"Freeze" on Exercise of Stock Options in event of Divorce?

[Christine Roberts]

An executive (living in a community property state)with a variety of stock options and deferred stock is in the process of getting divorced - is his employer potentially liable to the former spouse if the employer allows the executive to exercise stock options during the pendency of the divorce?

[Guest hank]

I'm not sure on what legal theory the employer could be held liable for allowing the exec to exercise options. I assume that the right to exercise vested options was a term of the grant, reflected in an option agreement, which runs to the exec. In the absence of a court order "freezing" that right, with notice to the employer, where does the employer's "duty" to the spouse come from?

[Christine Roberts]

Duty to spouse would not be contractual or based on any employment law principles but would come from community property laws, particularly where spouse has asserted (e.g., by notice to the employer) a community property interest in stock options granted during the period of the marriage.

[Kirk Maldonado]

Christine:

As a practical matter, if the non-employee spouse's attorney contacts the employer, the employer undoubtedly would refuse to allow the employee to exercise the stock option and sell the shares (or, at the very least, would hold the sales proceeds in escrow until the divorce is settledd).

If that attorney fails to notify the employer, I think that the non-employee spouse would have a great legal malpractice action.