Stock ticker on modern office building with Capital Gains.

A recent decision from the Colorado Court of Appeals regarding Stock Appreciation Rights (SARs) seems rather obvious – perhaps that’s why the decision was not published.

What is a SAR?

With a Stock Appreciation Right, a company can pay employees with a bonus linked to the price of the company’s stock, payable in the future (typically in cash) after the vesting date. If the stock price increases between the time of the granting and the exercise of the SAR, then they have value which the employee receives. If the stock price decreases, then the SAR has no value.

By way of example, if a company grants 100 SARs when the shares are $100 each, and at the time of exercise, the shares are worth $150 each, then the employee is paid $5000 (100 shares x $50/share).

SARs are similar to “phantom stock”, and broadly similar in purpose to a stock option (which is a divisible asset in a Colorado divorce), but also different in that, unlike stock options, SARs do not require any money to exercise. For more information on Stock Appreciation Rights, see this Wikipedia article.

Stock Appreciation Rights are Divisible Marital Assets in a Divorce

In Hamm,1In re: Marriage of Hamm, No. 20CA0613 (Colo.App. Jul. 1, 2021). the husband during the marriage had signed six different agreements to receive SAR units from his employer. As described by the appellate decision:

Stock Appreciation Rights in a divorceStock Appreciation Rights in a divorce

“The SAR plan provides that the company may “from time to time” award SAR units — described as bookkeeping entries credited to a grantee’s SAR account and valued based on the appreciation of the company’s stock over the base value at the time the award is made — to attract, retain, and reward employees who have substantial responsibility with the company.”

Hamm.2In re: Marriage of Hamm, No. 20CA0613, ¶ 16 (Colo.App. Jul. 1, 2021).

The SARs were payable after 15 years of continuous employment, upon reaching 65 while still employed, or death/disability.

The Court of Appeals cited Balanson3In re: Marriage of Balanson, 25 P.3d 38 (Colo. 2001). for the proposition that the definition of “property” in a divorce is “to be broadly inclusive”, and includes everything with an exchangeable value or makes up wealth. The Court further noted that both stock options (Balanson) and grants of restricted stock shares (per Miller4In re: Marriage of Miller, P.2d 1314 (Colo. 1996).).

Like the restricted stock shares in Miller, the husband in Hamm would not receive the value of the SAR units until & unless he remained employed for the requisite 15 years, but because the husband had an enforceable contractual right to the stock appreciation rights, they were not a “mere expectancy” (which would not be divisible), but were a form of deferred compensation.

The takeaway? Stock appreciation rights are just one example of how employers are getting more creative in compensating employees – and with that creativity comes increasing complication. But when an employee has an enforceable right to future compensation, even when such right is not yet vested and is contingent upon completing employment, that compensation will likely be treated as marital – as stock appreciation rights, stock options, restricted stock grants, and others.

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