Restricted securities are harder to divide than ordinary publicly traded stock. Legal limits on resale, company transfer rules and tax traps can make a 50/50 split on paper very unequal in real life. For executives and founders in Houston, The Woodlands, Sugar Land and Katy, restricted stock is often one of the largest assets in the marriage, which makes careful handling essential in a high net worth divorce.

What Counts as a Restricted Security?

In divorce practice, “restricted securities” covers several kinds of holdings that cannot be sold freely on the open market:

• Securities acquired in private placements or pre-IPO rounds, which are “restricted securities” under SEC Rule 144 and can only be resold under an exemption.
• Control securities held by officers, directors and large shareholders (affiliates), which are subject to Rule 144 volume, manner of sale and filing requirements even if they were bought on the market.
• Employer equity awards such as restricted stock awards and restricted stock units (RSUs), which carry vesting conditions.
• Stock subject to contract limits, including post-IPO lockups, company trading windows and pre-clearance policies.

Texas treats restricted securities acquired during marriage as community property subject to division. The practical problem is that neither spouse may be able to sell them on the timeline of the divorce. For background on equity awards specifically, see RSUs, PSUs and divorce in Texas and dividing pre-IPO equity in a Texas divorce.

How Texas Apportions Unvested Awards

Texas has a statute for employer-provided stock options and restricted stock. Under Texas Family Code Section 3.007(d), the separate property share of an award is determined by a fraction based on the vesting period:

• If the award was granted before marriage but required service during marriage to vest, the separate share reflects the period of service before marriage (and after divorce) compared with the total vesting period.
• If the award was granted during marriage but vests after divorce, the separate share reflects the period of service after the divorce compared with the total vesting period.

Section 3.007(e) applies the calculation separately to each tranche with a different vesting date. Our article on the time rule for stock options walks through examples. Note that this statute covers employer-provided plans. Restricted securities bought as an investment are characterized under ordinary tracing rules.

Valuation Challenges and Approaches

Restricted securities often have no reliable market price. Private company stock may have no recent comparable sale, and even public stock under a lockup cannot be sold at today’s quote.

Valuation experts typically use:

• Income approaches that project earnings or cash flow and discount them to present value.
• Market approaches that compare the company to public peers or recent transactions.
• Asset approaches, mainly for holding companies.

The biggest dispute is usually the discount for lack of marketability. The spouse keeping the shares wants a large discount to reduce the equalization payment. The spouse receiving other assets wants a small one. Texas courts generally need expert testimony to value closely held interests, and they must reach a value in order to make a just and right division. See the role of forensic accountants in business valuation during divorce.

Tax Considerations That Change the Math

Tax can matter more than valuation. Two assets with the same pre-tax value can leave each spouse with very different after-tax results.

• RSUs: generally taxed as ordinary income when they vest and shares are delivered, with withholding. A spouse awarded a share of future RSU deliveries should confirm how the tax will be allocated.
• Restricted stock awards: if the employee filed a Section 83(b) election at grant, later appreciation may be capital gain rather than ordinary income. Ask whether an election was made.
• Nonqualified stock options: under Revenue Ruling 2002-22, when nonqualified options are transferred to a former spouse incident to divorce, the receiving spouse generally reports the income at exercise.
• Incentive stock options (ISOs): ISOs generally cannot be transferred without losing ISO status. A transfer of an unexercised ISO to a spouse in a divorce will generally cause it to be treated as a nonqualified option. Many settlements instead leave the ISO with the employee, who exercises on the other spouse’s behalf under a constructive trust arrangement. Get tax advice before choosing a structure. See understanding ISO vs. NSO tax treatment in a Texas divorce.
• Section 1041: transfers of shares between spouses incident to divorce are generally not taxable, and the recipient takes the transferor’s basis.
• Nonqualified deferred compensation: some plans prohibit assignment entirely, so the settlement may need an offset rather than a transfer.

Division Strategies and Settlement Structures

1. Retention with equalization. One spouse keeps the restricted securities and the other receives equal value in cash, marketable securities, retirement assets or real estate equity. For example, a $2,000,000 restricted stock position might be offset by $2,000,000 of other community assets, adjusted for tax.
2. Delayed division. Shares are transferred once restrictions lapse and they become freely tradable. This requires clear deadlines and cooperation.
3. Contingent payments. The retaining spouse pays an agreed percentage of after-tax proceeds when shares are sold, often with a deadline and a floor.
4. Trust or escrow. A neutral trustee holds the shares until restrictions lapse and then sells or distributes them under an agreed formula.
5. Pre-IPO structures. A guaranteed minimum payment now plus additional payments tied to an IPO or sale price, similar to an earnout in a business acquisition.

Transfer Restrictions and Securities Compliance

Shareholder agreements may require board approval for any transfer, including to a spouse, and some prohibit transfers entirely. A transfer that violates the agreement can be void or trigger a forced buyback. If a transfer is barred, the settlement must rely on equalization or contingent payments. Our article on buy-sell agreements in divorce explains how these provisions work.

A spouse who receives restricted securities usually remains subject to Rule 144. Under Rule 144, the basic holding period is generally six months for shares of a company that files SEC reports and one year for a non-reporting company. Whether the receiving spouse can count the transferring spouse’s holding period, and whether affiliate limits continue to apply, depends on the facts. Involve securities counsel and the company’s transfer agent before the decree is signed.

The decree or agreement incident to divorce should state that the transfer is made pursuant to the divorce, intended to qualify under Section 1041, and should assign responsibility for company approvals, legend removal and any SEC filings.

Planning Considerations for Business Owners and Executives

• Marital agreements can set valuation formulas or keep business equity with one spouse. See our guide to prenuptial and postnuptial agreements for high net worth individuals.
• Shareholder agreements can include rights of first refusal and valuation mechanisms for divorce.
• Recordkeeping of grant dates, vesting schedules, 83(b) elections and purchase records makes characterization faster and cheaper.

The Expert Team

A strong team usually includes a business valuation expert, a CPA to model after-tax results, and securities counsel to review SEC and contract limits. Many Houston-area couples resolve these issues in mediation or collaborative law with jointly retained neutral experts, which can be faster and less expensive than trial.

Restricted Securities Help in Houston and Surrounding Areas

Restricted securities often appear alongside hedge funds, angel investments and derivatives and options. Anunobi Law represents executives, founders and their spouses in Houston, River Oaks, the Houston Heights, Sugar Land, Katy, Richmond, Missouri City, Fulshear, Stafford, Cypress, Spring, The Woodlands, Conroe and Pearland. Learn about our executive and C-suite divorce and high net worth divorce services, or schedule a confidential consultation with a Houston divorce lawyer.

Frequently Asked Questions

Are unvested RSUs community property in Texas? They can be partly community and partly separate. Texas Family Code Section 3.007(d) apportions employer-provided restricted stock based on how much of the vesting period fell during the marriage.

Can I transfer restricted stock to my spouse in a divorce? Sometimes. Company agreements may require consent or prohibit transfers, and securities laws still apply to the receiving spouse. When a transfer is not possible, an offset or a share of sale proceeds is used.

Can incentive stock options be divided in a Texas divorce? Yes, but transferring an unexercised ISO to a spouse generally ends its ISO status. Many settlements keep the option with the employee and share proceeds instead.

Who pays tax on restricted stock that vests after the divorce? It depends on the award type and the agreement. RSU income is generally reported by the employee, so the agreement should state how the tax burden is shared.

This article is for general information and is not legal, tax or securities advice. Reading it does not create an attorney-client relationship.