A "stock option" is an asset which provides the owner with a choice of whether or not to purchase a specified amount of discounted stock (or sell) at a specified price point within a specified time period. In the world of divorce law, the typical scenario is that one spouse's Employer compensates that spouse with the option to purchase company stock at future dates at bargain basement prices. The general idea behind stock options as compensation is to provide something of value while at the same time being able to argue that it does not have any real value, depending upon who is listening. So, when one spouse has a pocketful or stock options, how do we treat them in a divorce?
Classifying Stock Options as Marital or Separate.
In the simplest of terms, assets defined as "marital" are included in the marital estate which is subject to division, valued at according to the fair market value, and divided between the parties. Assets defined as separate are included in the division, and they are retained by the owner. "Marital property" is defined as property acquired after the date of the marriage of the parties and prior to the date of separation. So, stock options get the same anyalysis as all other assets in divorce. Was the option earned for services rendered during the marriage and granted during the marriage? If yes, then its marital. If the actual option is granted after the date of separation for services rendered during the marriage, it would be considered divisible property subject to distribution.
Therefore, what must be determined is the period of time the stock options were serving to compensate the employee. During the marriage, its divided, outside of the marriage, its separate.
Vested versus Unvested Stock Options
Vesting schedules complicate the issue of stock options even further. A vesting schedule provides an award of stock options at one time, however schedules the employees ability to exercise the options over a period of years, so long as they remain with the company. For example, Corporation XYZ awards John 10,000 options at $2.50 per share, with a vesting schedule of 2000 shares per year. XYZ shares are trading for $10.00 per share.
John and Linda, his wife of 20 years, are separating in year 3 of the schedule, so John has 6000 vested options, and 4000.
First, both vested and unvested options can be marital and have value, so do not make the mistake of assuming unvested options are off the table. In a twenty year marriage, all of the options will be marital except options intended as compensation for John's future labor. Even a portion of these options can still be marital, but you are getting into very complicated arguments which would require very specific information.
Valuing Stock Options
There are multiple methods used to value stock options, however in North Carolina the standard method is the "Intrinsic Value Method". This method has the advantage of being simple. The value of the current stock price is subtracted by the value of the option strike price, then multiplied by the number of options. This method is useful for common ordinary stock where pricing and marketability are easily determined.
Several financial websites provide publicly trades stock prices for given dates in history.
If you are dealing with restricted stock or stock that is not publicly traded, you will have to retain an expert accountant to determine the price using a more detailed method (Black-Scholes, Noreen-Wolfson variant, Kasouf, etc).
The parties are always free to agree on any value they like, and this is often the best result provided you are in a position to make a reasonable determination of the value.
Dividing or Distributing Stock Options
The law in North Carolina and most states favor "in kind distribution of marital property". This is difficult with stock options, which are treated like other forms of deferred compensation plans (pension, retirements, etc) which may only be divided when the benefit is recieved by the owner spouse. This means that the Courts are to split the actual stock options between the parties to the extent possible.
As a practical matter, ordering the actual exercise of stock options is difficult and has tax consequences that must be considered and are diffiicult to estimate. The best result is to have the owner spouse offset the value of the options with another asset, such as retirement or existing stock. If this is not possible, money will have to be set aside from somewhere to exercise the option benefits when they become payable to Employee, and while it is difficult, it can be done. As a family lawyer attorney, I suggest offsetting.
Practical Realities of Dividing Stock Options
If you or your spouse have significant stock options to consider in an Equitable Distribution, you will need the assistance of an experienced family law attorney to ensure the proper handling of these complicated assets. This article is very broad in scope and is intended as a brief introduction into how stock options are handled in a divorce. In most cases, your attorney will be able to negotiate a settlement, or a stipulation at trial, that can avoid any future negative consequences that can result in mishandling these assets.
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