Divorce, by its nature, is the last option in marriage, but what about (life and) options? How do we divide between the spouses stock options that were granted/vested/exercised before/during or after the marriage? Does a spouse have a right to options that were granted to the other spouse before the marriage but vested or exercised during it? Likewise, does the spouse have a right to options that were given during the marriage but vested or exercised thereafter? What is the proportion of the right and how should such be valued – based on their value at the time of the divorce or based on the consideration received upon their actual exercise, even if it occurs years after the divorce?
The Israeli Spousal Property Relations Law, 1973, generally stipulates that upon the dissolution of a marriage (or at an earlier date to be determined by the Court as the "Separation Date" of the spouses), each spouse will be entitled to half of the other's assets. Granting stock options to an employee serves as a benefit plan. The employee receives options that can be exercised after a certain period (vesting), at the end of which he is entitled to exercise the options to purchase the company's shares (at a predetermined price), while the employee may enjoy a financial benefit in the value of the difference between the price of the option and the share price at the time of exercise. Stock options can be used for various purposes, (e.g. recognition for past achievements, incentivizing future achievements, or combination thereof). The purpose determines whether the asset is one which both spouses have rights therein and the proportion of the spouse's rights therein.
In a case heard before the Tel Aviv Court in August 2007, stock options were granted before the marriage and few days after the marriage the employer was acquired, which led to the immediate vesting of all the options. The Court held that the spouse had no right to the options as they were given for work performed, primarily, before the marriage. This was although, originally, a precondition for the vesting of the options was continued employment in the company.
In a case heard before the Kiryat Shmona Court in November 2021, it was found that stock options granted shortly before the divorce and vested thereafter were granted for the employee's past and future performance. This analysis was based on the fact that this was a veteran company and a senior employee who received more options that what he previously received as a new employee and it was held that his spouse was entitled to half of the options vested during the marriage .
But what about the value of the options? As a rule, Israeli law prefers the principle of “clean separation” and the partition of assets at the time of the divorce. However, when it comes to options that are not transferable or tradable on the stock exchange, the implementation of this principle involves a number of difficulties, including the non-alienability, the difficulty (especially in start-up companies) in evaluation, and the violation of the principle of equal opportunity that was created during the marriage, as the value of the options at the time of the divorce may be negligible compared to the fact that at the time of realization, and taking into account that the provision of the options constitutes 'compensation' for a low salary, the result is that the employee's spouse is forced to make do with a low salary during marriage and is also prevented from benefiting from the non-monitory 'compensation'. In that respect, in a case heard in the Lod Court in 2018, it was found that due to the aforementioned reasons the options must be exercised in practice and the consideration must be transferred to the spouse based on her proportion in the options.
In conclusion, determining the proportion of the spouse's rights in the options, as well as their value, is a complex issue that also depends on the precise wording of the document regulating the grant of options, and it is necessary to consult with an attorney who is knowledgeable in the field before drafting or signing such an agreement and certainly in the case of a domestic dispute in which such rights are involved, it is important to be accompanied not only by a domestic relations lawyer but also by an attorney with experience in accompanying startup companies.