The NASPP Blog

A divorce case involving stock options that has some potential lessons for stock plan administrators recently came to my attention. The case involves grants that were divided in a divorce settlement and then later cancelled due to the employee’s termination.

Divorce is Expensive–Especially If Options Expire Unexercised

Under the terms of the divorce settlement, the employee’s options and SARs were split equally between him and his ex-spouse. The grants were non-transferable, so the employee was required to hold half of the grants in constructive trust for the ex-spouse. Upon exercise of that portion of the grants, the employee would then have to pay over the proceeds to the ex-spouse.

After the settlement was final, the employee terminated his employment and, as a result, the period in which the grants could be exercised was curtailed. The employee did not exercise the grants within that period and the grants were cancelled. The employee’s ex-spouse then claimed that the employee owed her the value of her half of the grants–about $15,000–because, by failing to exercise the options/SARs within the prescribed period, the employee had deprived her of the opportunity to realize this gain.

The employee had been under the impression that he could take the options/SARs with him. I’m sure anyone involved in stock plan administration can read the subtext here: the employee likely asked his (uninformed) best buddy at work what would happen to the grants and never bothered to check his grant agreements, exit paperwork, or even call stock plan administration to ask about the grants. I imagine that it’s even possible that this lack of follow-through was a contributing factor in the divorce in the first place.

The end result is that the court agreed with the ex-wife and the employee now owes her about $15,000.

Lesson 1: Appropriate Cancellation Procedures

In this case, the options/SARs were non-transferable and were all still held by the employee. Thus, when the employee’s termination was entered into the stock plan database, it was likely automatically applied to all of the options/SARS. Where the options are transferable and have been assigned to the ex-spouse in the company’s stock plan database, this procedure might not work quite so efficiently. If you are transferring grants divided in a divorce settlement to an ex-spouse, it is critical that you remember to cancel those grants along with the grants held by the employee when the employee terminates.

Lesson 2: Cancellation Notification

The second lesson here is to make sure that, in the event the employee does terminate, it isn’t your job to notify the ex-spouse that the grants he/she has a right to are subject to cancellation. At the time that you receive notice of the divorce settlement, make sure that any responsibility for providing subsequent notices about any change in the status of the grants (due to termination, change-in-control, repricing, stock split, etc.) falls squarely on the employee’s shoulders and that the employee is aware of it. You have enough to do keeping track of employees; you don’t need to take on their ex-spouses as well.

Lesson 3: Stay Out of It

I think this case is a good argument for not allowing transfer of options and awards upon divorce. By not permitting the transfer and requiring the employee to exercise the options/SARs on behalf of the ex-spouse, the company effectively distanced itself from all of the proceedings related to the grants. This also helped to clarify that the employee was responsible for alerting the ex-spouse to the fact that the options/SARs were going to cancel as a result of his termination. Where the company has transferred grants to an ex-spouse and is in communication with the ex-spouse about them, the lines may get a little blurry.

See the NASPP webcast archive, “Death and Divorce: The Lighter Side of Equity Compensation” for more tips on administering stock compensation through divorce.

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NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

• Register for the 18th Annual NASPP Conference.
• Submit your questions for next week’s Ask the Experts webcast on “Estimating, Applying and Reconciling Forfeiture Rates.” Don’t delay–you must submit your questions today.
• Refer new members to the NASPP so you qualify for the raffle and Conference discount available in our New Member Referral Program.
• Complete the Compliance-O-Meter quiz on Excel Skills.
• Take the “Question of the Week” challenge.
• Renew your NASPP membership for 2010 (if you aren’t an NASPP member, join today).
• It’s a big week for local NASPP chapter meetings!  Attend meetings in Chicago, Denver, Houston, Ohio, Phoenix, and Wisconsin.

– Barbara