STOCK OPTION – A benefit in the form of an option given by a company to an employee to buy stock in the company at a discount or stated fixed price.

Stock options are an important part of compensation for many individuals.  They are issued by an employer to either show appreciation for work done or to incentivize employees in the future.  The employee is awarded stock in the company at a certain value.  It typically takes a few years to vest so if the value of the stock, when vested, is lower than the issuing price, there is no value and no profit.  Everyone hopes, therefore, that the value of the stock awarded increases above the price of the award so that at the time of liquidation there will be a profit. At the time of liquidation, the owner of the stock option (the employee) would pay the price of the stock at the original price plus taxes on any gain.  For example, if a stock option was awarded at $35.00 per share and five years later it is vested and worth $60.00 per share, the owner (employee) liquidating would first have the $35.00 deducted, then owe tax on the $25.00 per share gain.  The net is the profit.

An important case came down, MG v. SM, A-1290-17T1 in 2018 about whether certain stock options should be included or excluded from equitable distribution.  Sometimes stock options or stock awards are granted during a marriage, but they do not vest and cannot be cashed in until after the marriage is over.  This obviously causes disputes about whether these assets are in or out of the “marital pot” in a divorce.  The Appellate Division went through a very step by step analysis showing how important the specific facts of the case are.

In this case, the husband was granted 8 stock awards during the marriage, but only 3 vested.  The other 5 vested after the Complaint for Divorce was filed.  The husband, in this case, had very specific plan documents showing that the options were received for future performance.  They were an incentive to stay with the employer post-Complaint and to continue high quality work in the future.  These specific facts and details allowed the husband to meet his burden that the money received for efforts which occurred outside the marriage may not be subject to equitable distribution.

The criteria for stock options relative to equitable distribution is as follows:

1. If the stocks are awarded and vest during the marriage, they are definitely subject to equitable distribution;
2. If the stocks are awarded during the marriage, but vest post-Complaint for work performed during the marriage (must look at all paperwork related to the stock), it is part of equitable distribution;
3. If the stocks are awarded during the marriage, but vest post-Complaint, and there is a material question during the marriage whether it is for past work or future work outside the marriage, there is a shift. And if the employee can provide proper documentation that it is truly for future performance after the marriage, it may be excluded from equitable distribution.

The key is why the stock liquidated after the marriage was issued, not the timing.  It’s all in the details.  If you have a complex financial matter in a divorce, call Helfand & Associates.  973-539-1000