Jane and Jonas are getting a divorce after fifteen years of marriage. Jane, who is an engineer, makes a substantial bonus in stock options every year—she works for a company which uses them as incentive to keep Jane and other good employees around for many years to come. Jane wonders if her stock options will be considered to be a part of the marital property which is up for division. After all, she doesn’t yet own the actual stocks. She doesn’t know where the future will lead, and whether she will keep her job long enough to exercise those options. Plus, she gets those stocks as a bonus for her good work, and they aren’t a part of her annual salary. So, are those options really something that she might actually have to share with Jonas?
A stock option is a party’s right to purchase stock in a corporation for a fixed price at a fixed time in the future. As in the scenario above, many corporations use stock options to attract and keep valuable employees, allowing them to exercise their options at a low price as a perk of employment. In the case of divorce, a spouse’s stock options might present some important questions in regards to the division of marital property.
In Massachusetts, stock options are expressly part of the marital estate, making them eligible for division. When dividing any marital property, the Massachusetts Probate and Family Courts use the standard of equitable distribution; here, equitable means fair, and not necessarily equal. The Court uses a sixteen-factor test, generally, to determine what is an equitable way of dividing property, and that same test will apply to stock options, as it does to all other real and personal, tangible and intangible property.
Some special questions can arise in regards to unused stock options at the time of divorce, however—mainly, in regards to their valuation. Because the value is not always readily apparent, the Court will often need to assign a value to them. Consider the following three scenarios:
- If the options have vested, and the stock is publicly traded, then this question is more easily answered: the Court will take the value at which the stock is trading and subtract from it the purchase price specified in the options.
- If the options have vested but the stock is not trading publicly, the question is much more difficult. In most cases, expert testimony will be required in order to consider the value of the stock.
- If the options have not yet vested, the question becomes just as difficult. Here, the options may be valued by the Court on an “if and when received basis.” In one case, the Supreme Judicial Court addressed the issue of stock options and held that the options may be valued and assigned by the Court between the parties once they become available and received by the spouse holding the options. [1]
How are stock options “distributed” during the divorce, particularly if they have not even vested? The Court here can do a number of things; for example: it can order a present assignment at the time of divorce; it can order the spouse who holds the options to purchase at the time of vesting and then share the stocks with the other spouse; or it can order the spouse who holds the options to “buy out” the other spouse with other funds or property available from the marital pot.
If you have questions about stock options and their valuation in your case, schedule a free consultation with our office. Call 978-225-9030 during regular business hours or complete a contact form here, and we will get back to you at our earliest opportunity.
[1] Baccanti v. Morton, 434 Mass. 787 (2001).