How Should Restricted Stock Options be Considered in a Divorce Case?
Lawyers are not accountants, or vice versa, but there are a lot of financial matters decided through the court systems. For a divorce case, joint and individual financial assets are among the key considerations for division. Its not uncommon for retirement, stocks, 401K or other accounts to be taken into account during a divorce, but there are some financial matters that are more complicated than a simple “fair and equitable division.” In this case, we want to look at restricted stock options. What are they and why should they be considered separately from other financial assets?
What Are Restricted Stock Options?
Many people are given stock options by their companies as a bonus or incentive to promote employee retention. It’s a common perk for hiring top talent and stock options can really pay off in the long run. A restricted stock option is one that won’t be fully vested until certain business criteria are met. Stock options, in general, won’t typically vest unless the individual is still working at that job. For restricted stock options, there will be additional requirements.
For example, some restricted stock options require what’s known as a “liquidity event,” which could be defined as nearly anything from the business perspective. These stock options can also be binary shares which means they will either vest 100% or not at all.
In a divorce these may be the most valuable assets of all. The spouse who does not own the options will want 50% of them. However, is that truly equitable given that much of the labor and work to earn these options may not take place until after the divorce?
Post-Divorce Labor
In the case of restricted stock options that have not yet vested at the time of divorce, one must consider the remaining time with the company to qualify to receive the vested stock options. For example, after the final judgment on the divorce, employment will still need to occur for an indefinite period of time, possibly ten years or longer, to obtain a result for the company that may never be obtained.
This is not a question for the average divorce attorney. In the State of Georgia there is no direct answer either. The general rule is that assets acquired from the joint efforts of the marriage are to be considered equitable (and thus divided 50/50 generally). At Shaw Law Firm we have taken multiple theories on this issue, depending on who our client is.
For example, during a marriage of 30 years, most of the wealth in the marriage was created in the last five years. The majority of that wealth was contained in restricted stock options that would not vest until after the marriage ended, and the options were owned by the husband. He agreed to pay the wife 50% of all the options that vest during the marriage (in this case, that was about 25% of the total). The husband would have to continue working post-divorce to earn the rest of the stock options, but should the ex-wife not benefit in some way from this wealth, since it was the first 25 years of marriage that created the contractual rights to the restricted stock options to begin with?
Cannot Predict the Future
What does all this mean in terms of a divorce case? Well, it comes down to the simple fact that you can’t predict the future. When the conditions of restricted stock options include absolute uncertainty about how long it will take for them to become vested, if at all, then how can that money be used to determine the equitable distribution of assets? When a liquidity event or other unspecified terms and conditions are placed on the asset, there no possible way to predict the value or if it will even come to fruition.
Determining valuation is just a portion of the work required in circumstances like this. Do you want to know more about complicated financial matters, like restricted stock options, and your divorce? Shaw Law is here to answer your questions and ensure your experience is fair and equitable.