Following in the US footsteps, UK fintech and financial services are increasingly reeling in top talent with stock options and other deferred compensation schemes. But how are such "delayed" assets treated in UK divorce courts? A legal view.

Complex incentive packages are now common in the competitive fintech sector and are challenging family lawyers and judges on how they value such assets and divide them fairly when couples get divorced. This publication continues to track different aspects of divorce and marital law issues as they affect high net worth individuals. (See here and here for other examples.)

Katie O'Callaghan, senior associate at Boodle Hatfield, said gone are the days when packages were purely about a base salary and the possiblity of a cash bonus. What we have now are "far more complex income structures." In this guest article, she walks through some of those structures and how the courts are dealing with performance-related pay in this new reality. "The Family Courts have made it clear that to exclude an asset simply because it comes into existence after separation is 'far too simplistic'", she writes. The editors of this news service are pleased to share these views; as usual, however, they do not necessarily endorse all opinions of guest writers. Email tom.burroughes@wealthbriefing.com or jackie.bennion@clearviewpublishing.com.

Deferred gratification
Companies now often compensate employees with deferred share ownership schemes such as stock options and restricted stock giving the employee the hope to cash in when the stock is eventually valuable. Stock options give an employee the right to buy company stock at a set price at a future date on the basis that the set price is likely to be significantly lower than the actual trading price at the time of purchase. The employee can then sell their stock at a decent profit. When a company offers restricted stock, it grants shares at no cost to the employee with the caveat that the stock is not transferrable until certain conditions have been met, such as employment for a defined period of time.

Other complex examples of deferred compensation include carried interest within private equity firms. As part of the disclosure process within financial proceedings on divorce, a spouse is obliged to provide details of any foreseeable changes which are likely to take place within the next 12 months and it is therefore difficult for a spouse to avoid revealing the possibility of acquiring stock if it is likely to occur in the very near future.

These types of compensation, which are more often than not a potentially very valuable component of many corporate packages, create a challenge for family law practitioners and judges when it comes to the exercise of dividing assets fairly on divorce. It is difficult if not impossible to attribute a current value on such schemes in a privately-owned company if the options have been granted but have not vested yet or have not been exercised and the stock has not been sold. Even where a current value can be attributed, they often rely on the future performance of one spouse which will inevitably take place after the parties have separated and their marriage is over.

The right way to deal with them
The employee spouse would of course argue that such unvested stock has no value at that time and is by no means guaranteed. He or she is also likely to say that it will require significant effort on their part after the marriage has ended to realise value and ought, therefore, to be considered as 'non-marital' which is strengthened if the awards are subject to a claw-back provision over a fixed-term contingent on the spouse's performance.

The Family Courts have made it clear that to exclude an asset simply because it comes into existence after separation is 'far too simplistic'. Often, the solution is to grant the non-employee spouse a percentage share of any future realisation of such awards that were in existence at the date of separation. However, if there is a genuine and significant element of performance underpinning the future value of the awards then the Court may be inclined to treat them as 'non-marital' and choose not to invade them if there are sufficient matrimonial assets to meet the other party's needs.

Practical considerations
Firstly, it is important to ensure that all such awards are disclosed and underlying documentation is obtained so that they are properly taken into account at the disclosure stage, given that awards such as stock options and restricted stock will not appear on tax returns until the options are actually exercised and the restricted stock has vested.

Secondly, knowledge of the timetable for exercising the options or selling the stock is crucial. Thirdly, most of these types of compensation cannot be transferred to a spouse so any financial settlement would need to order the employee spouse to exercise them and/or sell them on behalf of their ex.

Finally, there will be tax consequences which need to be explored and factored in, given that some of these schemes are taxed as capital gains rather than ordinary income.

What is certain is that these types of schemes are likely to be present in increasing numbers of divorces that come before the Family Courts and there is no 'one size fits all' approach to their treatment. Much will depend on the individual circumstances of each case as to the extent to which it is considered to be fair and reasonable to invade them as part of the carving up of the family wealth.