proper time rule should begin as of the date of granting the option, not the date of commencement of employment, since the options were not granted as an incentive to become employed(46). He argued further that each annual option was a separate and distinct option which is compensation for services rendered during that year, and as it was to accrue after the date of separation, it was totally his separate property.(47) The court examined the various reasons why corporations confer stock options to employees, and found that no single characterization could be given to employee stock options. Whether they can be characterized as compensation for past, present, or future services, or all three, depends upon the circumstances involved in the grant of the employee stock option.(48). By including the two years of employment prior to the granting of the options in question, the trial court implicitly found that period of service contributed to earning the option rights at issue.(49) The appellate court found that this was supported by ample evidence in the record.(50)
Various versions of coverture factors have evolved as courts addressed different factual circumstances. The recent Wendt case out of Connecticut entails a voluminous decision in which the court surveys the states which addressed the issue of division of unvested stock options, and notes the competing arguments and the most common numerators and denominators in diverse forms of the coverture factors.(51) A brief summary of the Wendt court's decision as to stock options is helpful to understanding the approach of many courts to the issue of unvested stock options.
According to the December 31, 1996 unaudited financial statement prepared by KPMG Peat Marwick, LLP, the husband owned 175,000 shares of General Electric Vested Stock Options and Appreciation Rights in the following amounts: 100,000 units granted November 20, 1992 with a $40 per share exercise price, 70,000 units granted September 10, 1993 with an exercise price of $48.3125 and 5,000 units granted June 24, 1994 with an exercise price of $46.25. The unaudited financial statements used the "intrinsic value" method, with a December 31, 1996 New York Stock Exchange price of G. E. common stock at $98 7/8 per share. On May 12, 1997, G. E. common stock split two for one and, thus, the number of options doubled to conform to the stock split. As of the date of separation, December 1, 1995, G. E. was trading at $72 per share. As of October 7, 1997, G. E. was trading at $72 per share in its split status or $144 per share at the pre-May 12, 1997 stock split number of stock options. Based on the facts found, the court divided the 175,000 vested stock options and appreciation rights based on the date of separation, December 1, 1995. In rejecting a Black-Scholes approach in favor of the "intrinsic value" method, the trial court valued the vested options as follows: 175,000 stock options at $3,200,000 for the November 20, 1992 grant; $1,658,125 for the September 10, 1993 grant and $128,750 for the June 24, 1994 grant for a total 'intrinsic value" of $4,986,875. The court noted that this amount was before taxes. The court additionally noted that the options had no cash value until exercised at which point there would be tax due at short term capital gains tax rates, i. e., ordinary income tax rates. The court assumed maximum rates for the IRS, Medicare and Connecticut tax and calculated the net after tax of the intrinsic value to be $2,804,219. The court distributed one-half of that sum to the wife. The court found that the doubling of the G. E. stock after the date of separation was not due to the efforts of the wife, but that "she should share in the general increase in the investment community."(52)
The Wendt court then proceeded to address the 420,000 unvested stock options differently. The court had already concluded that only a portion of these unvested stock options was marital property. The court had also concluded that the unvested stock options were granted for future services. Therefore, a coverture factor was required. The coverture factor was determined by a fraction as follows:
Number of Months from the Date of Grant to the Date of Vesting and are not Subject to Divestment.
Number of Shares to be Vested at that Date of Vesting.
Since there were eight separate dates of vesting, eight separate coverture factors had to be calculated. For example, the coverture factor utilized for the 70,000 units granted on September 10, 1993 which vested on September 10, 1998 was as follows:
60 = 44.5% x 70,000 units = 31,150 units to be divided.
The court then took the price of the G. E. common stock on the date of separation (i. e. $72 per share) to calculate the intrinsic value and thereby determine the dollar amount owed to the wife for the marital portion of the unvested options. This was represented as follows:
-48.3125 (exercise price)
$23.6875 intrinsic value per share x 31,150 units = $737,866.
The "$737,866" represents the pre-tax dollar value of the marital portion of the unvested shares as determined by the coverture factor.
The court had basically rejected the wife's expert's valuation methodologies (which included "Black-Scholes") and opted to use the "intrinsic value" to obtain the appropriate value. Specifically, the court rejected the wife's expert's use of the Black-Scholes model which actually resulted in a value 10% lower than the "intrinsic value" ultimately used by the court.(54) The court then determined the wife's share of the intrinsic value of the unvested stock options (i. e., $1,626,273). The court noted that this amount was before taxes. The court proceeded to assume current maximum rates for the IRS, Medicare and Connecticut and found that the net after tax value of the gross intrinsic value would be $914,486. The court then proceeded to award the wife half of this sum. The court ordered the husband to pay the sum in cash and not in any portion of the options.
A similar approach was taken in the case of In re Marriage of Short.(55) In this case, the court held that the inclusion of the unvested stock options in the pool of distributable assets depended on whether the options were granted to compensate the employee for past, present or future employment. The court held that unvested options awarded for past and present services were marital property regardless of the continuing restriction on transfer or vesting. Unvested options granted for future services were deemed to be acquired periodically in the future as the options vest and are subject to a time rule division to allocate the shares between marital (community) and non-marital (separate) property. A different time rule than in the Hug case was used to differentiate between vested options that are clearly separate property for which no time rule would be applied, and those which include both a community effort and separate effort.
Just recently, New York joined the substantial majority of states holding that "restricted stock and stock option benefit plans provided by a spouse's employer constitute marital property for the purposes of equitable distribution, where the plans come into being during the marriage but are contingent on the spouse's continued employment with the company after the divorce."(56) New York's highest court, in a seven-judge panel, unanimously joined the majority of jurisdictions that use a time rule to divide such contingent resources. The DeJesus court laid out the following four-step procedure to guide courts in dividing such options:
Trace shares to past and future services; Determine the portion related to compensation for past services to the extent that the marriage coincides with the period of the titled spouse's employment, up until the time of the grant. This would be the marital portion; Determine the portion granted as an incentive for future services; the marital share of that portion will be determined by a time rule; and Calculate the portion found to be marital by adding: that portion that is compensated for past services; and that portion of the future services deemed to be marital after application of the time rule. The sum result will then be divided between the parties using the equitable distribution criteria.
This was the method utilized in Colorado in the case of In re Marriage of Miller. The DeJesus court was persuaded that the Miller type analysis best accommodated the twin tensions between portions of stock plans acquired during the marriage versus those acquired outside of the marriage, and stock plans which are designed to compensate for past services versus those designed to compensate for future services.(57)
However, notwithstanding the complexity of these methods, the danger of rigidity and resulting unfairness from a blind application of a formulaic approach still exists. Such issue was addressed by an Oregon Court which stated that "No one rule will produce a just and proper result in all cases and no one rule will be responsive to many different reasons why stock options are granted."(58) This was, more than likely, the reason that New Jersey's Supreme Court ruled as it did in Pascale.
There is little doubt that stock options constitute a form of compensation earned by the employed spouse during the marriage.(59)
In February of 1999, an Ohio appeals court agreed with Susan Murray, the former spouse of Procter & Gamble Company executive Graeme Murray, that unexercised stock options should be used in calculating the value of child support for the couple's 16-year-old son. This decision was the first by an Appellate Court to say that parents cannot shelter income from their children - intentionally or unintentionally, by postponing the exercise of stock options until the kids are grown.(60) Note that options granted in consideration of present services may also be deemed a form of deferred compensation. (See In Re Marriage of Short, 125 Wash.2d 865, 890 P.2d 12,16 (1995).
A Wisconsin Court of Appeals pointed out that a stock option is not a mere gratuity but is an economic resource comparable to pensions and other employee benefits.(61) The Appellate Court of Colorado held that for purposes of determining child support, income includes proceeds received by father from actual exercise of father's stock options.(62)
The Supreme Court of Colorado held, in the Miller case already referenced above, that "under the Internal Revenue Code, the optionee of a non-statutory employee stock option must recognize income at the time the option is granted if the option has a "readily ascertainable value" at the time of the grant(63). If the option does not have a readily ascertainable value at the time of the grant, the optionee recognizes income at the time the option becomes "substantially vested" or no longer subject to a "substantial risk of forfeiture," which generally does not occur until the option is exercised.(64)
The Miller Supreme Court found that unlike pension benefits, employee stock options may well be considered compensation for future services as well as for past and for present services.(65)
It is clear that there is a growing trend among the courts of this nation to distribute unvested or non-exercisable stock options that were granted during the marriage. The key factor in such distribution is a determination as to the purpose for which the options were granted, i. e., whether the options were granted for past or future performance. Where an option is granted for a mixed purpose and/or requires continued employment past the termination date of the marriage (as determined by local law), many states are employing a time-rule fraction which may be modified by the trial court based upon the particular facts and circumstances of the case. Matrimonial practitioners must be aware of the various forms of time-rule fractions that can be used and the factors that can modify the fraction. Such factors include, but certainly are not limited to the following:
when the option was granted; whether the option was granted for past or future performance (if "past" how far back); whether or not the option was granted in lieu of other compensation; whether or not the option was a qualified incentive stock option or non-qualified stock option; when the options will expire; the tax effect of the grant of the option; the tax effect of exercising the option; whether or not the option has a "readily ascertainable fair market value;" whether or not the option is transferable; whether or not the option is restricted property; the extent to which the option is subject to risk of forfeiture; and any other factors that the parties or court may deem fair and equitable to consider.
Since the majority of employee stock options are non-transferable and cannot be secured as with qualified pensions under federal laws such as ERISA, matrimonial attorneys should specifically tailor their language when drafting agreements concerning such assets. These agreements should include:
a list of all options granted and an explicit description of which options are marital and which are not; if a Deferred Distribution Method is employed, a restoration of whether and under what terms the non-owner can compel the owner to sell options after they are vested; provision for payment of the "strike price" by the non-employed spouse and taxes resulting from the exercise of options; a description of how and when distribution is to be made to the non-owner spouse and precise notification and document exchange provisions.(66)
The matrimonial attorney involved in a case concerning stock options, especially when representing the non-employed spouse, should be sure to obtain the following information and documents:
a copy of the stock option plan; copies of any correspondence or internal memorandum which were issued by the company at the time of the grant of any stock options; a schedule of granted options during the employees period with the company; the date of each option granted; the number of options granted at each date; the exercise price of options granted at each date; the expiration date of each set of options granted; the date of vesting for each set of options granted; the date and number of options exercised; all short term or long term employee incentive plans covering the employed spouse; all Employment Agreements between the employed spouse and his or her employer; all company plans, handbooks and option award letters related to stock options granted; copies of the firm's 10K and 8K for the entire period that the employed spouse is with the company; dates of promotions and positions held by the employee; a brief job description of each position; the salary history of the employee indicating all forms of compensation; the grant date of exercised options and copies of any corporate minutes or proxy statements referencing the award of options.
The information listed herein provides the core information from which option values can be calculated and agreements intelligently reached concerning their distribution.(67)
As we enter the 21st Century, it is clear that matrimonial attorneys will need to become as knowledgeable as possible regarding this unique kind of asset. Hopefully, this article has given some insight into the complexities involved when dealing with Employee Stock Options and Divorce.
1. See Employee Stock Options Fact Sheet, (visited on June 10, 1999).
2. See Kruger v. Kruger, 73 N. J. 464, 469 (1977) distinguished by Weir v. Weir, 173 N. J. Super. 130 (Ch. Div. 1980) (the defendant's pension plan payment had not matured as it was not being distributed); Mey v. Mey, 149 N. J. Super. 188, 196 (App. Div. 1977); Callahan v. Callahan, 142 N. J. Super. 325, 328 (Ch. Div. 1976) distinguished by In the Matter of Pearl, 40 B. R. 860 (Bankr. D. N.J. 1984) (court imposed a constructive trust to avoid unjust enrichment of the defendants)
3. BLACK'S LAW DICTIONARY (5th ed. 1979).
4. See Treas. Reg. Я1.421-7(a)(1) (1978); I. R.C. Я1234(a) (1998) (general discussion of stock options).
5. See Bernard v. IMI Sys., Inc., 131 N. J. 91, 107 (1992).
6. See Gillman v. Bally Mfg. Corp., 286 N. J. Super. 523 (App. Div. 1996).
7. See 1 A CORBIN ON CONTRACT, Я273 (1963 & Supp. 1994), cited in Gilman v. Balley Mfg. Corp., supra at 528.
9. See I. R.C. Я422A (b) (1998).
10. See Treas. Reg. Я1.83-1(a), 1.83-7(8) (1978); 26 C. F.R. Я1.83-7 (1978).
11. Treas. Reg. Я1.83-7 (b)(1) (1978).
12. I. R.C. Я83(a) (1994); Treas. Reg. Я1.83-1 (1978).
13. See I. R.C. Я1234(b)(1) (1998).
14. Treas. Reg. ЯЯ1.83-7(b)(2), 1.83-7 (b)(3) (1978).
15. See 1997 U. S. Master Tax Code, (CCH) Я1923.
16. sfas No. 123 Accounting for Stock-Based Compensation.
17. This valuation methodology developed by Myron Scholes, who received the Nobel Prize in Economics in 1997, has been accepted in the financial community as one method for pricing options.
18. See Statement of Financial Accounting Standards No. 123, ∂75, Financial Accounting Standards Board, October 1995. See also article entitled "Employee Stock Options Valuation Issues" by Les Barenbaum, Ph. D. Dr. Barenbaum is a Vice President at Financial Research, Inc., a Kroll-Linquist Avey company, and a professor of finance at LaSalle University.
19 Statement of Financial Accounting Standards No. 123, ∂78, Financial Accounting Standards Board, October 1995. See also Dr. Barenbaum's article.
20. See Dr. Barenbaum's article.
21. See Dr. Barenbaum's article.
22. Note that the court granted the wife only a 25% ownership of each remaining option with the husband acting as trustee. He was required to exercise her share of the options only at her direction, but the wife was required to supply the husband with the funds necessary to make the purchase. The husband, however, was required to pledge the stock at the wife's request should she wish to utilize it to finance her purchase. Once exercised, the husband was to hold the stock in trust for the wife. Following the exercise of the option, the wife could require the husband to transfer the stock held in trust to her or sell it on the market and turn over the proceeds. There were various restrictions imposed concerning transfers in accordance with SEC "insider trading" rules and potential tax liability.
23. See Reinbold v. Reinbold, 311 N. J. Super. 460 (App. Div. 1998).
24. The "time-rule formula" has been adopted in a number of jurisdictions to divide stock options when the rights under the option agreement were acquired during the marriage. See In re Marriage of Hug, 154 Cal. Aplicativo. 3d 780, 201 Cal. Rptr. 676 (1984); Green v. Green, 64 Md. App. 122, 494 A.2d 721 (1985); Smith v. Smith, 682 S. W.3d 834 (Mo. App. 1984); Garcia v. Mayer, 122 N. M. 57, 920 P.2d 522 (1996) (observing that the majority of jurisdictions treat unvested stock options as marital property); In re Marriage of Powell, 147 Or. Aplicativo. 17, 934 P.2d 612 (1997); Stachofsky v. Stachofsky, 90 Wash. App. 135, 951 P.2d 346 (1998); but see Hann v. Hann, 655 N. E.2d 566 (Ind. App. 1995). Under this approach, the risk that the employed spouse may lose the right to exercise the options will be shared by the parties. See In re Marriage of Smith, supra.
25. See id. at 469.
26. See id. at 469.
27. See Pascale v. Pascale, 140 N. J. 583 (1995) distinguished by Elkin v. Sabo, 310 N. J. Super. 462 (App. Div. 1998) (distinguished on the issue of whether child support payments should be reduced).
28. However, consider out of state authority which would reduce the amount of unvested stock options subject to distribution based on a coverture fraction.
29. See Pascale v. Pascale, supra, note 21, at 607.
30. See Pascale v. Pascale, 274 N. J. Super. 429, 437-40 (App. Div. 1994).
32. See id. at 440.
33. See Kikkert v. Kikkert, 177 N. J. Super. 471 (App. Div. 1981), aff'd o. b. 88 N. J. 4 (1981); Pascale v. Pascale, supra, note 24, at 440.
35. Landwehr v. Landwehr, 111 N. J. 491, 504 (1988) (quoting Painter v. Painter, 65 N. J. 196, 214(1974)), cited in Pascale v. Pascale, supra, note 21, at 609.
37. See Garcia v. Mayer, 122 N. M. 57 (Ct. App.1996), cited in Wendt v. Wendt, 1998 WL 161165, at *118 (Conn. Super. 1998)
38. MacAleer v. MacAleer, 725 A.2d 829 (Pa. Super. 1999).
39. See Berrington v. Berrington, 409 P. A. Super 355, 598 A.2d 31, 34-35 (1991), affirmed 534 Pa. 393, 633 A.2d 589 (1993).
40. See Hann v. Hann, 655 N. E.2d 566 (Ind. Ct. App. 1995); In re Marriage of Huston, No. 96CA2228, 1998 WL 99187 (Colo. App. March 5, 1998); In re Marriage of Isaacs, 260 Ill. App. 3d 423, 632 N. E.2d 228 (Ill. App. Ct. 1994); Hall v. Hall, 88 N. C. App. 297, 363 S. E.2d 189 (N. C. Ct. App. 1987); Demo v. Demo, 101 Ohio App. 3d 383, 655 N. E.2d 791 (Ohio Ct. App. 1995); Ettinger v. Ettinger, 637 P.2d 63 (Okla. 1981). However, note that only North Carolina, Indiana and Oklahoma clearly hold that unvested stock options are not subject to distribution. In In re Marriage of Huston seems to have been reversed by Colorado Supreme Court in the case of In re Marriage of Miller. The Illinois Appellate Court in the case of In re Marriage of Moody, the trial court could retain jurisdiction to allocate the profits realized from an exercise of the options when the options were exercised after the divorce. Lastly, the Ohio court in Demo v. Demo excluded the options awarded for premarital effort.
41. See Hann v. Hann, 655 N. E.2d 566 (Ind. Ct. App. 1995) (distinguished by Wendt v. Wendt, supra pp. 8-10); Hall v. Hall, 88 N. C. App. 297 (1987) (distinguished by Wendt v. Wendt, supra, pp. 8-10); Boger v. Boger, 103 N. C. App. 340 (1991); Ettinger v. Ettinger, 637 P.2d 63 (Okla. 1981) (distinguished by Wendt v. Wendt, supra, pp. 8-10).
42. See In re Marriage of Miller, 915 P.2d 1314 (Colo. 1996).
43. In re Marriage of Hug, 154 Cal. Aplicativo. 3d 780 (Cal. Ct. App. 1984).
48. "Treatises which describe employee stock options in the context of general corporations law strongly suggest that contractual rights to such benefits vary so widely as to preclude the accuracy of any but the most general characterization of them. Thus, there is no compelling reason to require that employee stock options must always be classified as compensation for past, present, or future services. Rather, since the purposes underlying stock options differ, reference tot he facts of each particular case must be made to reveal the features and implications of a particular employee stock option." Identidade. at 679.
51. See Wendt v. Wendt, 1998 WL 161165 (Conn. Super. 1998).
52. Wendt v. Wendt, 1997 W. L. 752374, at *7 (Conn. Super. 1997).
55. See In re Marriage of Short, 890 P.2d 12, 16-17 (1995).
56. DeJesus v. DeJesus, 90 N. Y.2d 643 (1997).
58. In re Powell, 147 Or. Aplicativo. 17 (1997) distinguished by In re Matter of Marriage of Gohlman, 151 Or. Aplicativo. 93 (Or. App. 1997) (court held that the increased value of the wife's stock did not warrant modification or termination of support payments and wife was allowed to hold the stock for investment purposes).
59. See Callahan v. Callahan, 142 N. J. Super. 325, 328 (Ch. Div. 1976).
60. See Margaret A. Jacobs, Stock Options Spur New Battles in Many Child Support Cases, WALL ST. J., Mar. 17, 1999, at B1.
61. See Chen v. Chen, 416 N. W.2d 661, 663 (Wis. Ct. App. 1987).
62. See In re Marriage Campbell, 905 P.2d 19 (Colo. Ct. App. 1995).
63. Treas. Reg. Я1.83-7 (1978); see 2A Benefits Coordinator Par. 31, 146.
64. See I. R.C. Я83(a) (1994); Treas. Reg. Я1.83-1,-7 (1978). See also 2A Benefits Coordinator Par. 31, 146; In re Marriage of Miller, supra, note 33, at 1314.
65. In re Marriage of Miller, supra, note 33, at 1318.

The Equitable Distribution of Stock Options.
Employee stock options are considered marital assets that are subject to equitable distribution. These include both vested and unvested stock options. Even stock options awarded shortly after the divorce complaint was filed are considered subject to equitable distribution if they were awarded as a result of efforts expended during the marriage. On the other hand, if the options were awarded shortly after the marriage ended but are incentives for future performance (i. e. to keep the employee spouse at the company) then they are not eligible for equitable distribution.
The issue as to whether stock options obtained after the divorce complaint was filed were awarded for past performance or for future performance is often an issue in divorce cases. Usually the documents granting the options do not spell out the reason(s) for the award, which must then be inferred from the nature of the employment and the other facts of the case.
The speculative nature of a stock option’s value makes it one of the most difficult assets to value at the time of the divorce. This is because it is impossible to predict the exact future value of the stock at the time the option will be exercised, which may be years later; in fact, there is no guarantee that the option will be worth anything at all at the time that it becomes exercisable.
There are two methods for equitably distributing stock options. The first, and by far less common, method is the Present Value Method which utilizes a mathematical formula to try to calculate the present value of the stock options. The most widely accepted present value formula is the Black-Scholes formula which combines a variety of factors, such as the exercise price of the stock, the share price on the valuation date, the length of time until maturity, interest rates and a standard deviation formula to account for the volatility of the share price.
The Present Value Method allows the parties to divide the value of the stock option(s) at the time of the divorce, with the non-employee spouse receiving monetary compensation (or an equivalent offset of assets) for his/her share of the other party’s stock options. The benefit of using the Present Value Method is the finality of the distribution of the stock options at the time of the divorce. The downside is the cost of having the options valued as well as the speculative nature of the Present Value Method as it applies to stock options. In fact, some state courts have held that the speculative nature of stock options makes them unsuitable for present value calculations.
The more common approach to dividing stock options is the Deferred Distribution Method. Using this method, the parties’ Marital Settlement Agreement or the Final Judgment of Divorce contains language which imposes a “Constructive Trust” over the non-employee spouse’s share of the stock options. The Constructive Trust requires the employee spouse to hold the options for the benefit of the non-employee spouse. The employee spouse holds on to the options until they vest, are exercisable (if unvested and/or non-exercisable at the time of the divorce) and non-employee spouse directs the employee spouse to exercise them. It is important that there be language in the Agreement requiring the employee spouse to notify the non-employee spouse prior to the options lapsing. Once the options are exercised, the employee spouse sells the stock and gives the sale proceeds to the non-employee spouse after the payment of taxes at the employee spouse’s tax rate.