Spouse's unvested stock options are divisible marital property

Law Reporter, Apr 2003

Otley v. Otley, 810 A.2d 1 (Md. Ct. Spec. App. 2002).

A Maryland appellate court held that unvested corporate stock options constitute marital property that should be distributed in a divorce agreement even if the options have no market value at that time.

Here, a man participated in a stock option plan that allowed him to buy shares of his employer's stock. At the time he and his wife divorced, he held options permitting him to purchase 33,000 shares, but these options would not vest unless he continued to work for his employer for a set period of time. The divorce court ordered an equal distribution of marital property, but exempted the options because no market value for them could be shown at the time of the trial. The wife appealed.

Vacating in part, the appellate court cited case law holding that stock options, vested or unvested, are marital property under the divorce code. In addition, the Internal Revenue Service recognizes that a property right exists from the moment an option is granted. The court said that the valuation of this property right can be accomplished by making an analogy to the traditional division of pension plan assets.

Generally, the court explained, the marital portion of the benefit from an unvested option may be determined by comparing (1) the amount of time that the employee spouse was employed, during the marriage and after acquisition of the option, to (2) the amount of time that the employee spouse was employed, beginning with the date of acquisition of the option and ending with the date that the benefit was earned, that is, vested.

Even though an unvested option has no current monetary value, it is nonetheless an economic resource-- comparable to pension benefits-to which a value can be attributed, the court said. A determination of the appropriate valuation method is for the trial court, subject to review on appeal. The appellate court recommended the use of an "if, as, and when" valuation approach, in which the likelihood that the asset will vest is a substantial factor in determining its present value. Once it has determined the value of the options, the trial court must then decide on a fair distribution between the parties, taking into account how they acquired the asset and the effort expended by each party, the court concluded.

Wife's Counsel

Alan S. Town, Rockville, Md.