Dividing Stock Rights in a Colorado Divorce

How are vested and unvested stock rights treated in a Colorado divorce?


so stock rates is a general term that


encompasses a lot of different types of


equity compensation things like stock


options restricted stock restricted


stock units sometimes we see Phantom


stock rights or stock appreciation


rights all of those are forms of


executive compensation and all of them


can be very complex and very different


there’s no uh format that’s sort of


generally governs those rights although


the Internal Revenue code does play into


it but every single plan is different


every award agreement is different and


the difficulty is in Colorado vesting is


not determinative when you’re looking at


whether or not a stock right is marital


property so everyone comes into my


office and says I don’t have to worry


about the stock options they’re not


vested yet so once they vest we’ll


already be divorced and it’s my separate


property the law in Colorado is very


clear that vesting is not determinative


so instead we have to look to the


contract the plan document any


amendments any award agreements


sometimes it’s in the employment


agreement sometimes in the severance


agreement we have to look at the


contract that provides the benefit and


determine whether there’s a presently


enforceable right if there’s a presently


enforceable right regardless of whether


or not the stock rate is vested you’ve


got marital property now I’m getting


into what forms it presently enforceable


right it’s a very long and involved


process but it really boils down to are


there any circumstances under the plan


where the person who’s received the


award could get the stock right before


investing is there a provision that says


they can get it if they die or they


become disabled during the vesting


period sometimes there are Provisions


that say if there’s a change in control


of the corporation during the vesting


period their vesting will accelerate


those sorts of Provisions that provide


that people can get that award before


the end of the vesting period will


create property in Colorado and we have


to address that and unfortunately


there’s no formula you have to read


those documents and understand what they


say in order to determine whether or not


there’s property right

From Kristi’s interview for the Masters of Family Law series on ReelLawyers.com.

Nonqualified Deferred Compensation, or “executive compensation,” is a cornerstone of wealth for many executives. Executive compensation may include options, restricted stock, restricted stock units, phantom stock and stock appreciation rights. The purpose of executive compensation is to allow executives to defer tax liability, and to provide an incentive for performance by providing the executive with an equity stake or a link to stock performance in the company. While there are many common themes in the area of executive compensation, the plans under which these awards are offered can be very different, with unique structures, and can include bonus plans, incentive plans, omnibus stock plans, top hat plans, as well as employment and severance agreements.

Vested Stock Rights

In Colorado, vested stock rights acquired during the marriage will be marital property subject to division in the divorce. The issue of whether unvested stock rights will be considered marital property turns on the question of whether there is an enforceable right to the stock rights – generally determined by reference to whether the requisite services required to earn the stock rights have been completed.

Unvested Restricted Stock

The definition of “restricted stock” is stock that has been awarded outright to the executive subject to restrictions – generally a restriction on transferring the stock prior to vesting. To the extent that the plan or award agreement recognizes that a portion of the requisite services have been performed, unvested restricted stock will be determined to be marital property. In that case, courts will come up with a fraction – the number of days of service during the marriage that have already been completed over the number of total days in the vesting period — to determine what portion of the unvested restricted stock is marital. In addition, unvested restricted stock awarded during the marriage that carries both dividend and voting rights will generally be considered 100% marital property to be divided in the divorce. If the restricted stock carries with it only one of the characteristics of ownership (voting or dividends, but not both) Colorado law is unclear. The existence of one characteristic of ownership may still be sufficient to consider the restricted stock marital property, especially where the terms of the award agreement make clear that the company cannot repudiate the employee spouse’s right to retain the stock.

On the other hand, some plans or award agreements are clear that if the executive is not employed on the last day of the vesting period, there is no opportunity for the executive to receive any of the stock under any circumstances. In those cases, there is a strong argument that the unvested stock is not property and therefore not subject to division in the marital estate.

Be aware that restricted stock is not the same as restricted stock units. Restricted stock units represent the value of the employee’s interest in the stock in the future, but the stock does not actually exist in the hands of the employee and the employee receives no benefit from the units until the conditions for vesting have been met. As a result, restricted stock units are, like phantom stock rights and stock appreciation rights, more akin to options than to restricted stock and should be treated similarly in divorce in Colorado.

Unvested Options

Similar rules apply to stock options in Colorado. The main difference between stock options and restricted stock is that options provide the executive with the right to purchase stock at a predetermined price upon vesting, while restricted stock is an outright grant of stock that can’t be transferred until vesting occurs. Like restricted stock, stock options are often awarded subject to a vesting schedule. To be vested and able to exercise the option, the employee must meet certain criteria such as continued employment or meeting performance goals. And, as with restricted stock, vesting is not determinative in ascertaining whether unvested stock options constitute marital property in Colorado. Instead, unvested stock options will be considered property only when the employee has an enforceable right to the options under the terms of the plan, award agreement, and any other documents making up the contract granting the options. Issues such as whether the employee may still receive all, or a pro-rated share, of the options if he or she terminates service with the company prior to the end of the vesting period can inform the question of whether there is a legally enforceable right to the options prior to vesting. In Colorado, unvested options are marital property to the extent that the services required to earn the options have already been performed, such as where the options were granted as a signing bonus, as a reward for good work on a prior project. Where options were granted for multiple reasons (past and future services), where the terms of the contract are unclear as to whether the award was for past or future services, or even where the contract is clear that the purpose of the award is to reward future services, the terms of the plan and the award agreement may still provide enough information to determine there is a legally enforceable right to receive a portion of the options because some of the services required to earn the options have already been performed.

Kristi Anderson Wells spent many years working as an executive compensation attorney for Fortune 500 companies prior to beginning her practice in the area of family law. She is the author of “The Executive Compensation Handbook: Stock Option Awards, Restricted Stock Grants, Cash Bonuses, Incentives and Other Non-qualified Deferred Compensation in Divorce,” published by the American Bar Association, as well as being the author of the Ask Super Lawyers page, “How are stock rights divided in a Colorado divorce?”