South Carolina’s unjust approach to unvested stock options

Posted Tuesday, July 27th, 2021 by Gregory Forman
Filed under Equitable Distribution/Property Division, Of Interest to Family Court Litigants, Of Interest to Family Law Attorneys, South Carolina Appellate Decisions, South Carolina Specific

A few days ago a colleague called me to discuss an issue he was mediating, specifically how to apportion unvested stock options. This made me realize I’ve never written about Shorb v. Shorb, 372 SC 623, 643 SE2d 124 (Ct.App.2007). On the issue of whether unvested stock options are marital property, Shorb took an approach that differed from other jurisdictions and vitiates the general principals of what makes property marital.

In Shorb, the parties agreed that Wife would receive 55% of the marital portion of Husband’s Walmart stock options. The parties then disputed whether the unvested stock options Husband acquired prior to the date of filing, but whose vesting was contingent upon Husband’s continued employment with Walmart, were marital. The family court found they were 100% marital and Husband appealed.

The Court of Appeals affirmed. It noted, “[t]he determining factor is not when the right to exercise the option matures, but whether the stock option is earned prior to the date of separation. Employers may grant options for a variety of reasons, which must be considered in deciding when the option is earned. Most jurisdictions determine the nature of stock options by whether the options are compensation for past services or are an incentive for future services.”

This would seem to indicate that options whose vesting is contingent upon continued employment “are an incentive for future services.” But that is not the determination the Shorb court made. It held, “we believe the approach most consistent with this State’s equitable apportionment scheme and with the purpose of stock options is to classify both vested and nonvested stock options as being earned when granted, and if granted during the parties’ marriage, the options are marital property.”

The case of Bornemann v. Bornemann, 245 Conn. 508, 752 A.2d 978 (1998), describes the three ways state appellate courts have addressed the issue of whether unvested stock options are marital property. It notes “a minority of jurisdictions have adopted per se rules applicable to unvested stock options that do not require a fact specific analysis of when the options were earned. A few have decided that regardless of the purpose for which they were granted, stock options that are not exercisable at the end of a marriage are not marital property; and others have decided that stock plans granted during a marriage are wholly marital property.” (citations omitted). It was persuaded “that the majority approach that apportions unvested stock options between marital and nonmarital property according to when the options were earned provides the most appropriate method of classification” under its equitable distribution statute. This majority approach is the only one that properly accounts for the various reasons unvested stock options are awarded and therefore the best approach.

The Shorb holding is an injustice for spouses whose unvested stock options are an incentive for future services–basically turning property earned through labor after the date of filing into marital property. A family court could decide not to award the other spouse half the value of the unvested option–a possibility constrained in Shorb by the parties’ agreement to award Wife 55% of Husband’s marital stock options. But the approach more consistent with South Carolina’s general determination that marital property is property earned between the date of marriage and the date of filing would be to determine what portion of these unvested options were compensation for past services and what portion are an incentive for future services and only make the portion that is compensation for past services “marital.”

Shorb recognized that unvested stock options could be incentive for future services but made such options marital if granted before the date of filing. Until the Supreme Court decides otherwise, it remains controlling authority but it is badly reasoned authority. Still it is authority South Carolina family law attorneys need to know.

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