However, basing the coverture fraction on each individual portion of the grant means the third portion began vesting on January 1, and finished on January 1, In this case, the husband had stock options granted to him before he separated with his wife. All options vest on January 1, , and the parties separated on January 1,
Ranney was decided two years later and addressed the issue of classification of stock options in more detail. He entered into this agreement with his company about one month before he married his wife. So, even though the options were granted to him before marriage, they vested almost entirely over the course of the marriage.
In the case, Schuman v. However, all of these stock awards were subject to a vesting schedule and did not fully vest until after the husband and wife separated.
The Supreme Court found that the stock awards were a form of deferred compensation and could be divided whether vested or non-vested. The Court also ruled that the martial share of the stock awards should be calculated in the same manner as the marital share of pensions or other retirement benefits. Even though Virginia has many conflicting rulings regarding the classification of stock options, Dietz remains the standard for classification of marital versus separate shares of stock options in Virginia.
Put simply, Dietz found that options are marital if they are earned during the marriage and before the couple separates. Because there are so many different rulings throughout the state of Virginia, there are many outstanding questions about classifying and distributing stock awards.
An experienced attorney such as Van Smith will be able to recognize issues associated with stock awards and help you navigate the complicated framework of stock classification and division. For example, assume that parties are married on January 1, and husband is granted stock options on January 1, All options vest on January 1, , and the parties separated on January 1, In that scenario, half the options would be marital and half would be separate, because they vested over a four-year time continuum with exactly two of the years coming before the separation, and two of the years coming after.
The more vexing question, and one which Dietz did not answer, is how to implement the coverture fraction in situations where one block of stock awards is granted, yet separate portions of that award vest over different time frames. It has become relatively common for companies to issue one grant of stock awards with separate portions of the overall grant vesting over different time continuums.
When this happens in a divorce context, the method with which the coverture fraction is calculated can have a significant impact on the classification of the options. This concept is perhaps best explained by a hypothetical:. Return to the couple in the previous example who married on January 1, and separated on January 1, Assume again that husband was granted options on January 1, Now, instead of all options vesting at the same time, four years after the January 1, grant date, assume the options vest on the following time continuum: There are two ways of calculating the marital and separate portions of these options.
The first method is to run the coverture fraction on each individual portion of the grant. Applying this method, the first two portions of the grant would be entirely marital, as they vest before the date of separation. However, basing the coverture fraction on each individual portion of the grant means the third portion began vesting on January 1, and finished on January 1, All told, this method would result in On a graph, it would look something like this:. The second method is to run the coverture fraction exactly the same as you would have if the options were not divided into four separate portions.
As in the example on the prior page, this would result in exactly half 50 of the shares being marital and half 50 being separate. There is obviously a substantial difference between the results yielded by the two methods, and there are logical arguments for why each method is correct. Method 1 can be logically defended because the different vesting schedules result in the stock award being vested earlier than if all options vested over the same schedule.
For example, if the options simply vested over a 4 year continuum and husband lost his job at some point in year 3, he would lose all of the options, because technically none of them would be fully vested until year 4, at which point they all would be. Under the same scenario, however, where the options vest in 25 option blocks in four successive years, when husband lost his job in year 3, 75 of the options would have already vested and be fully exercisable.
Method 2 can be logically defended because it results in all the components of the stock award vesting at the same rate of speed, which appears to be what is intended by the overall grant. Each year the same number of options vest, which suggests that all are vesting at the same rate of speed.
By contrast, Method 1 assumes the options vest at different speeds, with the options in year 2 vesting at half the speed as those in year 1, the options in year 3 vesting at one third the speed, etc. Using Method 2 also avoids the seemingly absurd results one would encounter by varying the vesting schedules of the underlying portions of the grant, while all the while having the end result remain the same.
To illustrate this, assume that options are granted on January 1, If the options vest in 25 block increments each year for four years, Method 1 results in Now assume that a different vesting schedule is used. Of those shares granted there are only two vesting dates — 75 of the options vest on January 1, , and 25 of the options vest on January 1, The options vest on essentially the same time continuum, just with different vesting dates.
Use of Method 1 would result in 62 of the options being marital. Use of Method 2 continues to yield the same result, with 50 of the shares being marital. Method 2 also appears to be the method used by the Court of Appeals in the Shiembob decision, described above.
Although existing case law in Virginia provides a reasonable framework for classifying and distributing stock awards, questions remain outstanding. A good practitioner will be able to spot the issues associated with stock awards and ask the questions necessary to ensure that he or she is classifying the award properly. Weis Steven Goldman Demian J.