Options and RSUs in divorce: how are unvested rights divided, and what does the date of the rift mean?
In the high-tech sector, a significant part of the compensation given to employees may include options, shares and restricted stock units (RSUs), whose value can reach considerable sums. Unlike traditional assets, these rights may vest over years, be conditional on continued employment and change in value according to the company's performance and market fluctuations.
When a couple separates, complex legal questions arise: are options that have not yet vested included in the balancing of resources? Is there an entitlement to shares that will be received after the separation? And what is the significance of the date of the rift in determining the scope of the rights and their value?
Deciding these questions requires an examination of the nature of the equity compensation, the purpose for which it was granted, its vesting conditions and the period in respect of which it was accrued. In divorce proceedings that include rights of this kind, therefore, being accompanied by a divorce lawyer in Tel Aviv and the surrounding area who is also familiar with the characteristics of equity compensation may be of considerable financial significance.
Options and RSUs that have not yet vested: are they included in the balancing of resources?
Options, restricted stock units (RSUs) and tradable shares are rights with different characteristics, which have to be distinguished from one another in the balancing of resources. An option gives the employee, as a rule, the right to buy a share at an exercise price set in advance, while an RSU gives, subject to the terms of the plan, an entitlement to receive a share once the vesting period is completed. A tradable share, by contrast, is an asset whose value can be assessed according to the market price.
According to case law, options and shares granted in the course of employment may be regarded as part of the compensation given to the employee for their work and efforts during the period of the shared life, and may therefore be included in the balancing of resources, even if their vesting date falls after the date of the rift.
That said, the mere fact that the rights were granted during the marriage does not necessarily entitle the other spouse to half of them. It has to be examined whether the grant was intended to reward work done in the past, to serve as an incentive for continued employment in the future, or to combine the two.
When the grant relates to a period of work that overlaps only partly with the period of the shared life, it is possible in suitable cases to use the time rule, which reflects the ratio between the relevant period of work that fell within the partnership and the total period in respect of which the compensation was granted.
However, this is not a formula that applies automatically. The scope of the rights subject to balancing will be determined according to the purpose of the grant, the vesting conditions and the extent of their connection to the period of the shared life.
Even when an equity award was granted after the date of the rift, a question may arise as to the source of the right and the period in respect of which it was given. This issue requires an individual examination of the terms and circumstances of the grant, and the date of the grant alone does not decide the question of entitlement.
The date of the rift and its effect on the division of rights
One of the central issues in resource-balancing proceedings is determining the date of the rift, which serves as the starting point for determining the scope of the assets and rights accrued during the shared life.
The date of the rift is determined according to all the circumstances of the case, by examining the date on which the financial partnership between the spouses came to an end in practice. Leaving the family home, separating bank accounts or opening legal proceedings may serve as indications of this, but none of these events alone determines the decisive date.
When it comes to equity compensation, a distinction has to be made between the date of the rift, which is used to determine the scope of the rights subject to balancing, and the date on which their value will be assessed.
With regard to tradable shares, whose value can be assessed according to the market price, the starting point is an examination of the number of shares and their value on the date of the rift, subject to the circumstances of the case and the provisions of the law.
By contrast, when it comes to non-tradable options, where assessing their value on the date of the rift involves real difficulty or significant uncertainty, case law has recognized the possibility of determining, in suitable circumstances, that the valuation will be made at the time of actual exercise.
So, for example, in Family Appeal 19796-09-17 the District Court recognized the possibility of assessing the value of non-tradable options at the time of their exercise, taking into account the characteristics of the rights and the circumstances of the case. That said, this is not a sweeping rule that applies to every type of equity compensation.
As for RSUs that have not yet vested, the terms of the plan, the purpose of the grant and the date on which the entitlement to receive the shares crystallizes all have to be examined. It should not be concluded automatically that the vesting date will also be the date on which the balancing is carried out or the value of the rights is assessed.
It follows that the date of the rift may determine the scope of the rights subject to balancing, but the date on which their value is assessed and the way they are divided may vary according to the type of right and the circumstances of the case.
How are the options and shares divided between the spouses?
Once it has been determined that options, shares or RSUs are assets subject to balancing, it has to be decided how the division will be carried out in practice.
Under the Spouses (Property Relations) Law, 5733-1973, the resource-balancing arrangement is based on balancing the value of the assets subject to balancing, but the way it is carried out is not uniform and may vary according to the characteristics of the rights and the circumstances of the case.
When it comes to tradable shares, the possibility of a monetary balancing or of a division in kind can be examined, according to the circumstances and the provisions of the law.
Non-tradable options, by contrast, may be subject to restrictions on transfer and exercise that do not allow them to be transferred directly to the other spouse. In suitable cases a deferred settlement mechanism can be set, based on the spouse's proportional share of the rights subject to balancing and on their value at the time of actual exercise.
This mechanism may suit situations in which there is real difficulty in assessing the value of the options on the date of the rift, but it should not be applied automatically to all equity rights.
With regard to RSUs that have not yet vested, the terms of the plan, the purpose of the grant and the date on which the entitlement to receive the shares crystallizes have to be examined, and the appropriate way of balancing determined accordingly. The mere vesting of the units does not require the settlement between the spouses to be carried out on that particular date.
There is therefore no uniform division mechanism that applies to options, RSUs and tradable shares, and the way the balancing is carried out and its timing have to be fitted to the characteristics of the rights and the circumstances of each case.
The tax implications of dividing options and shares in a divorce
Dividing options, shares and RSUs in divorce proceedings may raise tax questions with significant financial implications.
The tax aspects vary according to the type of equity compensation, the tax track, the terms of the grant and the date on which the tax event occurs. It should therefore not be assumed that all types of rights are subject to the same tax rules, or that the tax liability necessarily crystallizes on the date of the rift.
In the balancing of resources it is important to examine the possible tax implications as well, and in suitable cases a tax expert can be brought in to examine the financial meaning of the division mechanism.
An early examination of the tax aspects may help in assessing the financial value of the rights and in reducing future disputes between the spouses.
The man's rights in a divorce when the equity compensation is registered in the woman's name
The entitlement to a balancing of options, shares and RSUs does not depend on the gender of the spouse who holds the rights. So when the woman is employed at a high-tech company and holds an equity compensation package, her partner may likewise be entitled to his share of the rights accrued during the period of the shared life.
In accordance with the principles of the Property Relations Law, men's rights in divorce are essentially identical to the woman's rights, and the starting point is an equal balancing of the assets subject to balancing, subject to the exceptions set out in the law.
That said, the entitlement is not necessarily to half of the entire compensation package, but to the proportional share determined to be subject to balancing, according to the source of the rights and their connection to the period of the partnership.
How can you prepare for the division of equity rights in a divorce?
When one of the spouses holds options, shares or RSUs, it is important to get a full picture of the scope of the rights before a property arrangement is put together. To that end it is advisable to gather the grant agreements, the holdings statements and the vesting schedules, and in suitable cases to bring in an expert to assess their value.
Spouses who wish to settle their property relations in advance can also consider drawing up a prenuptial or postnuptial property agreement that refers explicitly to existing and future equity rights, subject to the provisions of the law.
The division of equity compensation may significantly affect the financial outcome of the divorce. It is therefore important to settle the rights clearly and precisely, taking into account their characteristics and the circumstances of the spouses.
The author, Adv. Esther Shalom, practices family law, divorce and property disputes.
The above is general information only and does not constitute legal advice. Every case is examined according to its circumstances, and a lawyer should be consulted before any decision is made.
Contact
Adv. Esther Shalom, lawyer and mediator in family and divorce law
Esther Shalom Law Office
3 Totzeret HaAretz Street, Building Y, Petah Tikva
Telephone: 052-970-6731
ester-law.co.il
