When facing a divorce in which stock options are a part of the family’s assets, clients may feel uneasy about what these assets actually are and what questions to ask. The good news is that courts across the United States have uniformly ruled that stock options are an asset to be divided in divorce just like real estate, brokerage accounts and antiques. However, an experienced divorce lawyer will tell you that, when it comes to stock options, distributing their value in a divorce is significantly more complicated, and requires both experience and attention to detail.
There are two critical characteristics of stock options that render them radically different from other assets to be divided in a divorce.
First, stock options are almost always non-transferable. This means that the employee spouse who has been awarded the stock options by his or her company cannot transfer a portion of the options to the other spouse as a part of the divorce settlement. In this way, stock options are very different from retirement benefits, such as 40l(k) plans (another common perquisite of employment), which can be transferred to the other spouse.
Second, the value of a stock option can only be realized if certain contingencies are met. Some of these contingencies are within the control of the employee, but many are not. Contingencies may include continued employment or the company meeting certain performance goals. In addition, the fluctuations in the market value of the particular company stock on the stock exchange have a huge impact on the value of the option.
Before exploring more of the crucial details regarding stock options, let’s take a step back and make sure we are clear on what a stock option is. A stock option is:
(1) a benefit of employment granted by a company to its employees, particularly those in top management,
(2) the terms of which are governed by a written contract between the company and employee,
(3) which reflects the right of the employee who has been granted the stock option to purchase stock in the company (on or before a specified date and at a specified exercise price), and
(4) which is governed by detailed provisions of the Internal Revenue Code.
Within this definition are a myriad of legal issues that must be addressed. What does the written contract say about transferability and taxability? What does the contract say about conditions for vesting of the options, including continued employment? What conditions does the employee have to meet in order to exercise the stock options? What if the employee is fired from the company (or even dies) prior to the exercise date? What if the exercise price of the stock option is higher than the value of a share of stock on the stock exchange?
Ensuring that the client receives the bargained-for value in the division of stock options in a divorce requires careful analysis of the contract governing the issuance of the particular stock options and mastery of the relevant provisions of the Internal Revenue Code – as well as careful drafting of the pertinent parts of any marital settlement agreement.
With the prevalence of incentive payments as a component of executive compensation, and in light of the complicated issues and nuances involved with distributing stock options, it is increasingly important for both the top corporate management client and the spouse of that executive to retain experienced counsel who are knowledgeable about the intricacies of stock options in the divorce process.