Jane and Jonas are getting a divorce after fifteen years of marriage. Jane, an engineer, receives a substantial annual bonus in stock options. Her company uses them as an incentive to retain good employees. Jane wonders whether the court will consider these stock options marital property for division. After all, she doesn’t yet own the actual stocks. She doesn’t know where the future will lead or if she will keep her job long enough for those options. Additionally, she receives those stocks as a bonus for her good work, separate from her 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 incentives 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 share 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. Massachusetts Probate and Family Courts use equitable distribution to divide marital property, meaning fair, not equal. The Court applies a sixteen-factor test to determine how to divide property. This test applies to stock options as well as all other real, 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:
- The Court can easily answer this question if the options have vested and the stock trades publicly. It will take the stock’s trading value and subtract 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. Expert testimony will usually be required to assess the stock’s value. This is necessary in most cases.
- 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 does a divorce affect the distribution of stock options, particularly if they have not 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).