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Fighting over the Options


It used to be the assets couples fought over in a divorce were the house, the bank account, and the investment portfolio. But with an estimated 10 million Americans holding stock options, a tenfold increase over the past decade, according to the National Center for Employee Ownership, the fighting has opened on a new front. Despite the precipitous fall in the stock market that has sent option values plummeting, "the stock-option plan is still the first piece of paper divorcing couples shove at you," says Barbara DiFranza, a family law attorney in Salinas, Calif.

The biggest problem with stock options, unlike bank accounts and investment portfolios, is that they can be extremely difficult to value. Stock options give employees the right to buy a specific number of their company's shares at a set price for a set amount of time. Options can't be exercised until they vest, usually one year after they're granted. They're most valuable when the exercise price is well below the current market price. But even "out-of-the-money" options, those in which the market price is far below the exercise price, can have some monetary value, especially if the options have a long lifespan. "The more time until the options expire, the more valuable they are," since the stock has a longer chance to recover, says DiFranza.

VESTED. Attorneys and valuation experts use many methods to value options. Even so, "it's still just an educated guess," says Ginita Wall, a San Diego accountant who specializes in divorce.

Then there's the problem of allocation. Say, for instance, a husband joins a new company just before divorcing his wife and receives a handsome options package as part of his compensation. One of the questions attorneys must address is why the options were granted. If it was to compensate the husband for unvested options he left on the table at his former employer, his wife would be entitled to a share. If they're intended as a future incentive to remain at the new company, and won't vest until after the divorce, his ex may not have a claim on them. However, according to two appellate court cases, Kerr v. Kerr in California in 1999, and Moore v. Moore in Iowa in 2000, if the couple has children, "proceeds from future stock options may be seen as income to support the family," and so the wife is likely to benefit, says Wall.

Couples also need to examine the mechanics of the stock-option plan to determine whether the company allows the husband to transfer options to his ex-wife. If he can, she can wait until they vest and exercise them at will, assuming no restrictions. If he can't, they have to work out a detailed, contractual agreement that assigns certain options to the wife that she can control through her ex-husband. Since many companies whose stock prices have plunged have reissued options at lower prices, any settlement should allow the ex-spouse to claim the same share of the new options as she had with the old ones.

The agreement must spell out how options will be handled and the proceeds transferred to her. "The agreement should also instruct the husband to have a power of attorney drafted so that someone can exercise his wife's options in his absence," says DeVon Daniels, a Greenville (Del.) financial consultant who works on divorce settlements. The contract should also cover payment of taxes. Since taxes on the wife's exercised options will be withheld from her ex's paycheck, she'll have to make provisions to reimburse him.

Unfortunately, the law is of little help in these cases. "Dividing and valuing stock options in divorce is a newly evolving area of law fraught with an enormous amount of disagreement," says Edwin Schilling III, an Aurora (Colo.) benefits attorney. Settlements will continue to be negotiated on a case-by-case basis until the courts establish more rule-setting precedents. Until then, divorcing spouses must be diligent and make sure they get their fair share of the options pie.

To join a discussion in our forum, see hers.online at www.businessweek.com/investor/ By Toddi Gutner


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