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Classification of Unvested Stock Options
© 2004 National Legal Research Group, Inc.
ARIZONA: Brebaugh v. Deane, ___ Ariz. ___, 118 P.3d 43 (Ct. App. 2005)
The trial court erred in holding that unvested stock options given to the husband shortly before the divorce were entirely community property. Unvested stock options are classified in the same manner as unvested pensions, and the record showed that the options were at least partly consideration for future services to be rendered after the date of classification. Thus, the options were at least partly separate property.
The husband received stock options from his employer. The stock options were received in unvested form before the date of classification, but they did not vest until after the date of classification. The trial court treated the options as community property, holding that the husband had not proven that they were granted in consideration for service to be performed after the date of classification.
The Arizona Court of Appeals reversed. In the absence of Arizona law, the court considered law from other states, looking equally to both equitable distribution and community property jurisdictions. The court found that unvested stock options are generally treated like unvested retirement benefits:
Other jurisdictions also consider unvested stock options analogous to unvested pension benefits in determining the community interest. See, e.g., Garcia v. Mayer, 122 N.M. 57, 920 P.2d 522, 525, 14-15 (Ct. App.1996); Hug, 201 Cal. Rptr. at 681, 684-85; MacAleer v. MacAleer, 725 A.2d 829, 833, 9 (Pa. Super. Ct.1999). Thus, if the stock options are intended as compensation for Husband's efforts during marriage, they are community property. If, however, the options are, in part, intended to induce future employment, then, to that extent, they are Husband's separate property.
118 P.3d at 46. On the facts, the record contained considerable evidence that the stock options were compensation for future services:
The stock option agreements provide that the options were intended to encourage key employees to remain and to enhance Apollo's ability to attract new employees "by providing an opportunity to have a proprietary interest in the success of [Apollo]" and as an incentive to "focus on [its] long-term growth." The agreements provided that the options could vest on an accelerated basis if Apollo reached certain profit goals and the stock price reached a designated amount. Alternatively, and regardless of Apollo's performance, twenty-five percent of the options would vest annually beginning the year after the options were awarded.
Apollo's chief financial officer, Kenda Gonzalez, moreover, testified that stock options generally are granted as an incentive for employees to remain with a company, to think like stockholders and thereby consider the company's long-term benefits. She also testified that Apollo grants options based on the employee's level of responsibility within the company, not for past performance.
Id. at 46-47. In addition, "[h]usband admitted that he would not stay with the company if he only received his salary and bonuses." Id. at 47.
Because at least some portion of the stock options was consideration for future services rendered during the vesting period, and because the vesting period included time after the date of classification, the trial court had erred in treating the options as entirely community property:
If the stock options were intended solely as compensation for work performed or deferred compensation, the trial court's characterization would be correct. It does not appear, however, that the court considered the fact that the agreements specifically stated that the options were intended to encourage key employees to remain with Apollo and enhance Apollo's ability to attract new employees. The language of the agreements sufficiently rebuts the presumption that the options granted during the marriage are entirely community property.
Id. The case was remanded with instructions to use an allocation formula to measure the respective community and separate interests in the options.
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