Stock Options in an Arizona Divorce

The Arizona Court of Appeals in the matter of Brebaugh v. Deane issued a decision regarding whether stock options that have not vested before the petition of dissolution is served can be divided as community property of the marriage in the case of William J. Brebaugh v. Nancy L. Deane.

William Brebaugh and Nancy Deane petitioned for divorce after a marriage of thirty years. Stock options were given to Brebaugh by his employer several times during the marriage. The parties agreed the options that vested before the petition were community property and the options he received after service were sole and separate property. However, the parties were unable to agree on whether the stock options Brebaugh received during the marriage, but had not vested at the time of service, were community or separate property.

The trial court stated that the issue in this case was deciding how the community interest in the unvested stock options could be determined. Courts typically decide such an issue by examining two separate “time rule” formulas, which are known as the Hug formula and the Nelson formula. The most appropriate formula to use depends on the intent of the company when they offer the stock options to the employee.

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Brebaugh contended that the options were given to him as an incentive to stay with the company, which would favor the use of the Nelson formula. Deane asserted that they were compensation for Brebaugh’s past efforts because his salary and bonuses alone were inadequate compensation, which would favor the use of the Hug formula.

The trial court rejected Brebaugh’s claim after examining the time rule, deciding that he had not presented clear and conclusive evidence that the unvested options were his sole and separate property. Therefore, they ruled that the options were community property and Deane would receive one-half of them.

Brebaugh appealed this decision to the Arizona Court of Appeals, pursuing his claim that the options were given solely to encourage him to remain with his company. Deane maintained that there was insufficient evidence for his claim and that the options were compensation for work he performed during the marriage, which would make them community property.

The appeals court examined the stock option agreement and concluded that the agreement did not appear to support Deane’s claim. They also heard testimony from a representative of Brebaugh’s company who reiterated that stock options were generally granted to encourage employees to remain with the company.


Stock Option in an Arizona Divorce | The Ruling

The appeals court concluded that the trial court did not appear to have considered these pieces of evidence before ruling on the issue. Because of this oversight, the appeals court reversed the portion of the decree dividing the unvested stock options and returned the case to the trial court for further examination of the evidence presented.

What we can take away from this case is that it is important for the trial court to consider all evidence before deciding how to disburse unvested stock options to a divorcing couple. The intent of the employer when they gave the options to the employee, whether the options were compensation for past performance or incentives for remaining with the company, is crucial in determining which formula to use when dividing these stock options.