This year, compensation packages for top levels executives rebounded considerably following a decline last year and the most significant increase was seen in stock option awards.* For example, Apple’s Bruce Sewell led the pack with a whopping $66,571,750.00 in stock options! Though usually not to the tune of $66 million dollars, you or your spouse may have received some number of stock options during your marriage. During divorce, characterizing stock options and how determining how to appropriately allocate the options between the spouses often becomes very contentious. However, there are two prevailing methods for allocating intermediate stock options, i.e., options that were awarded during the marriage but will vest after the date of separation: the Hug formula** and the Nelson formula***. Ultimately, the Hug formula tends to be more favorable to the community, while the Nelson formula is typically more favorable to the employee spouse.
Under the Hug formula, the number of options determined to be community property is the product of the following fraction: the numerator is the total number of months between commencement of employment and the date of separation, and the denominator is the total number of months between the commencement of employment and the date when each option vested. This fraction is then multiplied by the number of shares of stock which could be purchased on the date each option vested.
In the Marriage of Hug, the Court recognized that stock options could be construed, depending on the particular facts of the case, as compensation for either past, present, or future services or a combination of these possibilities. The Court found that in Hug, the stock options were granted partly to entice the husband to leave his prior job and partly as an incentive to work hard in the future. Therefore, the Court concluded that the husband was earning the options from the date his employment started to the date the options vested.
On the other hand, under the Nelson formula, the numerator is the number of months from the date of grant of each block of options to the date of separation, and the denominator is the period from the time of each grant to its date of exercisability.
In the Marriage of Nelson, the Court observed that the options in Marriage of Hug were designed to attract new employees and more generously reward past services. However, in Nelson, only prospective increases in the value of the stock could result in a profit to the employee option-holder. Therefore, the Court determined that it was appropriate to place more emphasis on the period following each grant to the date of separation than on the employee’s entire tenure with the company up to the time of separation.
Allocating stock options is a very complicated and confusing issue. If you have any questions regarding the appropriate characterization of your stock options or you are simply looking for more legal advice regarding your current situation, please contact our California Certified Family Law Specialists (as certified by the State Bar of California Board of Legal Specialization) at Lonich Patton Erlich Policastri. Our attorneys have decades of experience handling complex dissolution proceedings and are more than happy to meet with you.
Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may include legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.
*Corporate Counsel Finds 2012 General Counsel Compensation Turnaround: Every Pay Category Rose, Stock awards Jumped 64.8%: http://www.alm.com/about/pr/releases/corporate-counsel-finds-2012-general-counsel-compensation-turnaround-every-pay
** In re the Marriage of Hug, 154 Cal. App. 3d 780 (1984).
*** In re the Marriage of Nelson, 177 Cal. App. 3d 150 (1986).