Exploring the use of the time rule in the distribution of stock options on divorce

Family Law Quarterly

Volumn 35, Issue 2, 2001, Pages 263-302

  David, Rosettenstein S ^a  

^a QUINNIPIAC UNIVERSITY   (United States)

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EID: 23044531024     PISSN: 0014729X     EISSN: None     Source Type: Journal    
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References (231)

1. In re Marriage of Lehman, 955 P.2d 451 (Cal. 1998);
2. In re Marriage of Walker, 265 Cal. Rptr. 32 (Ct. App. 1989);
3. In re Marriage of Harrison, 225 Cal. Rptr. 234 (Ct. App. 1986);
4. In re Marriage of Nelson, 222 Cal. Rptr. 790 (Ct. App. 1986);
5. In re Marriage of Hug, 201 Cal. Rptr. 676 (Ct. App. 1984);
6. In re Marriage of Miller, 915 P.2d 1314 (Colo. 1996);
7. In re Balanson, 996 P.2d 213 (Colo. App. 1999)
8. Rev'd in other part, LEXIS 437 (May 29, 2001);
9. Bornemann v. Bornemann, 752 A.2d 978 (Conn. 1998);
10. Wendt v. Wendt, 757 A.2d 1225 (Conn. Ct. App. 2000);
11. Wendt v. Wendt, No. FA96 0149562S, Conn. Super. LEXIS 1023 (Mar. 31, 1998);
12. Grich v. Grich, No. FA93 52531 IS, Conn. Super. LEXIS 3451 (Dec. 31, 1996);
13. In re Marriage of Fatora, No. CN95-10406, Del. Fam. Ct. LEXIS 195 (July 10, 1998);
14. Chimes v. Michael, 748 A.2d 1065 (Md. Ct. Spec. App. 2000);
15. Hislop v. Hislop, No. C7-98-144, C9-98-162, Minn. App. LEXIS 951 (Aug. 18, 1998);
16. In re Marriage of Salstrom, 404 N. W.2d 848 (Minn. Ct. App. 1987);
17. Davidson v. Davidson, 578 N. W.2d 848 (Neb. 1998);
18. Garcia v. Mayer, 920 P.2d 522 (N. M. Ct. App. 1996);
19. DeJesus v. DeJesus, 687 N. E.2d 1319 (N. Y. 1997);
20. In re McVay, No. 94 CA 7, Ohio App. LEXIS 5588 (Dec. 7, 1994);
21. Taraghi & Spanke-Taraghi, 977 P.2d 453 (Or. Ct. App. 1999);
22. In re Marriage of Powell, 934 P.2d 612 (Or. Ct. App. 1997);
23. MacAleer v. MacAleer, 725 A.2d 829 (Pa. Super. Ct. 1999);
24. Charriere v. Charriere, 7 S. W.3d 217 (Tex. Ct. App. 1999);
25. Dietz v. Dietz, 436 S. E.2d 463 (Va. Ct. App. 1993);
26. In re Marriage of Short, 890 P.2d 12 (Wash. 1995);
27. In re Marriage of Stachofsky, 951 P.2d 346 (Wash. Ct. App. 1998);
28. In re Marriage of Harrington, 935 P.2d 1357 (Wash. Ct. App. 1997);
29. Chen v. Chen, 416 N. W.2d 661 (Wis. Ct. App. 1987).
30. See generally Thomas P. Malone, Employee Stock Options and Restricted Shares: Determining and Dividing the Marital Pot, 25 Colo. Law. 87, 88 (Oct. 1996).
31. J. THOMAS OLDHAM, Divorce, Separation and the Distribution of Property § 7.02[2]-[4] (1999).
32. Id. § 7.10[5].
33. Id.
34. Id. § 7.10[5][b].
35. Id.
36. Id. § 7.10[5][b].
37. Id. § 7.10[5].
38. Id. § 7.10[2][b].
39. Hybrid plans exist where both the employer and employee make contributions and a separate account is maintained, but where the benefits paid are calculated using a defined benefit plan approach. Divorce courts tends to approach these as plans as defined benefit plans. OLDHAM, supra note 2, at § 7.10[2][c].
40. See generally OLDHAM, supra note 2, at § 7.10[5][a].
41. This technique meets the needs of both community property jurisdictions, and common law jurisdictions where distribution is restricted to "marital property," i.e., property accumulated during the marriage. Where all property is available for distribution on divorce, i.e., in a "kitchen sink" jurisdiction, it is difficult to see how any distribution made on the basis of time could occur in a principled way where portions of the time occur before the marriage. There will be exceptions of course, for example, where prior to the marriage the parties cohabited and during this time the employee was engaged in the relevant employment. Ordinarily however, the distribution of a pension component earned pre-maritally would require equitable justification on some basis other than time.
42. Although there may be no really sound actuarial basis for discounting to reflect the risk that the pension will not vest. See OLDHAM, supra note 2, at § 7.10[6][c][ii].
43. See OLDHAM, supra note 2, at § 7.10[5][c][ii].
44. Id.
45. It seems to be open to question whether the use of hypothetical realization dates and values (together with their associated problems) is called for with other classes of asset, whose realization horizon may be much closer, and whose risks of realization may be much greater. To be considered in this regard is the fact that the contingencies relate both to the ability in fact to realize the benefit as well as to uncertainties relating to value. In the case of pensions, once the pension has vested, and even before that point, the employer's ability to modify the structure of the scheme will be severely restricted, both as a matter of contract law and legislation. See, e.g., In re Marriage of Lehman, 955 P.2d 451, 464 (Cal. 1998). The employer may try to leave itself with considerable flexibility in the plan itself, since, in essence, the relationship is contractual.
46. Id. at 454. The same cannot be said for options. Accordingly, the vulnerability of options to contingencies would appear to be greater and correspondingly the appeal, if only to one of the parties, of devices that facilitate bypassing the exposure to such contingencies, is enhanced.
47. See OLDHAM, supra note 2, at § 7.10[5][a].
48. Id.
49. Id.
50. JOSEOH W. BARLETT, Venture Capital 226 (1988).
51. In some jurisdictions, notably Colorado, a different concept appears to be assigned to the term "vest." Here the concept applies to the moment when the marriage has an unchallengeable claim to the options, that is, when the "services entitling [the spouse] to exercise certain options had been performed prior to the entry of the decree." In re Balanson, 996 P.2d 213, 219 (Colo. Ct. App. 1999)
52. Rev'd in diff. part, LEXIS 437 (May 29, 2001). The notion here seems to be that the options become vested in the marriage. This appears to be somewhat different than the conventional use of vesting which relates to the option holder's relationship with the employer. The option conventionally is said to be vested if the employee ordinarily will have an unimpeachable claim to the option, even if the option is not exercisable. The Colorado court's concept would appear to "vest" a claim to the option in the marriage even if, vis-à-vis the employer, the option is not vested.
53. See also In re Marriage of Miller, 915 P.2d 1314, 1317-19 (Colo. 1996).
54. See Davidson v. Davidson, 578 N. W.2d 848, 853 (Neb. 1998);
55. In re Marriage of Harrington, 935 P.2d 1357, 1364-65 (Wash. Ct. App. 1997).
56. See also In re Marriage of Harrison, 225 Cal. Rptr. 234 (Ct. App. 1986), where options to purchase restricted stock were "vested" on the date of the grant, but any stock acquired by exercising the options was subject to the risk of forfeiture. The trial court applied a time rule to the options where the denominator started at the point of the grant and notionally terminated, in the trial court's words, at vesting. Since this suggested a denominator of one, which made no sense if a time rule was to be employed, the appellate court held that the court must have meant that the stock "vested" only when free from the risks of forfeiture.
57. Another version of this scenario occurred in In re Marriage of Walker, 265 Cal. Rptr. 32 (Ct. App. 1989), where the grant enabled the options to be exercised at one point in time, but any shares "acquired" through the exercise could only be received at a later date, described as the "vesting" date. At issue was whether the trial court was correct in holding that the period in the denominator ended when the options were exercisable. The appellate court held that the relevant date was the date when the employee could receive the shares, i.e., in the case's use of the term, when "vesting" occurred.
58. *3-4 (Dec. 7, 1994) (separation agreement used the terms "accrued," "acquired," and "earned," instead of "granted" and "vested").
59. The same view may be taken of options granted and exercisable during the marriage, even if the options were not exercised during the marriage. See Charriere v. Charriere, 7 S. W.3d 217, 220-21 (Tex. App. 1999).
60. Other permutations are also possible. For example, the option may be granted during the marriage to reflect performance prior to the marriage and no marital funds may be expended in exercising the option, leaving a court free to find that the nonemployee spouse has no claim to the options. See Demo v. Demo, 655 N. E.2d 791, 793 (Ohio Ct. App. 1995). Moreover, this article will happily gloss over the possible underlying factual disputes.
61. See, e.g., Peterson v. Peterson, No. CA99-01-007, Ohio App. LEXIS 5121 (Nov. 1, 1999) (claimant unsuccessfully alleges that options granted after the marriage ended were a reward for performance during the marriage).
62. This approach may be adopted on an absolute basis, as in Smith v. Smith, 682 S. W.2d 834, 837 (Mo. Ct. App. 1984) (implicit in court's holding that options are fully earned when granted);
63. Goodwyne v. Goodwyne, 639 So. 2d 1210, 1213 (La. Ct. App. 1994) (options granted during the marriage for past services are a community asset, even though the grant was conditioned on future employment). Additionally, a jurisdiction, while approving of the time rule in principle, may conclude that it is impossible on the record to separate out the portion of the benefit attributable to the employee's post-divorce efforts.
64. See Chen v. Chen, 416 N. W.2d 661, 663, 665 (Wis. Ct. App. 1987).
65. In Charriere, 7 S. W.3d at 221-22, the options were exercisable, but were not exercised during the marriage, and the court declined to adopt the time rule because the options had, in its view, been fully earned during the marriage.
66. In another permutation of this theme, a Pennsylvania court took the view that the options were earned prior to the date of separation, and that the employee spouse had not overcome the presumption that they were awarded for past services. In this regard, a requirement of continued employment constituted a mere contingency to be met before the option became exercisable, not an indication that the option constituted an incentive for future service. MacAleer v. MacAleer, 725 A.2d 829 (Pa. Super. Ct. 1999).
67. Hall v. Hall, 363 S. E.2d 189, 196 (N. C. Ct. App. 1987);
68. Hann v. Hann, 655 N. E. 2d 566, 569-71 (Ind. Ct. App. 1995);
69. Hutto v. Hutto, No. CA 92-51, 1992 Ark. App. LEXIS 523 (July 8, 1992).
70. *12-13 (nontransferability, serial future vesting, uncertainty of value and complication of sharing proceeds meant that the options were too conditional and speculative to be considered marital property);
71. In re Marriage of Moody, 457 N. E.2d 1023, 1026-1027 (Ill. App. Ct. 1983) (trial court directed to retain jurisdiction until the options were exercised or expired because on the facts options did not constitute distributable property until exercised because the options were impossible to value until exercised and it was possible, if not probable, that the options would not be exercised);
72. In re Marriage of Isaacs, 632 N. E. 2d 228, 232 (Ill. App. Ct. 1994) (options contingent on the passage of time and retention of employment only become distributable property if and when exercised).
73. *21. A measure of caution may be required in the analysis of this case. Although the court adopts a categorical position that if the services were rendered during the marriage, the options are distributable marital property, it is not clear from the reported facts that any portion of the options vested beyond the date the marriage ended. Indeed, the likely inference is to the contrary. The report suggests that all the options were exercisable but had not been exercised because the exercise price was less than the market value of the underlying stock. Accordingly, the true message from this case may be that the options are distributable if the grant is made during the marriage for services rendered up to the point of vesting, during which period the couple remain married. Overlooked by the court was the fact that, in all probability, the grantee would have to remain in the employer's employ until such time as the options ceased to be "under water." The appellate court seems to suggest that the trial court allocate the option scheme in the same proportions it was employing in the distribution of the parties' other assets.
74. * 21. The effect of doing this is assign no value to the postdivorce time the employee works until the options achieve a positive value under the "intrinsic" value standard.
75. In re Marriage of Salstrom, 404 N. W.2d 848, 850-52 (Minn. Ct. App. 1987);
76. In re Marriage of Hug, 201 Cal. Rptr. 676, 680 n. 2 (Ct. App. 1984).
77. *22 (Dec. 3, 1997).
78. This appears to be the model which the trial court attempted to employ in In re Marriage of Miller, 915 P.2d 1314, 1315 (Colo. 1996). The Colorado Supreme Court remanded for a determination of the extent to which the options were granted for services prior to the grant, which portion might be entirely marital property.
79. Id. at 1319.
80. Thus, options may be granted for past, present, or future services. See Davidson v. Davidson, 578 N. W.2d 848, 856 (Neb. 1998). Also, the technical structure of the grant may be highly complex and involve various features such as staggered vesting dates, acceleration provisions in the event of a merger, and so on.
81. A fact which some courts have been willing to recognize. See Hug, 201 Cal. Rptr. at 792 ("Although we approve of the time rule fashioned by the trial court in this case, we stress that no single rule or formula is applicable to every dissolution case involving employee stock options. Trial courts should be vested with broad discretion to fashion approaches which will achieve the most equitable results under the facts of each case.").
82. Courts are not always careful in their definition, although analysis of the facts tends to indicate what was intended. See In re Marriage of Short, 890 P.2d 12, 15-16 (Wash. 1995) ("numerator is the period of time between the commencement of the spouse's employment... and the date when the spouses were 'living separate and apart, "' requires the identification of the implication that they were married throughout this period);
83. Dietz v. Dietz, 436 S. E.2d 463, 470 (Va. Ct. App. 1993) (the numerator is the "number of months the [husband] was covered by the plan prior to [the date of final separation] and the denominator of which shall be the total number of months the [husband] is covered by the plan" apparently requires the understanding that the grant was made during the marriage).
84. See In re Marriage of Harrington, 935 P.2d 1357, 1366 (Wash. Ct. App. 1997) (Washington statute precluded distribution of options granted after the parties were "living separate and apart");
85. Short, 890 P.2d at 15 (parties living separate and apart when marriage "defunct," that is, when both parties no longer have the will to continue the marital relationship);
86. Dietz, 436 S. E.2d at 468 (property acquired after the last separation which at least one of the parties intends to be permanent is not distributable marital property);
87. Taraghi v. Spanke-Taraghi, 977 P.2d 453, 460 (Or. Ct. App. 1999) (appellate court upholds the trial court's use of the date of separation rather than the date of dissolution in the time rule because "the wife did not directly contribute to the [options] acquisition and... if anything, she actually interfered with the husband's ability to work).
88. See Chen v. Chen, 416 N. W.2d 661, 663 (Wisc. Ct. App. 1987) (options granted after the parties separation but prior to the divorce available for distribution).
89. But not always. See In re Marriage of Kilbourne, 284 Cal. Rptr. 201, 207 (Ct. App. 1991) (assets normally to be valued as near as practicable to the time of trial, but value of a professional practice to be determined at the date of separation).
90. For a contrary position, see In re Marriage of Walker, 265 Cal. Rptr. 32 (Ct. App. 1989), where the court stated "it is the community property interest in the asset which must be defined. The asset can be either the number of options, the amount of stock, or the actual gain on either or both." For reasons discussed in the text, this approach seems overly simplistic.
91. In Francesco v. Francesco, No. FA990171592S, Conn. Super. LEXIS 1349 (May 19, 2000) the option holder's assets fluctuated $20 million during the week of the trial and the option holder filed new financial affidavits daily.
92. *6-7. In an effort to achieve a just result the court ordered the option holder to file post-trial financial affidavits right up until the court rendered the opinion.
93. See Scott Brede, Stocks Play Havoc in Divorce, 26 (25) Conn. L. Trib., June 19, 2000.
94. See Soule v. Soule, 252 A. D.2d 768, 771 (N. Y. App. Div. 1998) (where option appreciated after the institution of divorce proceedings due to the "active" efforts of the option holder, the date of institution of the proceedings was the appropriate date on which to value the options, in contrast to assets whose appreciation is passive, that is due to market forces or inflation, which generally will be valued as closely as possible to the date of trial).
95. Wendt v. Wendt, 757 A.2d 1225 (Conn. App. 2000) (underlying stock value doubled after date of parties' separation for which appreciation the court found the employee spouse was partially responsible and to which appreciation the non-employee spouse made no contribution).
96. The converse proposition also may be advanced. The employee spouse may argue that it is inappropriate to distribute options granted and even exercisable during the marriage if the options were not exercised during the marriage and the value of the options is a function of the employee's post-divorce efforts. See Charriere v. Charriere, 7 S. W.3d 217, 221 (Tx. Ct. App. 1999) (the fact that the options would have no value apart from the option holder's post-divorce personal service did not preclude including in the marital community options granted and exercisable during the marriage).
97. In Rehfeldt v. Rehfeldt, Appeal No. C-850056, Ohio App. LEXIS 5603 (Feb. 12, 1986) the court declined to adopt a categorical rule for when a marriage should be deemed to have ended, both for the purpose of identifying assets available for distribution as well as for valuation purposes.
98. *14. The husband was awarded the options in their entirety and the wife received other assets. The options had demonstrably declined after the date of the referee's report to the divorce court. The effect of this, in terms of value, was to increase the wife's share of the options. The court took the view that this was merely a consequence of the risks that attached to the options assigned to the husband and was not an inequitable result.
99. * 14-15.
100. This appears to have been the concern of the Colorado trial court in In re Balanson, 996 P.2d 213, 218-99 (Colo. Ct. App. 1999)
101. Rev'd in diff. part, LEXIS 437 (May 29, 2001). Because the options were "under water" at the time of dissolution, the trial court's view was that any ultimate real value that the options had must be attributable to the employee spouse's post-dissolution efforts. This analysis is flawed, at least to the extent that it assumes the only value that the option has is the intrinsic value, i.e., the difference between the exercise price of the option and the market value of the underlying stock. Indeed, if the option currently is not exercisable, technically, the intrinsic value definitely is not the value of the option. In any event, the trial court was reversed on other grounds.
102. Id. at 220.
103. In Wendt, 151 A.2d at 1234-36, the claimant argued that the trial court had departed from a traditional approach of valuing assets at the date of dissolution and instead used the date of separation. Additionally, the claimant argued that the court had inappropriately identified the date of separation as the date which identified when the marital contribution to the numerator in the coverture fraction ended. The claimant said the numerator's period should terminate with the dissolution. The appellate court upheld the trial court on the basis that it was legitimate to try to identify those assets and values to which the employee had contributed after the separation. These could be isolated from mere value appreciation, which although it occurred after the separation, was "passive' in character, that is, it was appreciation not directly attributable to the employee's efforts.
104. See, e.g., Davidson v. Davidson, 578 N. W.2d 848, 858 (Neb. 1998);
105. Richardson v. Richardson 659 S. W.2d 510 (Ark. 1983);
106. Knotts v. Knotts, 693 N. E.2d 962, 968 (Ind. Ct. App. 1998).
107. For a collection of material relating to the formula and its applications, see ROBERT W. KOLB, The Financial Derivatives Reader (1992).
108. Les Barenbaum & Walt Schubert, Measuring the Value of Executive Stock Options, 12 (12) Fairh́re 3 (Dec. 1992).
109. Care is required in conducting any analysis. The coverture fraction establishes a linear relationship with time, the Black-Scholes formula is not linked to time in a linear way.
110. As in Davidson, 578 N. W.2d at 856 (options granted as compensation both for past and future services).
111. See also In re Marriage of Hug, 201 Cal. Rptr. 676, 784-89 n. 29 (Ct. App. 1984) (discussion of the various considerations that might motivate an employer to award an option). In some scenarios pinning down the relevant time may be elusive. For example, assume an employee is granted the option as a simple signing bonus. Presumably, it is the employee's prior activities that render him or her attractive. But how far back should the analysis go and what activities should be considered relevant? Conversely, if the employee had simply received cash as the bonus, in a conventional analysis, the marriage would be able to assert a claim to the entire bonus. Shouldn't we take the same approach when dealing with options, subject to allowing adjustments to recognize future contributions between the grant and vesting or maturity?
112. In In re Marriage of Salstrom, 404 N. W.2d 848, 850, 852 (Minn. Ct. App. 1987), the court found that the options were granted to induce the employee to leave his previous employer, but nevertheless held that a time rule could be applied to those options vesting beyond the "end" of the marriage.
113. But see Lomen v. Lomen, 433 N. W.2d 142, 143, 145 (Minn. Ct. App. 1988) (appellate court lets stand trial court decision which fails to employ time rule with respect to options the majority of which represented a signing bonus).
114. See Davidson, 578 N. W.2d at 857. Of course, if we take the position that the final distributable value (say, the intrinsic value) represents the appreciation of some lesser value assigned to the premarital grant (say, for example, the exercise price) then depending on whether or not the jurisdiction treats the appreciation as "passive"
115. (see OLDHAM, supra note 2, at § 7.10[5][b], on the treatment of premarital contributions to pension plans), if some of the time between grant and vesting/maturity occurred during the marriage we might have a basis for arguing that some of the value is distributable. One of the benefits of the conventional time rule is that it doesn't assign a particular value to any unit of time, except on an ex post facto basis. Indeed, what this seems to suggest is that while the conventional analysis of the time rule is that each unit of time is of equal value, a better description of the situation is that each unit of time carries equal weight in the distribution formula, but that the unit of time does not have value.
116. Ultimately, the case may be resolved not by theoretical conceptualizations of the situation, but other trial related issues. See Farish v. Farish, 982 S. W.2d 623, 629 (Tex. Ct. App. 1998) (employee spouse failed to present evidence regarding whether options were for past, present, or future services and thus the trial court could find that he did not discharge the burden of proving that the options were other than community assets).
117. See Hug, 201 Cal. Rptr. at 789 (original options granted partly as an inducement to leave previous employment and grant in dispute partly a replacement for the grant awarded at the onset of employment).
118. See Hug, 201 Cal. Rptr. at 782 (time in the numerator started to run with the commencement of employment with the employer, which was during the marriage, but prior to the grant).
119. This apparently simple proposition can still lead to factual disputes. In Wendt v. Wendt, 757 A.2d 1225, 1233-34 (Conn. Ct. App. 2000), the claimant argued that the trial court had inappropriately started the time period in the numerator running at the date of the grant, rather than the start of the marriage, and ended the period with the date of separation, rather than the date of divorce. The appellate court upheld the trial court's view that the grant was primarily prospective in character and that the numerator could legitimately terminate when the claimant ceased to contribute to any enhancement in the value of the option.
120. *23-24 (July 10, 1998).
121. This is essentially what was done in one of the models of the time rule adopted by the New York Court of Appeals. DeJesus v. DeJesus, 687 N. E.2d 1319, 1324 (N. Y. 1997). Compensation for past services would require a time rule where the numerator is the later of the beginning of the employee's employment or the start of the marriage, until the date of the grant and the denominator commences with the date of employment and ends with the date of the grant.
122. See also Davidson v. Davidson, 578 N. W.2d 848, 857 (Neb. 1998). The ultimate manifestation of this is where the grant is fully earned at the moment of the grant, and involves no earlier or later contributions by the employee, in other words where it is not necessary to employ a time rule at all.
123. See In re Marriage of Short, 890 P.2d 12, 16 (Wash. 1995) (grants made to induce employee to enter into employment with the employer, rather than establishing a competitor business, were fully distributable as a community asset). A little care is necessary in dealing with some courts' approaches to the time rule for past services. The common articulation of the formula references the stating point for the time involved in the denominator as the moment the employee commenced employment with the employer.
124. See DeJesus and Davidson, supra. This may be appropriate if the object is to recognize that the employee performed services from the inception of employment which contributed to the award of the option.
125. *24 (July 10, 1998). Technically, the past services that the employer intends to recognize may commence later than the start of the employee's employment and the formula may have to be adjusted to reflect this fact. Thus, if the employer historically granted a series of options to compensate for past services, it is probably appropriate to consider that the inception date for any grant in the series is no earlier than the vesting date of the preceding grant in the series. As one court has pointed out, ordinarily the earlier grant in the series will fully reflect the value of the services rendered prior to that grant.
126. See Davidson, 578 N. W.2d at 858. However, such an analysis may not always be appropriate.
127. See Bornemann v. Bornemann, 752 A.2d 978, 990-991 (Conn. 1998) (although options granted during the marriage were granted in several series, one of which vested after a series which straddled the dissolution date, both the straddling series and the later series were found to be fully distributable property because an employment termination agreement with the employer had rendered the loss of the options beyond the employer's control and thus made the options fully earned during the marriage). One court used the option grant date in lieu of the employment commencement date in the time rule formula because the record failed to disclose precisely when employment commenced.
128. *22 (Dec. 31, 1996).
129. In the most extreme manifestation of this, the jurisdiction may take the view that options granted for services performed during the marriage will be distributable in their entirety, notwithstanding the fact that the options were only granted after the marriage came to an end and even if the options, in part, are an incentive to remain in the employer's employ. See Goodwyne v. Goodwyne, 639 So. 2d 1210, 1213 (La. Ct. App. 1994).
130. The New York Court of Appeals in DeJesus v. DeJesus, 687 N. E.2d 1319, 1324 (N. Y. 1997), seems to have been aware of this potential difficulty in that it directed that a second time rule be adopted where a portion of the grant functioned as an incentive. The numerator was to be the period from the date of the grant until the end of the marriage and the denominator the period from the date of the grant to the point of maturity. One of the difficulties with this approach is that it assumes that the pre-grant and post-grant elements can be isolated, and presumably that each element should enjoy the same value. The position offered in the text seems to be a better approach, focusing as it does on the time during the marriage that the option was being earned relative to the total time it takes to earn the grant. The New York approach is helpful, however, in that it draws attention to the fact that the grant for past services may continue to be earned beyond the grant date.
131. Even if in principle the grant is made to recognize pre-grant efforts, the fact that vesting only occurs at some point after the grant is made means that there is a period of time during which the grantee has to curtail his or her employment choices in order to realize the option benefits. One way of looking at the situation is that the choices forgone on a continuing basis are a manifestation of earning the benefit. On this analysis, the option is "earned" up to the moment of vesting, regardless of the motive behind the grant. Another way of looking at the situation is that the employee forgoes the choices because of the value of the option to him or her makes it worthwhile, even allowing for a claim to a distributable share by the marriage. However, it is doubtful if this analysis holds up if the value attributed to the option is based on an "intrinsic value" approach, since the employee cannot know in advance what the option will be worth. The analysis would be tenable if the option is to be valued using a Black-Scholes formula.
132. This position may have to be argued with some diffidence because of current problems with the way options are valued for distribution purposes. It is not truly accurate to say that a share is disproportionate unless we can comfortably answer the question "Share of what?" Under a Black-Scholes analysis, an option becomes less valuable the less time it has before expiry. See supra, text associated with note 47. Accordingly, if we value the option at the point when it is vested or matured it will be worth less than when it was granted (which may be the point when the jurisdiction considers it to be fully earned by the marriage). If the option is valued at the time of the grant the marriage gets a maximum share of a maximum amount. If, however, the jurisdiction uses an intrinsic valuation technique, it is possible that the difference between the exercise price and the share price will be greater when the option vests or matures than when the grant is made. In such a situation, where the period of the denominator ends at the date of the grant, the marriage's share may be at a maximum, but it may be the maximum share of a lesser amount. Correspondingly, restricting the numerator to terminating at the date of grant, but allowing the denominator to run to the point of vesting or maturity, at which point, say, the intrinsic valuation may be higher, leads to a lesser share of a greater amount. Is either of these approaches producing an inappropriate share? For a similar sort of problem in the context of defined benefit pension plans
133. See In re Marriage of Henkle, 234 Cal. Rptr. 351 (Ct. App. 1987) (maximum benefit earned before termination of employment and marriage's and employee's contribution ended at point after which the value would no longer increase), and
134. Miller v. Miller, 577 A.2d 205 (Pa. Super. Ct. 1990) (marriage's share, that is the numerator, and employees share, that is the denominator, to increase for the period the value continues to increase).
135. See Davidson, 578 N. W.2d at 857-58;
136. *6 (Aug. 18, 1998);
137. In re Marriage of Powell, 934 P.2d 612, 614, 615 (Or. Ct. App. 1997);
138. In re Marriage of Nelson, 222 Cal. Rptr. 790, 795 (Ct. App. 1986).
139. See also In re Marriage of Harrison, 225 Cal. Rptr. 234, 241 (Ct. App. 1986). Where vesting of the rights occurs, but the rights are subject to the risk of forfeiture for a further period of time, a good case can be made that the option's benefits are still being earned during the time that the benefits remain at risk and accordingly that this time should be included in the denominator (and numerator, if appropriate).
140. See In re Marriage of Walker, 265 Cal. Rptr. 32, 38 (Ct. App. 1989) (where options could be exercised at one point but resulting shares were subject to a risk of forfeiture until a later date, the relevant coverture fractions had to include the time until the shares were free of the risk of forfeiture).
141. See Davidson, 578 N. W.2d at 858;
142. In re Marriage of Nelson, 222 Cal. Rptr. 790, 793 (Ct. App. 1986).
143. Possibly, the option is still being "earned" if the option only matures at some point beyond the vesting date.
144. See Chimes v. Michael, 748 A.2d 1065, 1069 (Md. Ct. App. 2000). Other drawbacks include the fact that using an actual exercise date generally will require the court to retain jurisdiction to implement a "when and if distribution scheme.
145. See Chimes, 748 A.2d at 1067. Also, the uncertainty of the benefits to either party carries with it the risk of destabilizing the entire distribution scheme, unless all asset distribution is delayed until the options are actually exercised. Ordinarily, this would not be an appealing prospect.
146. See, too, in the case of pensions. See, e.g., Schinker v. Schinker, 747 S. W.2d 761 (Mo. Ct. App. 1988) (no recognition given to any period of employment prior to grant, regardless of whether services rendered prior to the grant were rendered before the marriage or during it).
147. Of course, we may encounter situations where it could be argued that the marriage was sufficiently lengthy so that contributions in the form of reproductive equity, domestic labor, and support of a career have already been recognized while the marriage subsisted, so that the a claim to a share of the option based simply on the time that has elapsed since the grant and before marriage ends is not inequitable. See American Law Institute, Principles of the Law of Family Dissolution: Analysis and Recommendations (Proposed Final Draft, Part I, Feb. 14, 1997) [hereinafter PFD] § 5.05, Reporters Notes cmt. c, 304. However, the ALI does acknowledge that a spouse's contributions to the family, etc., may result in benefits to the employee's career which will revert to him alone after the divorce.
148. Id. § 5.06 cmt. e, 328.
149. This sort of problem was at the heart of the debate between the Supreme Court and Appellate Division in New Jersey in Pascale v. Pascale, 660 A.2d 485, 498 (N. J. 1995), where the issue was whether options granted immediately after the marriage "ended" were distributable by virtue of the non-employee spouse's contributions to the marriage. At least the debate only involved the issue of the ability to distribute the options, not the question of what the marriage's share should be.
150. The structural problems outlined in this paragraph can be bypassed to some extent if the analysis treats the employee's contributions as entitling the non-employee claimant to some form of income enhancement after the marriage breaks down. Thus, under changes proposed by the American Law Institute, supra note 66, at § 5.03, 271, after a lengthy marriage or contributions in the form of child care, on divorce the claimant will be able to assert a claim based on the income differential between the parties.
151. Id. at § 5.05, 280; § 5.06, 317. The portion of the income differential that is claimable is a function of time, but the relevant time is not the time during which the resource is earned, rather it is a function of the time the contribution was made to the marriage or the child. Of course, conventional modes of income enhancement in the form of alimony or the like carry substantial disadvantages where the proceeds being claimed are asserted to be entitlements already earned, rather than, say, ad hoc remedies for need. This mode of analysis basically characterizes the option not as an asset earned during the marriage, but rather as a resource available at the end of the marriage.
152. See, e.g., Smith v. Smith, 682 S. W.2d 834, 837 (Mo. Ct. App. 1984) (options earned for work already performed, while pension "earned over the whole period of the worker's employment").
153. In re Marriage of Hug, 201 Cal. Rptr. 676, 787-88 (Ct. App. 1984) ("pension and retirement benefits ordinarily seem to be a function of longevity"). In contrast, one view of stock options is that they represent income forgone during a rather limited period.
154. See Hann v. Hann, 655 N. E.2d 566, 577 (Ind. Ct. App. 1995) (Chezem, J., dissenting).
155. See generally OLDHAM, supra note 2, at § 7.10[5][a]. Using an assumption that all elements of time are equal in the context of a defined contribution plan clearly is difficult because of the fact that we actually do know what each unit of time contributed to the final benefit.
156. Id. But, where there is no obvious correlation between the time spent in producing the benefit, and the actual benefit produced, the use of an analysis which assumes each unit of time is of equal value is probably not only expedient, but also in most instances will not be demonstrably less accurate than any other approach. Indeed, the use of an equal valued time unit presumption in the context of options is probably more realistic than when it is applied to defined benefit plans, where ordinarily the final benefit is a function of the actual value of the salary received in the last few years of employment. However, it might be possible to demonstrate in individual cases how the employee's contribution during a specific period of time actually led to the enhancement in value of the option-especially if the intrinsic valuation technique is employed.
157. See Wendt v. Wendt, 757 A.2d 1225 (Conn. Ct. App. 2000). In such a case, a better analogy might be with a defined contribution plan, and the time rule arguably should be abandoned.
158. See Hug, 201 Cal. Rptr. at 792. Interestingly, none of the analyses seem to suggest that the value of earlier contributions should be weighted more to reflect the value of the "deferred gratification," that is the value of the time that has elapsed between the contribution of the time and the realization of the benefit. The final distributable benefit arguably is enhanced because of the time that elapses, but later units of time contributed by the employee (and the marriage) benefit from this enhancement after a shorter delay.
159. In re Marriage of Short, 859 P.2d 636, 644-45 (Wash. Ct. App. 1993), the appellate court seems to have been grappling with these concerns when it contrasted the division of pensions using the time rule, where the benefits reflected the employee's efforts over a protracted period of employment, with the distribution of options, where the time to realize the benefit was relatively short and where the value that was realized might reflect market forces rather than the employee's efforts. The Washington Supreme Court overruled the appellate court and applied a time rule. The appellate court's approach, however, was one which seemed to find favor with a court of appeals in Texas.
160. See Charriere v. Charriere, 7 S. W.3d 217, 221-22 (Tex. Ct. App. 1999) (time rule rejected along with the idea that options were analogous to retirement benefits because the options were not earned over the entire period of employment, and the option's value was fixed except for changes flowing from market forces).
161. See Kelly Smith & Roberta Kirwan, America's Best Company Benefits, Money (Oct. 1999), at 125 (survey of 350 large U. S. companies in June 1999 found that 17% of them granted options to 50% or more of their employees, up from 6% in 1993).
162. See Hann v. Hann, 655 N. E.2d 566, 577 (Ind. Ct. App. 1995) (Chezem, J., dissenting);
163. Hug, 201 Cal. Rptr. at 785.
164. See Short Takes: Stock Options Remain Small Part of Pay Picture, Hartford Courant, Nov. 6, 2000, at E1 (reporting that a Bureau of Labor Statistics study found that only 2.4% of U. S. private employers offered employees options in 1999, and that the offerings occurred primarily among technology firms, durable goods manufacturers, and wholesale and retail trades).
165. See In re Marriage of Nelson, 222 Cal. Rptr. 790, 797-98 (Ct. App. 1986) (options granted on promotion which happened 25 days after separation not distributable).
166. See Pascale v. Pascale, 660 A.2d 485, 498-99 (N. J. 1995). The court accepted that options granted to the wife after the divorce in recognition of her promotion were marital property because "his role as husband and father contributed in some way to [her] success, which increased her worth for that promotion. "
167. A contribution based analysis also seems to have been acceptable in Bornemann v. Bornemann, 752 A.2d 978, 988, 990, 994-95 (Conn. 1998).
168. If this perspective is adopted, then, arguably, no pre-grant time should be considered because the conventional conceptualization of wages is that they are paid prospectively. See OLDHAM, supra note 2, at § 7.11[3][a]. However, a distinction probably needs to be drawn between characterization of the options for the purpose of the marriage and characterization for the purposes of employment. The latter may inform the character attributed to the options for the purpose of property distribution, but that does not seem to preclude the property distribution process with endowing the assets with other attributes, for example, that the marriage commenced "earning" the option at some point prior to the grant by virtue of, say, the marriage's contribution to a career path.
169. See PFD, supra note 66, at § 4.15 cmt. c, 197.
170. Id. at § 4.08, cmt. f, 178.
171. See Murray v. Murray, 716 N. E.2d 288, 293-94 (Ohio Ct. App. 1999).
172. See In re Marriage of Hug, 201 Cal. Rptr. 676, 782 (Ct. App. 1984).
173. This approach would seem to deal nicely with the situation where the option was granted prior to the marriage, which then ends before the option is exercisable. For a nice set of sample formulae attempting to deal with some of the other factual work and marriage permutations that might be encountered when attempting to distribute options, see Davidson v. Davidson, 578 N. W.2d 848, 856-58 (Neb. 1998).
174. See Hug, 201 Cal. Rptr. at 793 n. 4 ("Claims of a community interest in employee stock options granted to the employee spouse after the dissolution of the marriage would appear too speculative and would lack the immediacy and specificity necessary for exercise of jurisdiction over them."). The court in Hug was concerned to indicate that, while it was willing to recognize a claim based on a time frame prior to options being granted where the relevant efforts and the grant occurred during the marriage, the principle could not be extrapolated to grants made after the divorce.
175. Id.
176. If the jurisdiction was amenable to characterizing options not as an asset, but as a source of income, then provided the necessary post-divorce authority was retained by the court, any subsequent award might be reached in the form of a maintenance order. The drawback of this technique, apart from any technical difficulties with making such an order, is that the justificatory premise would shift from entitlement by virtue of contribution, say, to one of need.
177. See Bornemann v. Bornemann, 752 A.2d 978, 983 (Conn. 1998).
178. See In re Marriage of Short, 859 P.2d 636, 640 (Wash. Ct. App. 1993) (onequarter of options vested 18 months after commencement of employment, remaining three-quarters vested in-equal increments every 6 months);
179. Chimes v. Michael, 748 A.2d 1065, 1068 (Md. Ct. Spec. App. 2000) (one-quarter of the options vesting on each annual anniversary of the grants).
180. See In re Marriage of Powell, 934 P.2d 612, 615 n. 3 (Or. Ct. App. 1997).
181. An analogous situation can occur where a series of grants are awarded for past services. The better view probably is that each grant in the series should be viewed as starting to be earned no earlier than the grant date of the preceding grant in the series. See Davidson, 578 N. W.2d at 858.
182. See Short, 859 P.2d at 17-18 (multiple stock options granted for future services vest consecutively, not concurrently, with the result that those vesting beyond the vesting date of the first flight to vest after the marriage "ended" belong to the employee alone). The situation can get highly complex. For example, a grant can be made involving several flights where the grant is intended to recognize both past, present, and future services. It may be necessary to isolate out some component of the grant that recognizes future service and then determine whether that component embodies each one of the flights to which the time rule should be applied or if the rule should apply to only the first flight to vest after the marriage ends. See In re Marriage of Stachofsky, 951 P.2d 346, 352 (Wash. App. 1998) (suggesting by way of dictum that the time rule would apply to the first flight only).
183. See In re Marriage of Harrington, 935 P.2d 1357, 1366 (Wash. Ct. App., 1997) (dictum that jurisdiction's rule is that of options granted during the marriage to compensate employee for future employment, only the first options to vest after the marriage "ended" are distributable as a community asset, later vesting options being the property of the employee alone);
184. Short, 859 P.2d at 17-18.
185. In the ultimate manifestation of this, in certain circumstances all flights may be treated as fully earned at the point of dissolution of the marriage. See Bornemann, 752 A.2d at 56. For the view that the employer's motive should not determine, at least as to pension benefits, whether the benefits should be characterized as marital property
186. See In re Marriage of Lehman, 955 P.2d 451, 456-59 (Cal. 1998).
187. *20 (Dec. 31, 1996).
188. The former amount would be reflected where the value distributed was the "intrinsic value" of the option. The latter amount would be obtained if the value was identified using a Black-Scholes formula.
189. See text, supra, associated with note 14.
190. See Lehman, 955 P.2d at 465 n. 3 (Baxter J. dissenting
191. Citing In re Marriage of Gillmore, 629 P.2d 1 (Cal. 1981) (non-employee former spouse who "cashes out" pension benefits in the context of divorce forfeits right to participate in increased future value of the pension).
192. For the sake of clarity we are not concerned with those instances where the time within which the option holder is free to exercise the option is extended. An example might be where an employee leaving employment might ordinarily only have three months in which to exercise vested options, but this period is extended to a year or more. The marriage's share normally will be calculated using a time frame that ends at the point of vesting. The time within which the option is able to be exercised and the extension of this period ordinarily would be irrelevant. However, it is not difficult to envisage a situation where options would have been lost to the marriage because, due to particular circumstances, the option holder would have been unable to exercise the option in time, yet where the potential to exercise the options was redeemed by the holder's post-marriage efforts resulting in the extension of the time in which exercise was possible. In such a situation, increasing the denominator in the coverture fraction to include a period beyond the original vesting date, possibly even to the date when exercise actually occurred, might not be inequitable, even if it resulted in the dilution of the marital share.
193. For example, the employer may pay the employee cash to encourage the exercise of the option, or the employer may make a loan to the employee at a belowmarket interest rate to finance the exercise. Such processes would be recognized as "synthetic" re-pricing. In the first, instance, the marriage would have a claim to a proportion of the cash, and in the latter a proportionate share of the proceeds of the option less a similar proportionate contribution to the interest paid to the employer for the loan.
194. On March 31, 2000, the Financial Accounting Standards Board issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation (FIN 44). This is an interpretation of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Generally FIN 44 applies to transactions after July 1, 2000, but may effect transactions involving re-pricing as far back as December 15, 1998.
195. In essence the scheme is "fixed," if both the number and option exercise price are known at the date of the grant.
196. This is possible because FIN 44, supra note 99, embodies a 6 month "look back" and "look forward" approach to determining whether the option should be characterized as a "fixed" or "variable" grant.
197. See Floyd Norris, Market Place: A Pesky Accounting Rule Won't Stop Sprint From Replacing Options to Help Its Employees, N. Y. Times, Oct. 23, 2000, at C6 (describing how the employer would allow outstanding options to be cancelled and replaced with an identical number of options 6 months and a day after the cancellation, with the time frame adopted to bypass the relevant accounting rule).
198. *22-3, in a distribution based on the "intrinsic value" of the option.
199. In principle the replacement may be viewed as giving the employee credit for services rendered to the other employer. For a discussion of this in the context of pensions, see OLDHAM, supra note 2, at § 7.10[5][a].
200. A point to be borne in mind is that options embody risks which tend to be greater than those encountered in pension schemes. During the marriage, risks may be considered to have been jointly assumed, and this joint assumption arguably also extends to the post-marriage extrication period. Where a replacement option grant is involved, the risks intrinsic to the two grants may differ. Additionally, if the vesting or maturity date of the subsequent grant is later, the effect of the replacement process is to extend the period of the non-employee former spouse's exposure to the underlying risks. In some circumstances it might be argued that that this extended exposure to possibly different and enhanced risks would justify not diluting the non-employee spouse's share in the replacement process.
201. OLDHAM, supra note 2, at § 7.10[5][c][ii].
202. See Reinbold v. Reinbold, 710 A.2d 556, 560, 563 (N. J. Super. Ct. App. Div. 1998) (in the context of discussing pension distribution, the court said that "[t]his is not to suggest that the parties cannot bargain away early retirement incentives or other pension enhancers").
203. See Garcia v. Mayer, 920 P.2d 522 (N. M. Ct. App. 1996), where the court was called upon to interpret a dissolution agreement which did not obviously address the consequences of acceleration.
204. Conceptually, at the time of any initial distribution, it might be possible to adjust the value of the marriage's share of the option itself, not the coverture fraction, to reflect the possibilities of acceleration. At present this seems unlikely to occur in reality.
205. See In re Marriage of Powell, 934 P.2d 612, 613 (Or. Ct. App. 1997).
206. See Garcia, 920 P.2d at 523.
207. Id.
208. For example, vesting may occur if the employer's earnings result in reaching a specific earnings per share target, or simply if a specific stock price is attained.
209. See Garcia, 920 P.2d at 527 (appellate court approved this approach but let stand, as being within the trial court's discretion, the trial court's approach which borrowed from another context the formula approved in California.
210. See In re Marriage of Hug, 201 Cal. Rptr. 676 (Ct. App. 1984), which used as the termination date of the denominator the pre-acceleration vesting date under the original grant. In essence, this approach gives the employee a benefit on the premise that the employee worked for a longer period beyond the date of the divorce in order to exercise the option than the employee actually did. In Garcia, this benefit was somewhat watered down because the Hug formula was designed to deal with options reflecting employee contributions prior to the grant and so the time period in both the numerator and denominator started to run from the date the employee commenced working for the employer, rather than the date of the grant, so that the marriage's share of the option was somewhat larger than it otherwise would have been. In the context of the distribution of pensions, the California Supreme Court has taken the position that when the employer gives the employee credit for years worked with a view to enhancing the benefit payable, this does not actually reflect "service" on the part of either the marriage or the employee, it is simply a calculation device used by the employer and, accordingly, the putative additional period should not be included in the denominator.
211. See In re Marriage of Lehman, 955 P.2d 451, 462 (Cal. 1998). In the context of option acceleration as a result of the post-divorce efforts of the employee, the employee does render the relevant "service." Indeed, in any event, if acceleration had not occurred, the relevant portion of benefits arising from the post-divorce efforts would enure to the employee under the conventional application of the time rule.
212. See id. at 466 n. 5 (Baxter J, dissenting).
213. A similar treatment should be extended to those cases where, after the marriage "ends," but before the plan's anticipated vesting date, the employer simply pays the employee cash to settle an outstanding option. The employee's voluntary retirement probably also should be included in this group. After all, the employee is choosing not to add additional value by further labor, so it is difficult to argue' that there is an equitable entitlement to a share greater than otherwise would be attributable to the marriage. However, at least with respect to the question of early retirement, there are pension cases which suggest a contrary result is possible. In Boger v. Boger, 405 S. E.2d 591 (N. C. Ct. App. 1991), the court held that the marriage should not participate in an early retirement "sweetener" pension enhancement package offered by the employer, taking the view that the enhancement did not amount to mere passive appreciation of the underlying asset-which would have been distributable. The court asked whether the interest in the "sweetener" was part of the "vested" rights that were distributable. The relevant interest was not "guaranteed" but was a mere expectancy. Perhaps, however, this should only be viewed as a facts and circumstances question, the outcome hinging on the issue of what interests the marriage legitimately could lay claim to participate in. In contrast
214. See Reinbold v. Reinbold, 710 A.2d 556, 563 (N. J. Super. Ct. 1998) (marriage entitled to a share of early retirement incentive portion of pension, where the pension was acquired over a working lifetime).
215. See In re Marriage of Walker, 265 Cal. Rptr. 32, 36 (Ct. App. 1989) (court accepts that where vesting was accelerated by virtue of a merger, the expert correctly relied on the accelerated date in determining the coverture fraction).
216. See also Reinbold, 710 A.2d at 563 (denominator in coverture fraction in pension distribution to reflect actual time worked rather than including additional time with which the employee was credited under an early retirement incentive program).
217. This approach is consistent with the approach taken by the New York Court of Appeals in Olivio v. Olivio, 624 N. E.2d 151, 155 (N. Y. 1993), in dealing with the "acceleration" of a pension benefit. However, in contrast to our concerns, the effect of the acceleration in this case was to increase the value of the pension benefit whose distributable share had already been determined. We are concerned with acceleration which would alter the distributable share of an option with a given value. Nevertheless, the essential point of the New York decision was to discriminate between an asset "created" after the marriage ended and ensuring participation in benefits which fundamentally had been earned during the marriage.
218. Id. at 210. Ordinarily, when a pension is involved, the longer the employee works beyond the date of divorce the relatively smaller is the marriage's share of a benefit of increasing value.
219. See Reinbold, 710 A.2d at 560. In the case of options valued by the intrinsic value method there is no necessary, or even likely, relationship between the additional time worked and the value of the option. Reinbold, like Olivio accepts the concept that the claimant should participate in benefits that fundamentally, if not technically, were acquired during the marriage.
220. Id. at 560, 563. However, this entitlement should not extend to benefits arising from the post-divorce efforts of the employee alone.
221. Id. at 561, 562. Accordingly, a post-divorce severance package which is a replacement for current and future earnings is not distributable.
222. Id. at 562. If the acceleration of an option can somehow be viewed as a device designed to provide a replacement for future income, arguably the benefits arising from the acceleration ought not to be distributable. But, even here, if the option scheme overall was intended to provide a stream of income, the argument might be made that the marriage had an entitlement to that stream, however it came about.
223. See Lehman, 955 P.2d at 454-55 (community earned a share of future pension payments even where payments enhanced by employer's early retirement incentive scheme).
224. Some care might be required in the analysis of the risks actually assumed. Thus, an option holder may be carrying the risks associated with a change in control. Clearly, if the options accelerate fully there is no problem. But, if acceleration is only partial or not guaranteed, there is an increase in risk. Sometimes this risk may be reduced by coupling the option with the grant of so-called limited stock appreciation rights. A stock appreciation right entitles the holder of the right to receive cash or stock to the value of the difference between the exercise price of the grant and the fair market value of the underlying stock. A limited stock appreciation right may be created with respect to outstanding options to take effect only in a change of control situation. The result is to establish an operative minimum value for the options. The effect is thus to reduce the option holder's risk. This situation might justify granting the marriage an enhanced share of any benefit from the exercise of a limited stock appreciation right. This would occur by reducing the denominator in the coverture fraction to the difference between the time of the grant and the time of the exercise of the appreciation right. This would replace a denominator reflecting the difference between the date of the grant and the original date of vesting of the overarching option. Of course, these discussions are premised on the idea that all the relevant risks are embodied in the option grant itself. In fact, it is the employee's employment itself that may be placed at risk. Arguably, at least in some scenarios, the option's acceleration provision is designed to offset the consequences of the lost employment. If that is the case, the appropriate treatment of the option might be to consider that the acceleration reflects post-divorce efforts on the part of the employee and thus subject to the treatment earlier in the text which suggests that in such a situation the marriage's share of an accelerated grant should not increase by virtue of the acceleration. For a discussion of entitlement to future benefits by virtue of exposure to risks, in the context of pension distribution
225. See Lehman, 955 P.2d at 455-56, 466-67.
226. This might be viewed as analogous to the situation in pension schemes where the employer decides to enhance the benefits payable under the plan, regardless of any specific activities of the employee. See Lehman, 955 P.2d at 454 n. 1, 460. However, the argument is easier to make in the context of a pension because the marriage can be understood as acquiring an interest in a future income stream, independently of the amount.
227. Id. at 454. In contrast, the effect of accelerating may be to cause the "stream," which otherwise might not have existed, to flow. But, perhaps, the marriage "earned" this possibility. Where the acceleration is due to the employee's post-divorce efforts, the benefits of that acceleration, that is, the resulting reduction in the denominator of the coverture fraction, arguably is not analogous to the situation where an employee works beyond an anticipated retirement date and thereby enhances the pension benefits payable. The critical issue is whether the post-divorce effort that led to the acceleration should be viewed as a contribution made by the marriage. Arguably, it is not so.
228. See Lehman, 955 P.2d at 465-66 (Baxter J., dissenting). However, it is possible to take the position that if the grant was made during the marriage, embodied in the grant was the prospect of an acceleration which might result in benefits being earned in less time than would ordinarily be required and that this enhancement could thus be characterized as an entitlement of the marriage.
229. Id. at 458 (opinion of the court). However, in Lehman, the majority did acknowledge that it would be possible to envisage a situation where the benefit was not "derivative" of the rights acquired during the marriage. Arguably, it is the employee's post-divorce efforts which sever the nexus.
230. See In re Marriage of Powell, 934 P.2d 612, 614-15 (Or. Ct. App. 1997).
231. Essentially the same approach can be adopted where the employer merges with another entity so that the there is a pooling of interests of the two entities. Generally, options in the employer will be exchanged for options in the new entity, based on an established formula. Again, it will be necessary for the intrinsic value of the options before the exchange to equal the resulting intrinsic value of the options in the new entity. It also may be necessary for the ratio of the exercise price of the option to the market value of the underlying stock to be preserved.