When Stock Options Are Not Stock Options
Ubertaccio v. Ubertaccio, 588 S.E.2d 905 (N.C. App. 2003) (Levinson, J. concurring)
In North Carolina, Equitable Distribution (ED) is one of the common mechanisms by which former spouses divide their personal and real property. Stock options and salary substitutions acquired by a party are typically subject to ED. However, not all stock options are genuine stock options on their face. Nor should all forms of deferred compensation be subject to ED. Below, we discuss a Judge that agreed with the outcome, but not on the rationale of classifying a “stock option” in ED.
- Facts: Plaintiff and Defendant separated in January of 2000. ED claims were filed. The parties reached an agreement over much of the property subject to division; however, they did not resolve who would be receiving the stocks that Plaintiff had acquired from her employer. In December of 1999, Plaintiff signed a contract with her employer which made her eligible to receive 10,000 shares of stock during the course of year 2000, of which 3000 were received in March 2000, and the remaining in July 2000. After the gains and taxes, Plaintiff ended up selling her shares for $82,637. At trial, the court found that the entire amount was divisible and/or marital, and ordered that Plaintiff pay 55% of the proceeds to Defendant. Plaintiff appealed. This blog will focus on Judge Levinson’s concurrence.
- Issue: Did the trial court err in classification and division of the stock?
- Holding: Judge Levinson disagreed with the split opinion.
- Rationale: Judge Tyson writes that stock options are a type of salary substitute or deferred compensation, thus they can be properly classified as divisible property if acquired as a result of a spouse’s work while still in the marriage even if not received until after separation. This is the case above where Plaintiff received the contract during marriage in December 1999 but did not receive the stock and proceeds until the parties had split. Judge Levinson disagrees and writes that Plaintiff’s stock grant adhered to the company’s “Phantom Stock Program,” which outlined eligibility, terms, conditions, and further rules. The issue was classification. According the phantom stock program, the units that were given to employees were not a stock option in the classic sense. Therefore, the application of an earlier case involving stock options, Fountain, was erroneous. Judge Levinson also writes that not all forms of salary substitution must be classified and distributed according to our ED statutes. Levinson believes that only those that are related in nature to pension and retirement are subject.
- Lessons and Observations:
- Judge Levinson’s reasoning is that ED classifies certain assets as marital, divisible, or separate. There could be a conceivable situation where a spouse earns a salary compensation that is not a result of work performed during the marriage, but rather some separate aspect. If those assets are blindly classified as a divisible or marital asset because they were simply a form of deferred compensation, then it would clearly be erroneous in the face of our ED statutes. The issue becomes evidentiary, and not an issue with interpretation of law.
- The North Carolina Supreme Court reviewed the appellate opinion and affirmed the opinion of Judge Levinson specifically.