Stock options are among the trickier assets to deal with in a divorce. Unlike outright owning stock in a public company, which is easy to value based on market prices, stock options represent a right to purchase shares of a business at some future date. When one spouse has stock options as part of his or her compensation package, the other spouse may not be aware of these options or how they actually work.
Understanding Stock Options
The basic idea behind stock options is relatively simple in theory but can be rather complex in practice. For instance, assume an employer grants an employee the option to purchase 1,000 shares after the employee has worked at the company for five years. Once the option vests, the employee is guaranteed the right to purchase the option shares for a fixed price, regardless of their actual market value. So, if the options were granted at $5 per share, that is how much the employee would pay, even if the stock is now worth $30 per share.
In many cases, this produces a nice windfall for the employee. But what if the employee is undergoing a divorce before the options vest? How are the options valued for purposes of determining a marital property settlement?
Judge Finds DuPage County Man Misrepresented Value of Options to Ex-Wife
A recent divorce case from here in DuPage County addressed that question. The husband was a vice president of sales at a software company. During the marriage, he held stock options to purchase 300,000 shares of the company for 12 cents each, a total price of $36,000. The husband retained these options as part of the final divorce settlement.
Five months after the divorce became final, the husband exercised his options. They were worth significantly more than the $36,000 option price. The company had been sold to a subsidiary of General Electric for $5.52 per share–yielding a profit of more than $1.6 million for the husband.
The wife, understandably upset, filed a petition with the divorce court to revalue the stock options and award her an appropriate share under the terms of the property settlement (which was 53 percent). The court partially sided with the wife. The judge agreed the husband had misled the wife about the true value of the stock options. Even before the GE sale, the judge said, the husband knew about the company's efforts to find a buyer.
While the divorce case was pending, there was an offer to buy the company for $2 per share. The judge decided that was a fair value for purposes of the wife's petition. The husband still appealed that decision, but the Illinois Second District Appellate Court affirmed the new value. The wife will, therefore, receive nearly $300,000.
Need Help Understanding Your Assets?
During the case above, the wife said she knew nothing about stock options and thought they were “the same thing” as actually owning stock. Do not allow such ignorance to undermine your rights in a divorce case. An experienced DuPage County family law attorney can help ensure you are not caught unprepared. Contact one of our three convenient locations today to schedule a consultation with one of our attorneys.