Who get's Restricted Stock in the Divorce? - 8 Mar 2011

http://bit.ly/hGh9iW  By Suzanne Griffiths and Christopher Griffiths

Restricted stock agreements are becoming more and more common in
divorce proceedings. The recent increase in these equity compensation
plans stems out of a law created by the Financial Accounting Standards
Board (FASB). This law, revised in late 2004, requires companies to
expense their employee stock options.

In light of this, many companies have begun to use restricted stock
instead of stock options. Restricted stock agreements are generally less
risky than stock options. With that in mind, employers are beginning to
favor restricted stock over stock options to provide employees a
greater sense of security.

Generally, a court must divide the assets and compensation each party
acquired for services performed during the marriage and exclude
compensation for services that will be performed after the marriage is
dissolved. This column describes some of the basics for determining
whether a restricted stock will be classified as a marital asset or
excluded as a separate asset.

Types of Restricted Stock Awards

There are two basic types of agreements that allocate restricted
stock: (1) a restricted stock award, and (2) a restricted stock unit
award. Under the first type of agreement, the employee receives, in his
own personal account, the number of shares outlined in the restricted
stock agreement. The second type of restricted stock agreement uses
restricted stock units.

A restricted stock unit is simply a promise to deliver stock at a
later date. The amount of stock that each unit represents will typically
be outlined in the restricted stock agreement. For example, one unit
may be equal to one, five, or ten shares of stock. The key distinction
between the two types of agreements is that in the first type of
agreement, the party owns the stock, and in the second type of
agreement, the party owns a promise to deliver stock.

The Substantial Risk of Forfeiture: What Defines a Restricted Share of Stock?

Restricted stock is distinguishable from normal stock in that it
carries a substantial risk of forfeiture. A substantial risk of
forfeiture is created when the restricted stock is conditioned on
uncertain future events occurring. Generally, restricted stock
agreements use time or performance related conditions. A time based
condition is one that forces an employee to work for a certain period of
time before they will receive the stock. An example of this may be
restricted stock that vests on the first day of January each year.
Performance related conditions relate to factors such as revenue growth,
increased customer satisfaction, or other types of goals. An example
would be a restricted stock agreement which states that the stock will
vest if revenue increases by 5 percent.

The substantial risk of forfeiture occurs when the chance the
employee will receive the restricted stock diminishes. For example, if
an employee needs to increase revenue by 5 percent in a year and the
country falls into a recession, there may be a substantial risk of
forfeiture. In a divorce proceeding, it is difficult to determine how
substantial the risk of forfeiture may be. Courts cannot just assume
that restricted compensation will actually be received and therefore
they have discretion and might not include the restricted stock as a
marital asset.

Deciphering the Agreement

1. Was the Restricted Stock award given for Past or Future Services?

In general, restricted stock is a marital asset if it is granted for
services performed during the marriage. In contrast, if restricted stock
is granted for future services which do not occur during the marriage,
it will not be marital property. A variety of issues occur when a single
contract outlines several different conditions, some past and some
future, which must be completed in order for restricted stock to vest.
In cases where this occurs, a court will analyze which portion of the
restricted stock is a marital asset and which is separate. A court
determines this by analyzing what compensation relates to past services
and what compensation relates to future services.

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