In re Marriage of Short – Divorce – Division of Marital Property
In re Marriage of Short, 125 Wash. 2d 865, 890 P.2d 12 (Wash. 1995).
NATURE OF THE CASE: This case involved a dispute over the characterization of stock options in the context of a division of marital property.
FACTS: Mr. and Ms. Short were married in 1978. The husband worked for Digital Equipment Corporation and by 1988 earned $80,000 per year and supervised 57 employees. H left Digital in 1988 and accepted a position at Microsoft for $90,000 per year salary and stock options to purchase 25,000 shares of stock at $46 per share. The stock options vested over time with one quarter vesting after 18 months and the remainder vesting in equal increments every six months thereafter.
H and W separated in 1989 and in 1990 H filed for dissolution. The stock split in April 1990 leaving H with options to purchase 50,000 shares at $23 per share. H exercised a portion of the options and realized a $500,000 profit. The court determined that the option assets were acquired in part during the marriage, after separation, and after the marriage. The court determined that the profits should be characterized as 50% community and 50% separate property.
W contended it was error to characterize the stock options as separate property and the court of appeals agreed and reversed, holding that the stock options were acquired during marriage and that thereafter all the options were community property. This appeal resulted.
ISSUE: Do stock options become characterized property on acquisition or on vesting?
RULE OF LAW: Stock options become characterized property on vesting.
HOLDING AND DECISION: The characterization of employee stock options as separate or community property depends upon when the stock options were acquired. A vested employee stock option is acquired when granted. An unvested employee stock option is less easily characterized and requires a more complex analysis. An unvested employee stock option is one that provides no legal title or rights of absolute ownership over the stock option to the employee. These options were contingent upon H’s continued employment and were unvested when granted.
To determine how unvested options are characterized the court must first determine whether the stock options were granted to compensate for past, present or future employment services. The court determined that certain of the stock options were granted to H for present services to induce H to accept employment with Microsoft. The court determined that 100% of the May 1990 options and 50% of both the unexercised May 1990 and November 1990 options were granted for present services and characterized these options as community property. The court then ruled that the remaining options were for future services to ensure continued employment at Microsoft. We determine that there is substantial evidence to support the court’s conclusion.
After the determination of whether the stock options were granted to compensate for past, present or future work, the time rule is then applied. With regard to future employment, the time rule is applied to the first stock options to vest after the parties are found to be living separate and apart. This is the lone stock option that includes both community and separate effort. We do not apply the time rule to every stock option that vests after the parties are found to be living separate and apart. Multiple stock options granted for future services vest consecutively and not concurrently.
DISPOSITION: The Court of appeals is reversed and the case remanded to distribute the shares.