When a married couple accumulates substantial assets during the marriage, they can expect the property division portion of their divorce to require a lot of attention and resources. Houses, cars, and business interests must be disclosed to the court so they can perform and just and fair division of the parties’ community property.
Parties must disclose all sources of wealth, including retirement plans and employee benefits. Although they may not fit the traditional definition of "property", employee benefits such as stock options may still be subject to division upon divorce.
In continuation of our series of blogs on special property division issues in divorces, we look at the legal implications of dividing stock options in divorce cases.
What Are Stock Options?
A stock option refers to the right to purchase shares of a corporation’s stock at a particular time and price. Stock options are a type of employment benefit that companies provide to their employees as an incentive to promote loyalty and reward outstanding performance. Stock options allow employees to have a stake in their company’s success by aligning their personal interests with the overall good of the business.
Stock options give employees the opportunity to purchase the company’s stock at a discount—usually the fair market value of the stock at the time the options were offered. Employees usually can only exercise stock options years into the future. In principle, stock options motivate employees to work harder toward enhancing the company’s future value by letting them acquire the stock at its past lower value so the employee can net a profit.
Companies tend to spread stock options over a multi-year period. Instead of letting the employee purchase 100 shares of company stock after four years of employment, for example, a company might allow them to purchase 20 shares at the end of their first year with 20 additional shares available at the end of each successive year until the end of their fourth year.
Many stock options have certain conditions before the employee can exercise them, in addition to the lapse of time. For example, the company may also have to exceed a certain figure in quarterly earnings after the employee’s fourth year in order for them to exercise the option to buy their first 20 shares. A stock option does not vest until all conditions are satisfied—until then, they are referred to as "contingent" stock options.
How Are Stock Options Characterized Upon Divorce?
In Texas, all assets that a married couple acquires while married are subject to a just and right division by the courts. Such property is referred to as "community property" because the couple acquires such property during the marriage.
When the couple divorces, the marital community estate is dissolved and property they once owned as a community must, therefore, be distributed between the two. In contrast, property that each party acquires before marriage and after divorce does not belong to the community and is not subject to a just and right division upon divorce. Division of property issues in divorce proceedings hinge on whether property is characterized as a community or separate property interest.
To the extent that they were earned while the couple was married, compensation for work is considered to be earnings that belong to the community estate. As a result, stock options that are received while the couple was married are owned by the marital community estate as long as they were awarded as compensation for past work completed. Texas courts have held that both contingent and vested stock options qualify as community property for that purpose.
Sometimes a party receives stock options before they were married but will not vest until after their divorce is finalized. In such cases, courts recognize that the employee spouse has a separate property interest in a portion of the stock. The employee spouse’s separate share of the stock is proportionate to how long the employee was not married while the stock option was not yet exercisable.
For example, if the employee spouse was given a stock option in January of 2012 that vested in January 2018, and was married from January of 2012 until January 2015, they have a separate property interest in roughly half of the stock because they were not married during three of the 6 years they will have had the stock option.
Reach Out to Coker, Robb & Cannon, Family Lawyers for Legal Counsel
If you have substantial assets and are going to get a divorce, you should enlist the professional counsel of an experienced attorney from Coker, Robb & Cannon, Family Lawyers. We can help you understand and get through the complex financial aspects of your divorce, including sophisticated property division issues involving stock options and other employee benefits.
To schedule an appointment about your case with a member of our dedicated legal team, call Coker, Robb & Cannon, Family Lawyers at (940) 293-2313 or visit us online today.