When Sarah’s husband Michael received his promotion to senior vice president at a Fortune 500 technology company, the equity compensation package was transformative. Michael received 45,000 restricted stock units (RSUs) vesting over four years, plus an annual performance stock unit (PSU) grant that could deliver another 15,000 shares if the company hit certain targets. At the current stock price of $87 per share, the RSUs alone represented nearly $4 million in future value.
Two years later, when Sarah filed for divorce, those RSUs became the center of a bitter dispute worth millions of dollars.
What Are Restricted Stock Units (RSUs)?
Restricted stock units represent a company’s commitment to deliver shares of stock at specified future dates, subject to continued employment. Unlike stock options, which require the employee to pay an exercise price to acquire shares, RSUs are grants—the employee receives shares for free when they vest. The ‘restriction’ is the vesting requirement: if the employee quits or is fired before vesting, they forfeit unvested RSUs.
The Critical Question: Are Unvested RSUs Community Property?
For divorce purposes, the critical question is whether RSUs granted during marriage but vesting after divorce are community property, separate property, or some mixture. The answer affects settlement values by millions of dollars in high-compensation cases. Texas courts apply what’s often called the ‘time rule’ to allocate RSUs between community and separate property.
The Time Rule: Calculating Community vs. Separate Property Portions
The time rule recognizes that RSUs serve dual purposes: they compensate past service and they incent future service. When RSUs are granted during marriage but vest after divorce, part of their value compensates work performed during marriage (community property) and part compensates work performed after divorce (separate property).
The standard formula calculates community property percentage as: time from grant date to divorce date, divided by time from grant date to vest date. For example, RSUs granted on January 1, 2020, vesting on January 1, 2024 (four years), with divorce on January 1, 2022 would be 50 percent community property (2 years ÷ 4 years).
Applying the Time Rule to Michael’s RSU Grant
In Michael’s case, the court applied this analysis to his 45,000 RSUs. The RSUs were granted two years before divorce with a four-year vesting schedule. At divorce, half had already vested (fully community property), and half remained unvested. For the unvested RSUs, the community portion was 50 percent. The total community property RSU value was $3.45 million, entitling Sarah to $1.725 million.
Mechanics of Division: How to Actually Transfer RSUs in Divorce
The mechanics of division required careful planning. For vested RSUs, Michael could transfer actual shares to Sarah through a standard transfer. For unvested RSUs, the division had to wait until vesting occurred. The court ordered that when each tranche of unvested RSUs vested, Michael would transfer to Sarah her community property share. This ‘if, as, and when’ approach meant Sarah would receive her shares over time as they vested.
Performance Stock Units: The Added Complexity of Uncertain Targets
Performance stock units added another layer of complexity. PSUs are similar to RSUs but with performance conditions in addition to time-based vesting. The employee must remain employed until the specified date, AND the company must meet specified performance targets. If targets aren’t met, no shares are delivered.
Michael’s PSUs required the company to achieve 15 percent annual revenue growth and 12 percent operating margin. If both targets were met, Michael would receive 15,000 shares. If exceeded, he might receive up to 22,500 shares. If missed, he might receive fewer shares or none.
Valuing PSUs: Probability Analysis vs. Wait-and-See Approach
Valuing PSUs for divorce required assessing the probability of meeting performance targets. Michael’s attorney argued the targets were aggressive with less than 50 percent chance of being met. Sarah’s attorney hired an equity compensation expert who concluded there was approximately 70 percent probability of meeting base targets.
The court took a middle approach, ordering that Sarah would receive 50 percent of whatever PSU shares Michael ultimately received, if any. This deferred valuation until performance outcomes were known, eliminated speculation, and divided actual proceeds when they materialized.
Key Takeaways for High-Compensation Executives Facing Divorce
The final settlement gave Sarah immediate transfer of 11,250 vested RSU shares, deferred transfer of 50 percent of unvested RSUs as they vested, and 50 percent of any PSU shares when targets were measured. The framework ensured Sarah received her community property share of equity compensation earned during marriage, while recognizing that some value represented Michael’s post-divorce work.
How Anunobi Law Can Help
Issues involving high-net-worth divorce, complex assets, and cross-border or business-related disputes require experienced legal guidance. Anunobi Law regularly assists clients with the specific issues discussed in this article. If you have questions, need advice tailored to your circumstances, or would like to discuss how these issues may affect you, please contact Anunobi Law to schedule a confidential consultation.
Legal Disclaimer
This article is provided for general educational and informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship between you and Anunobi Law. Every legal matter is fact-specific, and the application of the law may vary based on individual circumstances. You should consult a qualified attorney regarding your particular situation before taking or refraining from any action.
Any stories, names, or scenarios described in this article are hypothetical and used solely to illustrate legal principles. They are not intended to describe real individuals or actual cases