On (Employees) Stock Options and Divorces

October 8, 2018
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The article was published in Afik News 267 10.10.2018

Statistics indicates that more than a quarter of married couples in Israel will undergo a divorce. Some would say, like the well-known comedian Louis C.K., that marriage is just the preparation for the really good thing – the divorce. At the time of the divorce, the spouses’ assets are balanced and for this purpose each party’s assets are evaluated. Among other issues, an interesting question that arises is how to evaluate employee stock options received by one of the spouses – an issue that may arise, of course, in many other contexts.
Employee stock options are a benefit to an employee given by the employer, both to reward the employee and to ensure that the employee will continue working for the company. The employee receives options that are exercisable after a period known as a “vesting period”, at the end of which the employee is entitled to exercise the stock options and receive the company to which such are convertible (thus, the stock options constitute an incentive for the employee not to resign). The vesting period, as well as other conditions relating to the option, such as exercise method, negotiability, etc. are set in the option plan and in the contract between the employee and the employer.
In Israel, every couple who married after 1974 (since the enactment of the Spousal Property Relations Law) is subject to a system of balancing resources at the time of divorce. Thus, inasmuch as there is no financial agreement (see our article in issue 266 of Afik News) at the time of the divorce, each spouse’s accumulated assets during the marriage are examined.
In addition to the high rate of divorce in Israel (and perhaps things are related – depending on who you ask), there are more than a few high-tech employees and those have a special asset – employee stock options.
An interesting holding issued in September 2018 by the Central District Court, discussed a divorce case in which a husband, a high-tech employee, had stock options under the company’s Employee Stock Ownership Plan. As is customary in employee stock options, these options were not tradable and therefore the question arose not only on how to evaluate the options but also on what date to assess their value. Should it be at the time of divorce or at a later date – when the options are actually exercised? Should it be treated like a lottery ticket purchased by the husband before the divorce if such ticket won the lottery after the divorce? When talking about stock options, the issue is more complicated than that of a lottery ticket, as there is a possibility that the company will rise but there is also a possibility that the company will collapse and then the options’ value will be zero. The Court therefore held that the options’ value shall be determined only at the time of realization, as is also the way that the value is calculated for tax purposes.
It is important to note that the value of options, of course, is not only relevant for divorce or tax purposes, but of course it has great significance in terms of being a conditional compensation mechanism for employees and an incentive for employees in order to preserve them. For this purpose, it is also important to consult a lawyer with experience in the field when building a stock ownership plan and the allocation of options thereunder.