Connecticut courts’ approach to unvested stock options in divorce

On Behalf of | Sep 21, 2021 | Property Division

The Connecticut statute that governs equitable property division in divorce does not define “property,” which has left it to our courts to do so on a case-by-case basis. CT Gen. Stat § 46b-81. Basically, before the judge can craft a fair property division, they must determine what property is available for potential ownership by either ex-spouse after divorce. The property aspects of nontraditional or intangible kinds of assets have required more in-depth examination to determine whether they are distributable upon divorce. Today, we look at how Connecticut courts have handled the challenges inherent in determining whether unvested stock options constitute “property” for this purpose.

As a starting point, Connecticut courts take an expansive view of what assets are distributable property at the dissolution of a marriage. The courts refrain from creating exacting formulas, and instead equitably divide assets based upon the statutory criteria after an examination of the nature and character of the assets in the marital estate.

Elusive nature of unvested stock options

Real estate, personal property, vehicles and boats, art collections, bank accounts, heirlooms – these are all clearly tangible property subject to distribution. But some assets are not so easily definable or distributable.

Executive compensation often includes an option grant of unvested shares of company stock that become available upon satisfaction of a predetermined condition. Usually, they vest on completion of a particular length of service or less frequently when the individual or company reaches a financial or performance milestone. Until stock options vest, the executive cannot exercise the rights of ownership like selling them or voting as a shareholder.

Each stock option arrangement depends on the terms of the employment contract and plan description, and may also be impacted by internal corporate rules or federal or state law and regulations. Accordingly, if the executive leaves of their own volition or in an involuntary termination of employment, they normally loose unvested stocks and options.

For example, the vesting schedule may provide for incremental vesting over time. One-quarter of the stock or option might vest after one year of service followed by the remaining stocks Or options vesting according to a schedule. What happens if the executive divorces somewhere in the middle of the vesting schedule or before vesting has begun at all? Does their soon-to-be ex-spouse have any property rights in these stocks or options? When is the stock actually earned and owned subject to distribution?

One approach has been that when a spouse partly earns unvested stock options before the divorce and partly after, the court can create a “coverture factor,” a flexible mathematical approach to apportioning vested and unvested options when appropriate. Wendt v. Wendt, 59 Conn.App. 656.

This scratches the surface of complexities that can come before the court. The complications may require the parties to engage financial experts to help the judge sort through the myriad of issues that can arise, including valuation.

What does the Connecticut Supreme Court say?

Our Supreme Court most recently discussed these issues in detail in Mickey v. Mickey, 292 Conn. 597 (2009). While that case involved retirement benefits and disability retirement benefits, the court’s discussion is instructive in stock option cases as well.

The court explained that while its view of what constitutes property is broad, there are inherent limitations. The distributable marital estate includes “interests already acquired, not to expected or unvested interests, or to interests that the court has not quantified,” quoting Smith v. Smith, 249 Conn. 265 (1999).

The court articulated a two-part test in Mickey for how to determine whether a contingent asset of “unconventional” nature is distributable property:

  1. An asset is divisible in divorce if “susceptible to reasonably accurate quantification,” quoting Bender v. Bender, 258 Conn. 733 (2001), and if it constitutes “presently enforceable rights, based on either property or contract principles.” For example, this encompasses a “vested but unmatured pension or an inchoate contractual right” if the expectation that the asset will eventually vest is “sufficiently concrete, reasonable and justifiable,” again quoting Bender.
  2. If the asset does not meet this definition because it is contingent on a future happening, the court asks whether the likelihood of the future event is “overly speculative.” Recognizing there are “different degrees” of contingencies in potential future interests, the court said that, by example, some unvested pensions would be distributable even though dependent on some future happenings like the owner completing a certain length of service. By contrast, a potential future inheritance is too speculative to qualify as property divisible in divorce.

Related issues

While pensions have some similar vesting characteristics, courts do not always treat them the same as stock options. Connecticut judges tend to lean toward defining most pensions as distributable property as a type of traditional retirement vehicle connected to marital expectations for future financial security and based on labor that occurred during marriage.

Legal issues can also arise around whether unvested stock options are deemed distributable in property division or as a source of future income for alimony – and whether they can ever be used for both purposes in divorce. Courts are careful to avoid inappropriate “double dipping.”

The judge in each divorce must carefully consider each type of asset according to the terms of their creation as well as related issues of speculative or ascertainable value, future expectancy and contingent ownership.

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