Stock options and stock awards are becoming a regular addition to employee compensation. Knowing what to do with these stock options can be a difficult task to hurdle in general. But dealing with these stock awards in a divorce proceeding requires even more knowledge about the type of the award as well as the existing law in Virginia.
What are Stock Awards?
There are many different types of stock awards, but the most common are stock options. Simply put, a stock option is the right to purchase company stock at a set price, regardless of what the company’s stock price happens to be trading for at the time of purchase. Sometimes “fully vested” stock options are given to an employee, which means the employee has the right to use the options immediately after they receive them. More commonly, however, stock options are given to an employee with a “vesting period,” meaning the right to use the options becomes earned over time.
Virginia Cases Dealing with Stock Awards
In order to understand how to deal with stock options and how a judge will likely tackle stock options during a divorce, it is helpful to look at some recent Virginia cases on the topic.
Dietz v. Dietz is the earliest and most widely known Virginia stock option case. In this 2003 case, the husband had stock options granted to him before he separated with his wife. The options vested both before and after the separation. The trial court ruled that the stock options should be considered deferred compensation and ordered the husband to pay his wife a percentage of the net proceeds of the marital share if and when the husband exercised any of the stock options that were marital property. The husband appealed this ruling. However, the Court of Appeals agreed with the trial court and found that the stock options were, in fact, part of a deferred compensation plan.
Ranney v. Ranney was decided two years later and addressed the issue of classification of stock options in more detail. In Ranney, the husband’s employer granted him 20,000 stock options that vested over the course of four years and were contingent only on his continued employment with the company. He entered into this agreement with his company about one month before he married his wife. So, even though the options were granted to him before marriage, they vested almost entirely over the course of the marriage. At the time of the hearing, all of the options had been used to purchase assets or to provide for the couples’ expenses. The trial court found that the entirety of the award was the husband’s separate property because he received the options before he married his wife. However, the Court of Appeals reversed this decision and found that because the necessary condition to vest the stock options (the husband’s continued employment) happened during the marriage, the husband earned the right to the options during marriage.
In the 2011 case, Schuman v. Schuman, the wife’s employer gave her a number of stock options, as well as an award of restricted stock and preferred stock during the marriage. However, all of these stock awards were subject to a vesting schedule and did not fully vest until after the husband and wife separated. The Court of Appeals ruled that the various stock awards were entirely the wife’s because they did not fully vest until after the separation. However, the Supreme Court of Virginia did not agree and they reversed the Court of Appeals ruling. The Supreme Court found that the stock awards were a form of deferred compensation and could be divided whether vested or non-vested. The Court also ruled that the martial share of the stock awards should be calculated in the same manner as the marital share of pensions or other retirement benefits.
Even though Virginia has many conflicting rulings regarding the classification of stock options, Dietz remains the standard for classification of marital versus separate shares of stock options in Virginia. Put simply, Dietz found that options are marital if they are earned during the marriage and before the couple separates.
Because there are so many different rulings throughout the state of Virginia, there are many outstanding questions about classifying and distributing stock awards. An experienced attorney such as Van Smith will be able to recognize issues associated with stock awards and help you navigate the complicated framework of stock classification and division. Call the office of Smith Strong at (804) 325-1245 or (757) 941-4298.