Stock Options Divided in an Arizona Divorce Case
As many are aware, an employee may receive Stock Options or Restricted Stock Units from their employer as a form of compensation. The question becomes how are stock options are divided in a divorce in Arizona.
A stock option provides the employee an option to purchase company stock at a stated price, referred to as the “strike price,” at a given point in time.
Typically, the options have a vesting period.
For example, an employee may be granted 1000 stock options that vest equally over four years such that each year 250 of the options vest until the passage of four years at which time all 1000 options are vested.
If the market price of the stock is higher than the “strike price,” the employee can turn the stock back to the company and be paid the difference between the “strike price” and the actual market value of the stock.
Alternatively, the employee can continue to hold the stock to see if future appreciation will provide the employee with a greater profit from the stock.
The main difference between a stock option and a restricted stock unit is that the employee owns the company’s shares that were granted under the terms of the stock option plan.
They can sell them, or they can hold them as long as they wish. A Restricted Stock Unit, however, is different.
Dividing Restricted Stock Units in an Arizona Divorce
Similar to stock options, a Restricted Stock Unit will have a “strike price” and a vesting schedule.
However, unlike stock options, the employee does not own the stock when the Restricted Stock Units vest.
Instead, the employee is only entitled to cash in the difference between the “strike price” and the current market value of that stock. Many Restricted Stock Units also have a date by which the employee must elect to exercise the cashing in of the Restricted Stock Units after which time they are deemed void.
Both Stock Options and Restricted Stock Units are taxable income.
As a result, you must take into consideration the income tax effects of these assets when dividing them in an Arizona divorce.
Almost all employee benefit plans contain language providing that these stock options cannot be transferred, which means the court has no authority to order the company to rename the Stock Options or Restricted Stock Units in the name of the nonemployee spouse.
In such circumstances, it may be wise to have the employee spouse hold the nonemployee spouse’s share of those Stock Options, and Restricted Stock Units in a constructive trust with specific language included to protect the nonemployee spouse.
One of the more complicated aspects of dealing with Stock Options and Restricted Stock Units is understanding the terms of the Stock Option and Restricted Stock Unit plan to identify the community property interest in those assets that have not fully vested.
It is equally important to know whether the assets were granted to the employee as a reward for past performance or, instead, as an incentive to continue employment in the future.
Unvested Stock Options in an Arizona Divorce
Arizona court’s lacked guidance on how to address Stock Options and Restricted Stock Units until the Arizona Court of Appeals addressed the issue directly in the case of Brebaugh v. Deane.
The Arizona Court of Appeals in the matter of Brebaugh v. Deane issued a decision regarding whether unvested stock options in an Arizona divorce were community or separate property 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 on the options that vested before the petition was community property and the options he received after service was 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 method to use depends on the intent of the company when they offer the stock options to the employee.
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 held 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 granted to encourage employees to remain with the company.
Formula to Apply to Unvested Stock Options in an Arizona Divorce
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.
If you need information about how stock options are divided in a divorce in Arizona, you should seriously consider contacting the attorneys at Hildebrand Law, PC. Our Arizona community property attorneys have over 100 years of combined experience successfully representing clients in divorce cases in Arizona.
Our family law firm has earned numerous awards such as US News and World Reports Best Arizona Family Law Firm, US News and World Report Best Divorce Attorneys, “Best of the Valley” by Arizona Foothills readers, and “Best Arizona Divorce Law Firms” by North Scottsdale Magazine.
Call us today at (480)305-8300 or reach out to us through our appointment scheduling form to schedule your personalized consultation and turn your Arizona community property case around today.
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