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How are stock options in Ningbo divided in a divorce?

Ningbo Author：LuXu WANG

Employees of internet companies and publicly listed companies are often granted stock options. At the time of divorce, are the options that have not yet been exercised belong to the joint property of the husband and wife? How to divide? The conclusion first says: whether stock options belong to the common property of husband and wife depends on the overlap between grant and exercise and the duration of the marriage relationship-options granted within marriage and the exercise conditions are achieved within marriage are usually recognized as the common property of husband and wife; If the rights are granted before marriage and exercised within marriage, the corresponding rights and interests of the waiting period and the overlapping part within marriage can be claimed together. Options have personal exclusive attributes, in practice, one side of the multi-award right employee is compensated at a discount to the other party. This article is written in conjunction with the Civil Code and the practice of family litigation in Ningbo.

1. Legal Basis and the Three-Stage Structure of Options

Article 1062 of the Civil Code stipulates that the wages, bonuses, remuneration for labor services, income from production, operation and investment, etc. earned by the husband and wife during the existence of the marriage relationship are the joint property of the husband and wife; Article 1087 stipulates that the joint property of the husband and wife at the time of divorce shall be dealt with by agreement between the two parties. The Measures for the Administration of Equity Incentive Plans of Listed Companies defines stock options as the rights granted by a listed company to eligible participants to purchase a specified number of the company’s shares at a predetermined price within a defined future period.

To accurately account for stock options, one must first understand their three-stage structure: grant (the company grants options, and employees acquire the right to purchase shares in the future) →Vesting/Satisfaction of Exercise Conditions(Upon the expiration of the vesting period and the satisfaction of the performance conditions, the options “vest”) → Exercise (purchase the shares at the exercise price to realize equity-based gains). The property value of an option varies across different stages, and so does its legal treatment: at the grant stage, the option’s value is low and uncertain; at the vesting/maturity stage, its value increases significantly; and upon exercise, it is converted into actual shares of stock. Determining whether an option constitutes marital property essentially involves ascertaining whether the underlying property interest was acquired before or during the marriage and whether it bears a direct relationship to the labor contributions made during the marriage.

2. Key points: Handle cases based on the degree of temporal overlap.

  1. Property granted before marriage and vested prior to marriage is considered personal property.: If the grant and exercise of the option are both before marriage, it belongs to the personal property of one party before marriage and will not be divided upon divorce.
  2. Marital grant, marital exercise of title is common property: If both the grant and exercise of stock options occur during the subsistence of the marriage, the option rights constitute the fruits of labor and investment acquired during the marriage and are therefore marital property subject to division upon divorce.
  3. Vesting occurs before marriage, and options are exercised during marriage; the overlapping portion constitutes marital property.: If the rights are granted before marriage but exercised within marriage, the option rights corresponding to the overlapping part between the waiting period and the duration of marriage are generally recognized as the joint property of husband and wife -- because the realization of the option value depends on the continuous service and waiting within marriage, and the spouses have the basis of sharing benefits for the payment within marriage.
  4. If the right is exercised only after divorce, the rights pertaining to the overlapping period may still be asserted.: If the right is exercised before marriage or granted within marriage or after divorce, the rights and interests arising from the overlapping part of the waiting period and the exercise period during the existence of the marriage relationship can still be divided as common property; the court can decide that the holder should pay the other party's discount in proportion after the exercise of the right, or it can not be dealt with temporarily and can be sued after the exercise of the right.
  5. The grant agreement is explicitly tied to the employment relationship and serves solely the professional development interests of one party.: If the option is attached to a specific position, and the option is voided immediately after leaving the company, and there is no property consideration, its personal attribute is stronger, and more consideration will be given to the party holding the right when dividing, and only the corresponding value in marriage will be compensated.

3. boundary conditions and difficulties in value calculation

The practical difficulties of option division focus on the value evaluation: first, the calculation basis, which is based on the value of the stock after the exercise; if the right has not been exercised, the court may not deal with it temporarily, or decide to share the future exercise income proportionally. Second, the valuation factors are complex, involving the grant price, exercise price, market price volatility, remaining vesting period, and the likelihood of meeting performance conditions, often requiring an opinion from a professional valuation firm. The third is the cost of taxes and fees. The income from the exercise of equity incentives of domestic listed companies belongs to the item of "income from wages and salaries" in the personal income tax. Resident individuals who obtain qualified equity incentives will not be incorporated into the comprehensive income of the current year before December 31, 2027, and the comprehensive income tax rate table will be applied separately in full to calculate the tax-the division scheme should reserve tax space and cannot be cut in half according to the market price of the exercise. Fourth, options are inherently personal in nature; they are typically registered in the employee’s individual name and tied to the employment relationship, making compulsory transfer inappropriate. In practice, they are generally vested in the employee, with the employee compensating the other party by paying a cash equivalent.

Another common dispute is "waiver": if the employee voluntarily waives the exercise before the divorce, resulting in the loss of the option, the other party may not be able to claim the division of the unexercised part; but if the waiver occurs during the divorce proceedings and is obviously intended to damage the property rights and interests of the spouse, the other party may still claim compensation according to the value of the option before the loss or request less property of the waiver. Furthermore, if an option involves shareholding on behalf of another party or arrangements designed to circumvent regulatory requirements, it inherently carries risks regarding its validity and may affect the determination of property ownership in the event of divorce.

4. Analysis of Common Misconceptions

  1. Myth 1: Unexercised options are not considered property and do not need to be divided.Correct answer: Vested stock options that have met their vesting conditions have realizable monetary value and may be divided as marital property; those that have not yet vested may still entitle the spouse to a proportional share of any future gains.
  2. Misconception 2: Whoever the option is registered under owns it.Correct answer: Although an option is registered in one party’s name, the portion acquired during the marriage or exercised during the marriage may still be considered marital property; the registration status does not necessarily determine ownership.
  3. Misconception 3: Stock options granted before marriage are not subject to division in a divorce.Correct answer: For options granted before marriage but exercised during the marriage, the portion of the vesting period attributable to the marriage may be deemed marital property; therefore, a one-size-fits-all approach should not be applied.
  4. Misconception 4: Stock options are divided equally based on their current market value. Positive solution: The option split needs to consider the exercise cost, tax, waiting period, performance conditions and other factors, especially the unexercised part can not be simply based on the market value of half, discount calculation to reserve tax and risk space.

5. Checklist of actionable steps

  1. Obtain the option grant agreement, exercise agreement, the company’s equity incentive plan, and other relevant documents to determine key time points such as the grant date, vesting date, exercise date, and vesting period.
  2. calculate the proportion of the overlapping period between the duration of marriage and the waiting period and the exercise period of options, and frame the scope of interests corresponding to the common property accordingly.
  3. For shares that have been exercised, the value of the portion constituting joint property shall be assessed, and the discount basis shall be determined by reference to the market prices on the exercise date and at the time of division.
  4. Negotiated division scheme: it can be agreed that "the option and the income after exercise will be distributed according to the overlapping proportion of marital and waiting periods", and the time and method of payment will be specified; if the negotiation fails, the division will be sued.
  5. For the option that has not been exercised, the way of income distribution after the exercise is agreed in the agreement or judgment, or the right to sue again after the exercise is reserved.
  6. Pay attention to the tax costs and tax calculation methods associated with exercising options, and ensure that the restructuring plan allocates sufficient tax reserves to avoid future disputes.

6. Differences between restricted stocks and stock options: Don't confuse these two types of incentives.

In practice, there is also restricted stock (including restricted stock unit RSUs) alongside options. There are subtle differences in the division logic between the two: stock options are "the right to buy at an approximate price in the future" and the realization of value depends on the exercise of the right. For restricted stock, if granted during the marriage, the value corresponding to the interest at the time of grant and the unlocking of the marital vesting is usually recognized as common property; if granted before marriage and unlocked after marriage, the common portion is accounted for in proportion to the corresponding period of the marriage during the unlocking period. Both tools should first look at the grant date, vesting date, unlock date terms of the incentive plan document, and then align with the marriage period, not the general application of the "option syllogism".

There is also a problem of "restricted sale period" for the stock after exercise: the shares held by directors, supervisors and senior executives of listed companies have restricted sale arrangement according to the securities law and exchange rules, and the stock may not be transferred temporarily when the judgment is divided. The court will deal with it as "the equity of the stock belongs to one party and the other party obtains the discount", or it will be delivered after the ban is lifted and specified in the document. According to the typical case caliber of the financial trial of the Zhejiang High Court, the lifting of the ban on restricted shares belongs to the scope of corporate autonomy, and the judicial principle does not interfere-the division plan should respect the rules of restricted sales, and take "when can be sold and when can be transferred" as the premise of the design of the plan. In addition, involving overseas listed company options (such as U.S. stock RSU), but also superimposed on foreign exchange management (exercise funds exit, income settlement) and foreign-related service, the application of the law, the value assessment usually needs to be authorized or vesting date of foreign currency market price conversion, professional assessment and foreign exchange compliance advice is essential.

7. How should the stock option clause in a divorce agreement be drafted?

When negotiating the split option, the statement proposal in the divorce agreement contains five elements: the first is the grant subject and the subject of the option or restricted stock (company name, stock code, batch); the second is the confirmation of the key time node (grant date, vesting date, exercise date, unlocking date); third, the calculation caliber of the split ratio (the overlap ratio between the duration of the marriage and the waiting period/vesting period); fourth, the treatment of the unexercised portion (the prorated payment of the discount after the exercise, the agreed payment period and overdue interest); and fifth, the way of bearing taxes and fees (who bears the exercise tax and whether the discount includes tax). Example sentence pattern: "Both parties confirm that the stock options of XX Company registered in the name of Party A (grant date XXXX, XX, XX), in which the corresponding proportion of option rights and interests during the marriage and the income after exercise are shared by both parties, Party A shall pay discount to Party B according to the above proportion within 30 days after each exercise; The personal income tax arising from the exercise shall be borne by Party A, and the discount income of Party B shall be the amount after tax. Once the terms are clearly set forth, even if the actual exercise date differs from the original expectation, the allocation formula will remain enforceable, thereby preventing secondary disputes.

There is another key point that needs to be clarified in the breakdown calculation: the value of an option is not the “market capitalization,” but rather the net proceeds calculated as “market capitalization minus the exercise cost minus taxes and fees.” The exercised stock is accounted for according to the difference between the market value and the exercise price at the time of the split, while the unexercised option takes into account the spread between the exercise price and the market price, the remaining waiting period and the possibility of the achievement of the performance condition-if the exercise price is higher than the market price (the option "false value"), the option has no real positive value and is generally not included in the split. When determining the discount compensation, the court will also consider the liquidity discount (restricted shares, unreleased shares can not be realized immediately), the parties may wish to negotiate the "market value, cost, tax, discount" four elements listed in the calculation table item by item check, reduce the "each said".

If the negotiation fails, the lawsuit can apply to the court to entrust a professional evaluation institution to issue an opinion on the option value -- the evaluation institution should have the qualification of securities and equity assets evaluation, and the evaluation base date and caliber (market value, liquidity discount, taxes and fees) should be specified at the time of entrustment; the evaluation fee should be paid in advance by the applicant, and finally borne by both parties according to the proportion of responsibility sharing. With a third-party assessment as a reference, the court has more evidence to rely on when deciding the discount amount, and it is easier for the parties to reach a mediation near the assessed value.

class case reference: the defendant's shareholding is equity incentive income, with personal attributes, subject to the labor relationship and the allocation of enterprise resolution, although the sale restriction has been lifted but still in the lock-up period, the income has not been fulfilled, the court found that the division conditions have not been fulfilled, rejected the plaintiff's request for the division of the 1.8823 share. That is, incentive interests such as options must be divided after the exercise of the right and the realization of the proceeds. Trial Court: People’s Court of Yuyao City, Zhejiang Province Case No.: (2020) Zhe 02

81Min Chu 5523

8. Frequently Asked Questions

What to do with options granted in marriage but not yet exercised?

If granted within marriage and the exercise conditions have been met, it belongs to the common property and can be divided; if the exercise conditions have not been met, the court may not deal with it temporarily, or decide that the holder should pay the income to the other party according to the corresponding proportion within marriage after the exercise of the right, which is subject to negotiation or judgment.

Who decides how much an option is worth?

The evidence and the assessment will have the final say. The exercised part is accounted for according to the market value of the stock and the cost of exercise; the unexercised part involves complex factors such as waiting period, performance conditions, market price fluctuations, etc.

How much tax does the option pay and how does it count when it is split?

The equity incentive exercise income of domestic listed companies belongs to the item of "income from wages and salaries", and those that meet the conditions will not be incorporated into the comprehensive income, and the comprehensive income tax rate table will be applied separately for taxation (the policy will continue until the end of 2027). When dividing property, taxes and fees should be deducted first, and compensation should then be calculated based on the net proceeds, to avoid an inequitable outcome that would result from splitting the pre-tax market value equally.

If one party waives their right to exercise, can the other party still receive a share?

If the normal abandonment before divorce results in the loss of the option, the other party usually cannot claim the unexercised part of the option; but if the malicious abandonment during the divorce proceedings is intended to harm the spouse's rights and interests, the other party can claim compensation according to the option value or request to give up the party less property, and the burden of proof is on the claimant.

The option has not yet reached the exercise conditions, what will the court do?

There are three kinds of treatment depending on the situation: if the exercise conditions have been met, the compensation will be divided according to the common property or discount; if the exercise conditions have not been met and the value is difficult to determine, the court may not deal with it temporarily and will sue after the exercise; there are also courts that "pay the income according to the corresponding proportion of marriage after exercise" and write the distribution formula into the judgment.Incentive plan documents should be submitted in the lawsuit to explain the vesting progress and help the court determine the realistic value of the option.