How Are Stock Options Divided in a California Divorce Proceeding?

How Are Stock Options Divided in a California Divorce Proceeding?

When a couple divorces, it is easy to divide physical items. One of the parties simply takes possession of items such as home furnishings, tools, jewelry, and even cars. Other property is more difficult to evaluate and divide. This is the case with employee stock options.

Stock options are granted by a company to an employee, usually managers and executives. Stock options represent the right of the employee, at some point in the future, to purchase company stock if he or she chooses to do so. Sometimes, a company gives an employee stock options to attract the employee to come to work for it; other times, a company offers stock options to try to keep an employee or to compensate him or her for future work. If and when a stock option “vests”, the employee has the right to buy the company’s stock.

A basic understanding of property rights in California is essential to understanding how family courts deal with stock options. You can learn more about these rights here.

In addition to understanding basic property law, it is important to understand what the term “vest” means in relation to stock options. The date a stock option “vests” is the date upon which an employee has the right to buy the stock. This is known as “exercising” the option right.

The first step in determining how to handle stock options in a divorce is deciding who owns the option. Courts have broad discretion on how this is done. However, two different approaches are typically used, both of which are named after the cases that established them. They are known as the Hug formula and the Nelson formula; they are also known as time rules. In essence, the sooner after the date of separation an option vests, the larger the community interest in them.

Which formula is applied, usually depends on the reason the company offered the stock option in the first place. The Hug formula typically applies to options that were given to the employee to attract him to work. The Nelson formula is usually used when the options were offered to keep an employee or to compensate him for future work. While many people assume that options that vest after the date of separation are separate property, this is simply not true when the Nelson time rule is applied.

Valuing stock options properly requires an attorney who understands all the law and who is experienced in making the strongest arguments for her client. To obtain the counsel of just such an attorney, please contact the Law Offices of Judy L. Burger. We have extensive experience in divorce, child custody, and child support matters. Call today to learn more: (415) 293-8314.