My husband works for a publicly traded company, and part of his compensation is in the form of restricted shares and options to purchase shares of the company. How are these dealt with in determining our property division and Support Payments?
The Courts tend to look at restricted share and stock option compensation as income when they become available. To see what this means, we’ll need to define restricted shares and options and what ‘available’ means.
Restricted shares are shares that are awarded but cannot be transferred for some prescribed period of time. Once the restriction lifts and the shares ‘vest’, the holder is free to either hold on to the shares or to sell them. Whatever the holder of the shares decides, the Courts have held that once the shares vest, they should be treated as income, otherwise the shares could be held indefinitely until support payments are no longer required (when a spouse remarries, or children become old enough to not merit further support payments).
The Courts will tend to look at restricted shares in light of the Federal Child Support Guidelines (the “Guidelines”), wherein a paying spouse is required to use all of their assets to reasonably generate income. Restricted shares, once vested, can be sold for a guaranteed profit and choosing not to exercise their right to do so effectively allows the paying spouse to artificially reduce the amount of income they pay support on.
Options are treated somewhat differently. An option is a right – but not an obligation – to purchase shares in a company for a predetermined price. For support purposes, options are different than restricted shares because there is a cost one must pay, which is the option price set at the time the options were granted. This is important in terms of the concept of ‘availability’ discussed above, because if the option price is higher than the company’s share price, exercising the option would result in a loss and that is obviously not a course of action a prudent investor would take as they could simply buy a similar share in the open market at a lower price. In this sense, the options would not be ‘available’ as the term relates to support payments until their cost is less than the price of the shares.
The Courts would likely adopt the view that the options would qualify as income for support purposes once their cost is less than the value of the shares. Financial experts could be called on for assistance in determining income on a regular basis in order to assist in determining the appropriate amounts to be imputed from the stock options. This is a fair and equitable approach, since the valuation of options for property division can be a complex and arbitrary exercise.
The above represents the general approaches that are borne out by case law, but the Courts will ultimately reach their conclusions based on what they deem to be fair and appropriate in light of the terms set out in the Guidelines and the facts specific to each individual case. This highlights the need for divorcing spouses to engage experts with a strong background in dealing with both the legal and valuation principles involved in a divorce.
Gordon Krofchick, CA, CBV is President of Krofchick Valuation Partners and is a forensic accountant with over 30 years’ experience in working with issues that impact a matrimonial separation, divorce, or other complex financial and litigation issues.