Options and Shares in Divorce | The topic of options and shares division in a divorce proceeding is a very complicated and complex issue.
Options and shares of an employee during a divorce process
The topic of options and shares division in a divorce proceeding is a very complicated and complex issue. Compared to other assets that are divided between the spouses during the divorce proceedings, it is difficult to assess the value of the options and / or the shares, as their value is constantly changing depending on market volatility. For these and other reasons, the way they are divided in the divorce process is not always clear. What is the difference between a stock and an option? What is the meaning of dividing an option / share in the divorce proceedings? What is the correct way to divide these assets between the spouses? These questions and more will be answered in this article. The reward method for employees that is common in companies in Israel and around the world is through regular salary.
But in the high-tech and start-up industry, the remuneration method is different and quite a few companies tend to reach an agreement with the employee for a reward, which will be worth money in the future. This method of compensation is based, among other things, on the fact that start-up companies, at the beginning of their journey, tend to reduce the cash flow reserved for the company’s development.
Understanding Options and Shares in Divorce: Key Differences and Implications
First, let’s look at the essential difference between an option and a stock: An option is the option to purchase a stock in the future. In other words, the option gives the holder the right to purchase a share at a pre-determined price (published in the prospectus), which is the exercise price. Employee stock options are the most common means of payment in the high-tech world, as it does not require spending cash here and now when it is necessary for the existence of the company, the resource is always available and motivates the recipient to strive for start-up success. This is the place to explain, that when the option holder converts the option into a share (exercises it), a new share is created which the company issues for exercise, for which purpose it needs to raise additional funds.
The share is a partnership certificate in a company that represents the relative share of the owner in the company. That is, while in options you can lose or not profit at all (it depends on the value of the share on the day the option is exercised), in receiving shares the employee will always gain, since he did not pay for the share. On the sidelines, it should be noted that while receiving a share is “safer”, if it is a company that can provide an impressive profit, the return that will be received from an option is higher.
Assessing Warrant Value and the Time Rule in Divorce Proceedings
We already understand that it is not possible to treat all the warrants in the same way, since they are not the same. Their value varies depending on the nature of the company, depending on the market and the time point in which the company is in. Beyond that, during a divorce process the value of the warrants can change over a relatively short time. Beyond the fact that the warrants can vary from company to company, the warrants themselves are different. The value of an option that has expired is different from the value of an option whose allocation has not yet expired.
It should be noted that if the workplace grants the right to exercise the option conditioned to the remaining in the workplace, this does not necessarily indicate that the options were granted for the period of stay. Therefore, the claim that the stipulation of time for the purpose of exercising the options is a component that determines the essence of the options has no basis, and each case must be examined on its own merits using the test stones set by the court during the
When a family law firm examines these parameters, we need to check whether there is an overlap between the period of work for which the options were received and the period of marriage. Sometimes things are not clear cut of “black and white”. It could be that part of the options was granted during the marriage while another part was given after it. On such case, one should check the period for which there is an overlap between the receipt of the options and the period of marriage, and divide the options value which has been granted by the period of marriage. This rule is called “time rule” According to which the length of the period of work during the marriage is weighted in relation to the period of work for which the options were granted.
Valuation Date and Methods for Dividing Shares and Options in Divorce
Since we are a family-law firm dealing with the distribution of shares, the question arises, how will we estimate the value of the shares so that we can divide them between the spouses. In general, several judgments state that the date of valuation is the day of separation for two main reasons: Fear that after the day of separation the spouse may take actions that will reduce the value of the company, and another reason lies in the fact that profits that were not created after the day of separation should not be shared, when only one of the spouses made efforts to yield the profits.
It should be noted that there is no obligation at all for a family lawyer to determine the destiny of the options (which is a future asset) when discussing the division of property, and in some cases it is even better not to divide hose at this time, but it is recommended to divide them, on a pre-determined date -equally split then between the couple. Therefore, even if they will be worth a fortune, and even if they will equal nothing- they will be divided equally during a divorce agreement.
There is another solution during a divorce process which is to ask a family lawyer to appoint an expert on behalf of the court who will estimate the value of the options from the date of marriage until the date of the break up, when at that time the options will be divided equally between the parties. But as already explained above, it will be an assessment only when the parties may find out on the expiration date of the option, that the assessment was different from reality.
Interpretations of the Financial Relations Act
One interpretation of the law speaks of the fact that the court should strive to carry out economic justice with those who reach its courts. For example, in a judgment given in the Jerusalem Family Court in 20964/02, it was determined that in the specific situation and in a case that was placed before the court, a half-on-half division would cause injustice to the spouse.
The court also takes into account additional economic considerations, including the value of the spouse’s contribution and the support received by the other spouse, which led to an increase in profits / assets, as also determined, for example, in case 04/5879, which was given by the Honorable Justice Rubinstein in the Supreme Court.
On the other hand, a family lawyer can show cases in the ruling precedents in which we see that the court comes to the conclusion that the gaps between the spouses were not created due to the support of one spouse of the other, and that the burden in all fronts, was solely on one of the spouses. Therefore it may not apply the principles of section 8 of the Financial Relations Act to such cases.
