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Property Division – Stock Options, Restricted Shares, Restricted Stock Units

When determining marital property in a divorce, many things may appear to be fairly straightforward, but some may be a little more uncertain or downright ambiguous. The allocation of stock options, restricted shares, and restricted stock units is an aspect of divorce that tends to be confusing and, often times, a point of considerable contention between the divorcing parties. The Illinois Marriage and Dissolution of Marriage Act (IMDMA) presumes that these types of assets that are granted to a spouse either after the date of the marriage, or before entry of a legal separation judgment or divorce, are marital property, whether they are vested or not. (750 ILCS 5/503(b)(3)).

What are stock options, restricted stocks or restricted share units?

A stock option is simply the right to buy or sell stock at a set price on or by a specific date or within a specified period of time.

Restricted shares of stock are stocks that are restricted by some terms or conditions, often related to the passage of time and continued employment. Restricted stock is often used as a form of employee compensation and is a popular alternative to stock options, particularly for executives, due to favorable accounting rules and income tax treatment.  The employee holder has legal title to the stock, which is subject to the company’s contractual right to repurchase if the employee holder is terminated or leaves the company. Upon satisfaction of those terms and conditions, the stock is no longer restricted, and it becomes the property of the employee holder.

Quick Tip: Knowing the terms and conditions contained in your spouse’s employment agreement
or contract will ensure that you do not leave money on the table. Basic Discovery techniques,
like Marital Interrogatories or Subpoenas, are very useful in most divorces.

 

Restricted stock units (RSUs) have recently become popular as employee compensation. They are a hybrid of stock options and restricted stocks. RSUs involve a promise by the employer to grant restricted stock to the employee at a specified point in the future, after certain conditions are met.  The employee does not have title to the stock until, and unless, the set conditions are met.

The writers of the Illinois Marriage and Dissolution of Marriage Act recognize the fact that these types of assets may not have an easily ascertainable value at the time of the divorce.  Therefore, the Court will retain jurisdiction over this particular type of property until such a time when their value may be determined and the division may be decided. This may occur upon expiration of the specified date when the stock options are exercised because then the restricted shares or restricted stock units are no longer constrained.

The challenge that any Court faces is allocating these special assets prior to them being exercised or fully granted to the employee spouse.  The values of these types of assets are typically fluid and subject to the ups and downs of the stock market. It is difficult for the Court to enter an order that grants the award of a specific dollar amount when the value is uncertain.  Further complications arise because, in most cases, the options, restricted shares and restricted stock units are not transferable to a non-employee spouse due to the contract or agreement that created them.

Faced with this problem, it is important to create detailed and specific language in the settlement agreement that spells out the parties’ obligations relative to these types of unique assets.  Usually, the employee spouse is required to exercise his/her right in the options, restricted shares and restricted stock units in such a way as to maximize the value of these assets at the time the assets may be exercised.  There are also income tax considerations which must be taken into consideration when drafting a proper settlement agreement.

Generally speaking, at trial, the Court determines how the options, restricted shares or restricted stock units will be divided between the parties.  It often requires the spouse who owns the options, restricted stock or restricted stock units to maximize their value when exercising them and to not let them go to waste by refusing to exercise them.

There have been several Illinois cases that illustrate just how the court handles property division of stock options. In the divorce case of In re Marriage of Frederick, 578 N.E.2d 612, 618 (Ill. App. 2d Dist. 1991), the husband was the holder of stock options received from his employer as part of his compensation. The court determined that the options had no value until they were exercised at some time in the future.  Therefore, it retained jurisdiction to divide the profit from the exercising of the options, if any, until the time that they were exercised.  Once exercised, they would have measurable value which could be divided between the parties.

If you are considering divorce and stock options will be part of your property division proceedings, it is best to hire a family law attorney to protect your interests. Stock options, restricted shares and restricted stock units may not have a value for many years after the divorce is final, and a good attorney can help ensure that the division is fair.

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