Stock Options in Divorce: Assets or Income?

Stock options in divorce cases are a tricky issue because they have characteristics of both an asset and income. They represent a right to buy a company’s stock and can be alienable, like an asset. But they are also meant to capture the appreciation in value of the stock and are often given as compensation for past, present, or future services, making them like income. The classification of stock options in a divorce case depends on the specific facts and the court’s goals. The Chicago Board Options Exchange (CBOE) opened in 1973 and now has over 1,900 underlying securities and 60 indices, with nearly 300 million option contracts traded. Despite their reputation, 70 percent of options make money. Options are contracts that give you the right to buy or sell a stock at a certain price. There are different types of options, like American, European, and Capped, each with different rules for when you can exercise them. The value of options depends on factors like the stock’s volatility and how much time is left until the option expires. There are different models that can be used to figure out the value of options, with the Black-Scholes model being the most commonly used. It looks at factors like the stock price, the time until the option expires, and the risk-free rate. The Black-Scholes model for options trading has some limitations, but it is still accurate within six percent. In 1998, stock options made up two percent of corporate equity, and as of 1998, they make up over $1 trillion. This suggests that stock options may motivate executives to work harder. However, stock options must be based on measurable performance to be considered as compensation. Also, when executives raise dividends, it can lower the value of the stock and the corresponding call options, which may not benefit option holders. Basically, executives can increase the value of their stock options by buying back company stock, which benefits them and existing shareholders. Some studies suggest that not recording stock options as an expense can overstate corporate profits. Warren Buffett has criticized the use of stock options as a form of compensation. In divorce cases, courts have different approaches to valuing and dividing stock options as marital assets. Stock options awarded during a marriage might be considered as marital assets in a divorce case, even if they are not yet vested. Different states have different rules about this. Court cases have shown that stock options can be considered as taxable compensation and may be counted as income for child support calculations, even if they have not been exercised yet. Stock options for future services are not subject to equitable distribution in Florida. This means that if the options are awarded for work that will happen after a marriage is over, they are not considered part of the assets that need to be split during a divorce. This is because their true value lies in their future exercise, and they are not important considerations in executive compensation until they are exercised. The court in Ohio used the definition of “income” to include stock options as part of a husband’s compensation. They found that the husband has complete control over when to exercise the options, so they should be considered as part of his income. The court then used the increase in value of the stock options to calculate additional child support that the husband had to pay. They didn’t use financial models to calculate the value of the stock options because they thought those models might not be reliable. Instead, they looked at how much the options had grown in value from the time they were granted to the time they were exercised. Stock options in a divorce can be tricky to divide because they can be considered both an asset and income. It depends on the specific terms of the options. Some options are given to all employees and are seen as an asset, while others are given as a reward for executives and are more like income tied to their performance. In some cases, executives might have the power to manipulate the options, which can make dividing them even more complicated. It’s important for the court to consider all these factors when deciding how to divide stock options in a divorce. Jorge C. is a lawyer who specializes in family law at a firm in West Palm Beach. Michael M. is a business appraiser who values businesses and assets. They both have a lot of experience and are well-respected in their fields. This column is from the Family Law Section of a legal organization in Florida. It’s about promoting duty and service to the public, improving the justice system, and advancing the study of law.

Source: https://www.floridabar.org/the-florida-bar-journal/stock-options-in-divorce-assets-or-income/