In the court case Parry v. Parry, the Second District Court of Appeal created a process for determining how to classify stock options as marital or nonmarital assets. Stock options are contracts that allow someone to buy shares of stock in the future at a set price. Employment stock options are usually given with a vesting period, meaning the owner can’t use them until a certain time. This is meant to keep employees at the company. The court made a step-by-step guide for figuring out which part of the stock options are marital property and which part are not. Restricted stock are unvested shares of stock given to an employee as part of their compensation. Once the shares vest, they are owned entirely by the employee and there is no cost to them. These shares are only used for employment compensation and cannot be traded in the market.
The Ruberg-Parry methodology is used to determine how to divide employment-related stock options and restricted stock during a divorce. It does not apply to stock options unrelated to employment. In the Ruberg case, the court ruled that vested stock options and restricted shares were considered marital property, while unvested ones were not. The wife argued that all of the stock options and restricted shares should be considered marital property because they were given as compensation for work done during the marriage. The court decided that the “primary purpose test” should be used to determine if the stocks and options were given as compensation for work done during the marriage. The court said that the important thing is to look at when the stocks and options were given and whether they were meant as compensation for past or future work. The “primary purpose test” is used to figure out if a form of compensation is for work already done or for work to be done in the future. In the Ruberg case, the court found that stock options were meant to pay for future work, so they were not considered as part of the couple’s shared property in the divorce. If the compensation is for work already done, it is considered shared property. If you have stock options or restricted shares from your job, you need to figure out if they are considered marital property in a divorce. If they are meant to compensate you for work you’ve already done, they are marital property. If they are meant to compensate you for work you will do in the future, then they might be your own property. It’s important to pay attention to whether the options have already been earned or if they are still just expectancies. The Parry case established a method for figuring out how much of stock options and restricted stocks earned during a marriage should be considered marital property. It involves using a fraction to determine the time spent earning the stocks during the marriage, compared to the total time needed to earn them. This helps decide how much of the stocks should be divided in a divorce. In Parry, the divorce court used a fraction to figure out how much of Mr. Parry’s stock options were earned during his marriage to Mrs. Parry. The numerator (top number) of the fraction is the time from when the stock options were granted to the date of the divorce, and the denominator (bottom number) is the total time from when the options were granted to when they become available. Each stock option grant and vesting block is calculated separately to figure out how many shares were earned during the marriage. This helps the court divide the stock options fairly between the spouses. The court decided that even unvested stock options could be considered marital property if they were earned during the marriage. This method helps the court accurately determine what portion of the stock options were earned during the marriage. Mrs. Blue had stock options from her job as an accountant. When she got divorced, she had to figure out if her stock options were hers alone or if they were part of the marital assets. The court looked at the company’s plan and a letter Mrs. Blue got and decided that the options were meant to keep her working hard in the future, so they were mostly hers. Mrs. Blue already earned half of her stock options before she filed for divorce. Her husband wants to figure out how much of the remaining options are marital property. To do this, they use a fraction to calculate the portion of the options that were earned during their marriage. For the 25,000 options that vest in 2007, 81.25% are considered marital property. For the 25,000 options that vest in 2008, 65% are considered marital property. Mrs. Blue was granted 100,000 stock options as part of her compensation. When she got divorced, 86,463.5 of these options were considered marital assets and had to be divided between her and Mr. Blue.
But if they got married after the options were granted, but before they vested, or if all the options vested after four years instead of every year, or if Mrs. Blue filed for divorce right before getting the options, the percentage of options considered marital assets would change. The “primary purpose test” is still important in analyzing stock options and restricted stock in divorce cases. It helps determine if the options or shares are marital assets or not. The test looks at whether the options or shares were earned for past services during the marriage. If they were, they are considered marital assets. The coverture fraction is also important and flexible, allowing courts to capture all stock options or restricted shares earned during the marriage as marital assets. It considers the vesting period and whether the options or shares were earned before or during the marriage. Both the “primary purpose test” and the coverture fraction are used together to determine how stock options and restricted shares are divided in a divorce settlement. Reuben A. Doupé is a lawyer who specializes in family law in Naples. He works at a law firm and focuses on helping people with legal issues related to marriage and family.
Source: https://www.floridabar.org/the-florida-bar-journal/ruberg-parry-and-the-classification-of-unvested-stock-options/
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