Stock Option FAQ
Courtesy of Charles F. Vuotto, Jr.
My spouse has stock options at his work. Are those considered an asset to be divided during our divorce?
Although the extent of company’s issuing employee stock options has declined from the levels that existed in the 1990’s, to the extent that a divorcing party has stock options, these are certainly assets subject to equitable distribution. 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.” The price at which the option is awarded is called the “grant” price; this is usually the market price at the time the options are granted. Black’s Law Dictionary (5th Ed. 1979). See also Treas. Reg. § 1.421-7 (a)(1) (1978); I.R.C. § 1234 (a) (1998). Generally, stock options are incentives to stimulate the efforts of key employees as well as attempts to retain such employees. Generally, there are two basic categories of stock options: (1) incentive stock options (commonly referred to as “ISO’s”) which are qualified or statutory options and (2) non-qualified stock options (which are commonly referred to as “NQSO’s”). Simply put, the difference between the two types of options results from tax compliance requirements at the time of the grant.
Stock Options can be valued using various methodologies, some of which are very complex and go far beyond the space requirements of this short article. One valuation approach is the intrinsic method (i.e., current trading price less strike price). Another valuation method is the Black-Scholes formula (a complex formula taking future risk and volatility into account). Suffice to say that options, like any other asset, can be valued with one party retaining the options and buying out the other divorcing party’s share. Another option is to divide them in kind by way of a Callahan Trust. This refers to the case of Callahan v. Callahan 142 N.J. Super 325 (Ch. Div. 1976).
New Jersey courts, when addressing stock options incident to divorce, emphasize the necessity to balance the “need for definitiveness embodied in the date of complaint rule with the need for flexibility inherent in equitable distribution.” This quote came from the Supreme Court case of Pascale v. Pascale 140 N.J. 583, 612 (1995), which is the seminal case in New Jersey concerning the distribution of stock options.
There is unquestionably a growing trend among the courts of this nation to subject unvested or non-exercisable stock options granted during the marriage to distribution. Further, options may be viewed as income under certain circumstances for purposes of fixing support obligations. As the trend continues, it is critical that litigants be aware of the ever changing case law and that matrimonial attorneys become familiar with these unique types of assets and tailor their discovery demands, negotiation and trial preparation accordingly.