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practicing in Chester, Delaware and Montgomery Counties, Pennsylvania

Stock Options as Marital Property

Companies often compensate employees with stock options, the right to purchase stock at a set price under prescribed circumstances. It has been argued that if those options are not exercisable on or before the date of separation, then they are not marital property and, therefore, not subject to distribution by the court in the event of a divorce. In Pennsylvania it depends upon when the options are earned.

Pennsylvania's Superior Court addressed this question in MacAleer v. MacAleer, 725 A. 2d 829 (Pa. Super. 1999). In so doing, the Court reviewed the treatment of stock options in other jurisdictions, most of which concluded that stock options are similar to pensions or other benefits and, therefore, constitute an economic resource which amounts to a form of property. The Pennsylvania court quoted the Supreme Court of Connecticut: "Despite the fact that the stock options at issue in this case had not yet matured or vested at the time of dissolution [of the marriage], the options created an enforceable right in the defendant. " Bornemann v. Bornemann, 245 Conn. 508, 518 (1998).

The court studied other jurisdictions handling of this problem and cited a number of both similar and disparate points of view. Indiana, for example, holds that if the options were not exercisable by the date of either divorce or separation they were not marital property, regardless of when the right to the options accrued. The MacAleer opinion is good educational material on this subject.

The Pennsylvania Divorce Code defines marital property as "all property acquired by either party during the marriage . . . except [p]roperty acquired after separation." 23 Pa. C. S. 3501(a)(4). The Pennsylvania court, therefore, went one step further and drew a distinction between stock options earned prior to separation and those earned after separation. "If the employer awards a stock option solely to compensate the employee for past services, then the option is deemed to be earned when awarded. If awarded for future services, then the option is deemed to be earned when the right to exercise the option matures." MacAleer at 833.

The court did not address the question as to how to value the options. In every case of mine in which the issue arose, we did an in-kind division to be made when the options were exercisable - each party to receive a share of profit from the exercise of the options. That way, if the employee cannot exercise the options for some reason, he or she is not out-of-pocket for funds the employee/spouse never actually received. That distribution scheme de-emphasizes the valuation issue, as well.

The court did allude to the problem of options earned in part prior to separation and in part after separation. The court suggested, but did not hold, that a formula similar to the coverture fraction used in determining the marital portion of a pension might be appropriate. See also my FAQs re pensions.

©copyright 2001, Susan V. Edwards

Susan V. Edwards, Esquire
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