Restricted stock, also known as “letter stock” and “section 1244 stock,” is an ownership share of a business entity that is nontransferable (meaning it can’t be sold) until certain conditions are met. When the predetermined conditions are met, the stock may then be sold.
The most common restriction on the sale of stock is a vesting period, which is a specific length of time that must pass or a defined goal that must be accomplished before the restricted stock may be sold. If the employee is fired or leaves before the vesting period is over, the rights to the restricted stock are forfeited. This encourages the employee to remain with a company for a certain amount of time so that they will be able to profit from the sale of the restricted stock. Upon divorce, the percentage of restricted stock that is considered to be community property depends on when the spouse received the restricted stock and when it vests. The Texas Family Code provides a starting point when determining to what extent restricted stock is community property. A spouse who is a participant in a restricted stock plan provided by an employer has a separate property interest in the restricted stock as follows:
- If the stock was granted to the employee spouse before marriage, but it did not vest until after the parties were married, the employee spouse’s separate property interests are determined by the following fraction:
- The numerator is the period from the date the stock was granted until the date the parties married plus the period from the date of divorce until the date the restriction could be removed.
- The denominator is the period from the date the stock was granted until the restriction was removed.
- If the employee spouse was granted the stock during the marriage, but had to stay employed after the divorce to realize any benefit from it, the employee spouse’s separate property interest is determined by a different fraction:
- The numerator is the period from the date of divorce until the date the restriction is removed
- The denominator is the period from the date the option or stock was granted until the date the grant could be exercised or the restriction removed.
Restricted stock is less common now than it was several years ago, but it seems to be gaining momentum again. The bottom line is, if it exists, it will be divided upon divorce. If your marriage property includes restricted stock, and you have questions about its division, contact the experienced attorneys at Orsinger, Nelson, Downing & Anderson today.