How are Long-Term Incentive Plans and Share Options treated in a divorce?

The family courts consider all assets acquired during the marriage to be part of the matrimonial pot, such as the family home, company interests and investments. This can also include Long-Term Incentive Plans (LTIPs) and share options, which are increasingly common components of modern compensation packages- by Alistair Myles

These assets can represent a significant portion of a high-earning spouse’s remuneration and future financial security. However, dividing these financial assets in a divorce is far from straightforward. Therefore, it’s important for splitting couples to understand the careful, tailored approach that is required.

LTIPs are performance-based awards (often shares or cash) – provided to employees, which vest over a number of years if particular conditions—such as company performance or continued employment—are met. Their purpose is to incentivise employees to contribute to long-term growth of the company. On the other hand, share options grant employees the right to buy shares of their company at a set price, often following a vesting period. If the share price appreciates, they can be highly valuable, but it can also fluctuate significantly.

The courts will start off by distinguishing between assets earned during the marriage (likely to be considered matrimonial and thus shareable), and the assets earned after separation or that relate to future performance (may be treated as non-matrimonial and less likely to be shared). However, this distinction can be particularly complex with LTIPs and share options, which often overlap periods both during and after the marriage.

The Courts will typically apply a time-based apportionment to separate the portion that was “earned” during the marriage from the portion related to future efforts or post-separation performance. For example, if an LTIP award has a three-year vesting period and the couple separated halfway through that period, the court may consider 50% of the award to be matrimonial and available for sharing, while the remaining 50% may be treated as non-matrimonial. Alternatively the courts may treat the grant date as the relevant date: any shares granted (whether vested or not) after the marriage being firmly non-matrimonial.

Valuing these assets can be challenging for the courts, as they may not have vested yet, making their value uncertain; they may depend on future performance conditions; and the tax implications may affect the net value a spouse would actually receive. The Courts may direct joint accountancy evidence to determine a fair valuation in the form of a expert financial report. Valuation methods may involve discounting the potential award to reflect vesting conditions, risk of forfeiture, and performance hurdles. For example, they will consider situations where the value of the underlying company drops significantly, or the recipient of the LTIPs or share options leaves that particular employment. The value of those assets is frequently forfeited in that circumstance as they usually become illiquid and/or uncertain.

Once the court does determine how much of the LTIP or share option is shareable, several practical arrangements can be considered. Each option has its pros and cons, and will depend on the needs of each spouse, or / and how willing they are to cooperate following the dissolution of the marriage.

• Deferred sharing: The owning spouse pays a share of the proceeds to the other party once the award vests and is realised. However, this requires ongoing cooperation between the parties, which isn’t always ideal.
• Offsetting: The other spouse receives a larger share of other assets (like property or cash) instead of a direct share of the LTIP or options. However, this can be challenging when the value of the award is uncertain.
• Trust arrangements: This is less common, but it’s sometimes used for complex awards, allowing the proceeds to be distributed fairly once the value is realised. Again, this requires cooperation.

Taxation is also a key factor in dividing LTIPs and share options. Have income tax and National Insurance been paid on the award, given that they represent part of the recipient’s remuneration package. Additionally, any subsequent sale or realisation of shares may trigger a capital gains tax (CGT) liability. Given this, it’s essential to account for these liabilities to avoid one spouse bearing an unfair tax burden. Legal and financial advisers can help structure settlements to reflect the net value of the awards rather than the gross value.

In all, understanding how courts view LTIPs and share options assets, how they’re valued, and how they can be divided is essential for achieving a fair financial settlement following a divorce. As illustrated above, these are complex assets which can represent a significant part of each individual’s financial futures. It is important to work with lawyers who work closely with financial experts to ensure that LTIPs and share options are valued accurately, divided fairly, and that tax implications are fully considered.

Alistair Myles is a Founding Partner at Ribet Myles Family Law