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Valuing Stock Options in Divorce

The general rule in New York is that all property acquired during a marriage and before the commencement of a matrimonial action or signing of a Separation Agreement is subject to “equitable distribution.” In other words, marital property. How property is titled is immaterial. Also, property acquired after the commencement of a divorce action can be characterized as marital property if you used marital funds to purchase this property.

Early on in the case the lawyers and/or the Court need to value the property. In the case of a marital residence or deferred compensation this is a fairly simple procedure. Valuing a business, or artwork, or a license is more difficult.

If stock is publicly traded, valuation is the fair market value of the stock or the amount at which the share of stock is being traded at, usually at the date of trial (not commencement of the legal action). Valuation of stock of a privately held company is more problematic. Then the valuator must examine the type of business, prior sales of company stock, the future outlook for the company, good will, etc.

What then of stock options? Both employers and employees like stock options. There is no cost to the business unless the company appreciates in value. And the employer has not risked his or her own money. If the stock has appreciated in value then the employer can achieve a return. If not, the employee simply does not exercise the option.

In New York if the stock options were granted to the spouse as compensation for past services and if the option plan began during the marriage the spouse’s interest in the plan may be marital property.

How do the lawyers determine if the options were granted as reward for past services? They examine the Plan documents, e.g., the Stock Options Plan and the Options Statement. These documents should address such issues as how the options are treated, whether they provide for divorce, what is the exercise price and when do they expire.

The attorney for the non-propertied spouse should remain vigilant for chicanery. Particularly in small companies, the executive can negotiate, sometimes orchestrate, his compensation package. Is he being granted stock options as a reward in addition to his normal compensation? Or is he receiving the options in lieu of a raise?

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As of October 2010, New York became the final state to enact no-fault divorce. Prior to October 2010, one (1) spouse would have to invoke grounds against the other, such as accusing the other of abandonment or cruel and inhuman treatment; or they could live separate and apart for one (1) year or more based on a written separation agreement filed with the court. There are several different New York Grounds for Divorce.
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