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Microsoft Stock Awards - Division in a Divorce

1. The Short Case is Cited As Authority For a Share of Only the First Stock Award.

In re Marriage of Short, 125 Wn.2d 865 (1995), is always cited as authority by the attorney of the Microsoft employee in a divorce as restricting the spouse's share to one half of the first stock award after the decree of divorce. The Short case involved a dissolution of marriage of Patricia and Robert Short. Robert worked for Microsoft. A significant asset to be divided was Robert's right to exercise future options for Microsoft stock. The trial court found that only the option immediately after the divorce was community property and divided 50/50. Future stock options were for future services, and were therefore Robert's separate property. The evidence at trial included (a) the front-loading of stock options; (b) Robert's abandonment of a competing business; (c) the terms of the actual stock option plan; and (d) the tailor-made contract for Robert. The Washington State Supreme Court in Short affirmed the trial court's decision.

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2. The Reasoning of the Short Case Made Sense In 1995.

The reasoning in the Short case was as follows: "After determining whether employee stock options were granted to compensate the employee for past, present, or future employment services, the 'time rule' is applied. For future employment services, the 'time rule' is applied to the first stock option to vest after the parties are found to be 'living separate and apart'. This is the lone stock option that includes both a community effort and a 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' because to do so ignores the separate property provisions of RCW 26.16. Multiple stock options granted for future services vest consecutively, not concurrently. Such a ruling insures that stock options are characterized and apportioned to reflect their marital and nonmarital aspects." In re Marriage of Short, 125 Wn.2d 865, 874 (1995).

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3. Why Microsoft Stock Awards In 2013 Are Different From the Short Case.

Microsoft no longer awards the stock "options" described in the Short case. A July 8, 2003 article from the "Microsoft News Center" (Exhibit G) states that: "Starting in September 2003 employees will be granted Stock Awards instead of stock options. The Stock Award program offers employees the opportunities to earn actual shares of Microsoft stock over time, rather than options that give employees the right to purchase stock at a set price." See "Microsoft Reshapes Compensation for Continued Success," July 8, 2003. There appears to be a strong component in stock awards that is based on past performance. The Microsoft "Stock Plan" describes how Microsoft employees will receive special "Awards." A version downloaded in 2012 states "These awards are to be made to deserving employees by means of a written or electronic "Award Agreement," which sets forth the specific terms of the Award. Stock Plan, pars. 2 and 5.a."

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4. The Microsoft Board Can Make Awards Based on Performance.

The Microsoft Board can grant any or all of these awards to its employees. "The Board may, but need not, determine that an award shall vest or be granted subject to the satisfaction of one or more performance goals.... For awards that are intended to qualify as performance-based compensation..., performance goals will be based on one or more of the following business criteria: sales or licensing volume, revenues, customer satisfaction, expenses, organizational health/productivity, earnings . . . margins, cash flow, shareholder return, return on equity, return on assets or return on investments, working capital, product shipments or releases, brand or product recognition or acceptance and/or stock price. These criteria may be measured: individually, ... or in any combination;...." Stock Plan, pp. 4-5, par. 4.b. Once Microsoft has announced an award to an employee or class of employees, the award can be exercised by individual employees by written or electronic notice. Stock Plan, par. 12.a.

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5. The Current Viability of the Short Case Is In Question.

The arguments made in this Legal Guide are controversial, have not been accepted by any court, and may not be accepted in the future. Nevertheless, it seems odd that after nearly 20 years, no one has challenged the Short decision's current viability. Microsoft stock awards currently appear to be significantly different from the tailor-made award discussed in the Short case. Microsoft stock awards are currently granted as part of an omnibus employee compensation package. At the end of each fiscal year, all company employees undergo annual reviews. Bonuses and stock awards are then granted based on past performance, promotions, and corporate achievement. There is a five-year vesting period for stock awards. Therefore, a stock award in 2013 would seem to be substantially based on past work. If so, it would seem that Microsoft awards for five years following a divorce should be treated as community property and be divided equally between the parties.

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6. The Marital Community Should Have a Share of Five Annual MS Awards.

If the court someday accepts the above analysis, the spouse who divorces a Microsoft employee should claim a declining share in the five annual awards following a divorce. Part of each award should be earmarked for 50/50 division as community property. The first award after the divorce would be 100% community property, and would be equally divided. The following year the MS employee's stock award would be based on four years which are community property; the spouse should be awarded 1/2 times 4/5 of the total award. Each year the community's share would decline. In the fifth and final year after the divorce the stock award would include a one-fifth community property interest, one-half of which would go to the spouse. Unless the MS employee in a divorce produces clear and convincing evidence that the next five stock awards after divorce are entirely intended to reward future work at MS, the spouse should be awarded a share of those MS stock options for the next five years.

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7. Conclusion.

Currently the Courts in Washington State rule that in every divorce of a Microsoft employee, only the first annual stock award is community property; and that subsequent awards are the separate property of the MS employee. This Legal Guide argues that the nature of employee awards at Microsoft has significantly changed, and that the case on which the trial courts rely is no longer applicable. It is likely that the trial courts will continue to rule this way until In re Marriage of Short is distinguished or overturned on appeal from an adverse trial decision.

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Disclaimer

This Legal Guide is provided for general educational purposes only. By using or participating in this site you agree and understand that there is no attorney client relationship between you and the attorney who wrote this Legal Guide, and no attorney-client confidentiality. The law changes frequently, and varies from jurisdiction to jurisdiction. The information provided in this Guide is general in nature and may not apply to the factual circumstances described in your question. The applicable law and the appropriate advice may be different in the State or States where the relevant facts occurred. For definitive legal advice you should independently consult an attorney who (1) is licensed to practice in the state which has jurisdiction; (2) has experience in the area of law you are asking about, and (3) has been retained as your attorney for representation or consultation. Your comment to this Legal Guide may be used for promotional or educational purposes. (C)Bruce Clement

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