Court Opinion

ID: 9752260
Source: CourtListenerOpinion
Date Created: 2023-08-28 17:52:58.544008+00
Date Added: 2024-06-11T07:27:11.948373
License: Public Domain

NEWMAN, Justice, concurring.
I agree with the Majority that stock options earned during the marriage prior to separation are marital assets subject to equitable distribution. I also agree that where possible, courts should distribute marital property at one time, thus precluding future proceedings, avoiding undue financial dependency between former spouses and enabling the parties to go on with their lives. Valuing stock options is an important step in this process because once a trial court determines what the *595options are worth, it can assign their value to the option-holding spouse’s portion of the marital assets. It can then compensate the non-option-holding spouse by granting to him or her a corresponding amount of transferable marital property such as real estate, stocks and cash. Because such a resolution is not feasible in this case, I believe, as does the Majority, that the deferred distribution approach is appropriate. However, I write separately to note that because we prefer immediate distribution whenever possible, our trial courts should be open minded when presented with expert testimony regarding ways to place a present value on unvested stock options.
In the instant matter, the sole evidence provided to the trial court was that during the marriage, but prior to separation, Husband received 4,449 Harley-Davidson stock options that remained unexercised. Wife’s expert witness testified that on November 2, 1995 (a date close to the master’s hearing) the value of a share of Harley-Davidson stock was $27.00, thus yielding a total value of $120,123.00 for 4,449 shares. From this number he deducted the total strike price of the options ($49,480.29) giving a net value of $70,642.71. This was a net figure without any consideration of taxes. The trial court rejected the valuation because the expert assumed that the stock would be worth $27.00 per share on the date when Husband actually had the right to purchase it. Considering this too speculative, the trial court determined that the options had no ascertainable value. Therefore, the trial court noted that the expert’s failure to consider the tax implications was irrelevant.
Here, the trial court rejected what has been called the intrinsic value method. The Supreme Court of Nebraska in Davidson v. Davidson, 254 Neb. 656, 578 N.W.2d 848, 858 (1998), defined the intrinsic value method as “the market value of the stock, less the exercise cost of the option and any applicable financing costs”. This method has been applied in In re Marriage of Hug, 154 Cal.App.3d 780, 201 CaLRptr. 676 (1984) and Richardson v. Richardson, 280 Ark. 498, 659 S.W.2d 510 (1983). The Majority appears to believe that the *596intrinsic value method is too speculative, and I agree. In light of the fact that the only evidence presented to the trial court regarding the value of Husband’s stock options was based on the intrinsic value method, the Majority correctly holds that a deferred distribution must be ordered in this case. I write separately to emphasize that as a general rule courts are not necessarily confronted with a simple choice of either the intrinsic value method or deferred distribution. There are other more sound and sophisticated ways to value stock options, and if expert testimony is provided to support valuations, it is within the province of the trial court as fact finder to accept or reject such testimony.
One way to determine the value of stock options is the discount to present value method. In a recent decision, Hansel v. Holyfield, 779 So.2d 939 (La.App. 4th Cir.) the Court of Appeal of Louisiana affirmed a trial court’s valuation of stock options based on the expert testimony of an actuary who applied the present value discount method. As explained in Wendt v. Wendt, 1998 WL 161165 (Conn.Super.), the discount to present value approach starts with the intrinsic value, as explained above, and applies discounts to determine present value. As an example, the Wendt court cited to an unpublished New York decision, affirmed without opinion in Evans v. Snyder, 197 A.D.2d 389, 603 N.Y.S.2d 740 (1993). In that case, financial experts applied three discounts for (1) tax due upon sale; (2) lack of marketability; and (3) risk of forfeiture to 12,500 shares of restricted stock. This reduced the intrinsic value from $3,837,500.00 to a present value of $1,654,730.00.
Although there are no published appellate decisions from Pennsylvania courts applying the discount to present method value to stock options, it has long been applied for determining the present value of the marital portion of a pension. In DeMasi v. DeMasi 366 Pa.Super. 19, 530 A.2d 871, 886 (1987) the Superior Court set forth how this method is used to calculate the present value of a pension:
1. Calculate the amount of husband’s monthly pension benefit, assuming he was at age sixty-five on ... the date of separation.
*5972. Find husband’s life expectancy at the time of separation and subtract his normal retirement age to determine the expected number of months of pension benefits.
3. Select an appropriate discount rate.
4. Find the value of the annuity at age 65.
5. Discount the value at age 65 to present value accounting for mortality, disability and termination.
6. Reduce present value of the plan if it has not yet vested.
7. Apply the coverture fraction if a portion of the pension was earned before marriage.
When expert witnesses calculate the present value of stock options based on application of similar principles, I believe that it is within the discretion of the trial court to order immediate distribution of the asset.
Another well-known model for valuing stock options is the Black-Scholes valuation method. “The Black-Scholes option-pricing model is a standard model used by analysts for pricing options. Fisher Black and Myron Scholes, the developers of the model, won Nobel Prizes in economics following the development of the model.” In re The Coleman Company, Inc. Shareholders Litigation, 750 A.2d 1202 (Del.Ch.1999). “It ... is a complex formula which takes into consideration: (1) the volatility of stock prices, (2) the record of its dividends, (3) the exercise price of the stock, (4) the current market value of the stock, and (5) computes all of this in a lognormal formula.” Wendt at *195. Although a Connecticut trial court has opined that the Black Scholes method is inappropriate for evaluating stock options in a marital context, Chammah v. Chammah, 1997 WL 414404 (Conn.Super.1997), the Supreme Court of Nebraska in Davidson, supra, held that a trial court did not abuse its discretion by using the Black-Scholes method to value the husband’s employee stock options.
I have discussed discounting to present value and the Black Scholes model simply to illustrate that there are alternatives to the unacceptably speculative intrinsic value method employed by Wife’s expert in this case. Regrettably, because the record is void of any testimony supporting another method of *598valuation, I am compelled to agree with the Majority that deferred distribution is appropriate in this matter. This is unfortunate, because it means that the parties’ mutual financial dependence continues after the termination of their marriage. However, I reiterate that if parties provide the trial court with expert testimony that cogently sets forth how a present value can be assigned to stock options, it is within the court’s discretion to accept that testimony and order immediate distribution of the marital assets.