Dividing Stock Rights in a Colorado Divorce
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.
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.
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.
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 co-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?”