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    The Lawletter Blog

    FAMILY LAW: Stock Options—Classification

    Posted by Gale Burns on Mon, Nov 21, 2011 @ 16:11 PM

    November 22, 2011

    Brett Turner, Senior Attorney, National Legal Research Group

    A recent Virginia Supreme Court decision clarifies the law on classification of stock options.  In Schuman v. Schuman, Record No. 100967, 2011 WL 5325292 (Va. Nov. 4, 2011), the wife received stock options during the marriage.  The options did not vest until after the marriage was over.  The trial court held that the stock options were entirely the wife's separate property.  The court of appeals affirmed, holding that the options had not been acquired during the marriage, because they did not vest until after the marriage was over.  Schuman v. Schuman, Nos. 0631‑09‑4, 1259‑09‑4, and 1260‑09‑4, 2010 WL 1539955 (Va. Ct. App. Apr. 20, 2010) (unpublished).  The court's holding was consistent with prior authority, holding that stock options are acquired on the date of vesting.  Shiembob v. Shiembob, 55 Va. App. 234, 685 S.E.2d 192 (2009); Ranney v. Ranney, 45 Va. App. 17, 608 S.E.2d 485 (2005).

    On further appeal, the Virginia Supreme Court reversed.  Virginia's equitable distribution statute provides that deferred compensation benefits, "whether vested or nonvested," can constitute marital property.  Va. Code Ann. § 20-107.3(G)(1).  If the court of appeals' position were correct, unvested options could never be marital property, because they would never vest until after the divorce.  "The inclusion of the phrase 'whether vested or nonvested' clearly indicates that the date of vesting is not, by itself, dispositive of whether the deferred compensation is marital or separate property."  Schuman, 2011 WL 5325292, at *2.

    What, then, is the correct way to determine when stock options are acquired?  Section 20-107.3(G)(1) applies the same rules to both retirement benefits and deferred compensation benefits, such as stock options.  "[T]he legislature clearly intended for the delineated plans of compensation to be treated uniformly. Therefore, it is axiomatic that the marital share of deferred compensation should be calculated in the same manner as the marital share of pensions or other retirement benefits."  Id. at *3.

    Virginia law is clear that retirement benefits are acquired when they are earned, not when they vest.  E.g., Dietz v. Dietz, 17 Va. App. 203, 436 S.E.2d 463 (1993).  Schuman applied the same rule to stock options.   "'[S]tock options, like retirement benefits, are acquired when they are earned, and not at the time of receipt, vesting or exercise.'"  Schuman, 2011 WL 5325292, at *2 (quoting 2 Brett R. Turner, Equitable Distribution of Property § 6:49, at 292 (3d ed. 2005)).  The marital interest is therefore a fraction, equal to the total time married during the earning period, divided by the total earning period.[1]

    The court did not determine the date of earning on the facts of Schuman, instead leaving that issue for the trial court on remand.  But Schuman adopted the general majority rule, so there is ample relevant authority from other states.

    Nationwide, there is general agreement that stock options, like retirement benefits, are earned gradually over time.  The time period includes, at a minimum, the entire vesting period.  If the employee must remain with the employer until a certain date to receive the options (and that is the main purpose of a vesting period), then the options must be compensation for the employee's service during that period.

    The harder question is whether services for some period before the date of vesting should be included.  Cases nationwide reach different results on this issue, depending on the facts.  Compare, e.g., In re Marriage of Hug, 201 Cal. Rptr. 676 (Ct. App. 1984) (where options accompanied change in employment, options were consideration for prior employment, including options lost by changing positions), with In re Marriage of Harrison, 225 Cal. Rptr. 234 (Ct. App. 1986) (distinguishing Hug on the facts, and finding that the options were consideration only for services during the vesting period).  See generally 2 Turner, supra, § 6:49.

    The Nebraska Supreme Court identified a series of factors to be considered in determining when stock options were earned:

    To determine which percentage represents compensation for past, present, and future services, "[n]either the language of the [employee stock option or stock retention share] agreement itself nor the testimony of the employer is dispositive." Relevant, nonexhaustive considerations include whether the employee stock options or stock retention shares were intended to (1) secure optimal tax treatment, (2) induce the employee to accept employment, (3) induce the employee to remain with the employer, (4) induce the employee to leave his or her employment, (5) reward the employee for completing a specific project or attaining a particular goal, and (6) be granted on a regular or irregular basis.

    Davidson v. Davidson, 578 N.W.2d 848, 856 (Neb. 1998) (citation omitted) (quoting Thomas P. Malone, Employee Stock Options and Restricted Shares:  Determining and Dividing the Marital Pot, 25 Colo. Law. 87, 90 (1996)).

    Finally, it should be noted that each separate grant of stock options will normally have its own unique vesting period, and will therefore be earned at a different time.  Thus, "the marital portion of each award should be calculated individually rather than as one single award."  Schuman, 2011 WL 5325292, at *3.



    [1]As used in this sentence, "time married" means the time between the date of marriage and the date of classification.  In states like Virginia and California that classify property as of the date of separation, or in states like New Jersey that classify property as of the date of filing, this period may actually be less than the entire length of the marriage.

    Topics: legal research, family law, Brett turner, valuation of stock options, Schuman v. Schuman, vesting, deferred compensation benefits, marital v. separate property, acquired when they are earned, marital portion calculated individually

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