A divorce decree can award a spouse shares of stock on a specific date. Securities rules and company agreements may still prevent anyone from selling those shares for months. During that time the stock price can move sharply, and whoever holds the shares holds the risk. For executives and spouses dividing equity in a Texas divorce, lockups and trading restrictions are a settlement issue, not just a securities issue.

This guide explains the main restrictions, how they shift risk between spouses, and the decree terms that protect both sides for families in Houston, The Woodlands, Katy and Sugar Land.

Restrictions that can delay a sale

• IPO lockup agreements. Before an IPO, company insiders and many employee holders commonly agree with the underwriters not to sell for a period after the offering, often around 180 days.
• Company trading windows. Many public companies allow officers and certain employees to trade only during open windows, typically after earnings are released.
• Insider trading law. No one may trade while aware of material nonpublic information.
• Section 16. Officers, directors and 10% holders report trades and can be required to return “short swing” profits from a purchase and sale within six months.
• Rule 144. Restricted securities and shares held by company affiliates can be resold only if certain conditions are met.
• Rule 10b5-1 plans. Executives may sell under prearranged trading plans. Since amendments adopted in late 2022, directors and officers face a cooling off period before trades begin, and modifying a plan is generally treated as starting a new plan.

How lockups shift risk between spouses

If the non-employee spouse receives shares, or a right to proceeds, that cannot be sold until the restrictions end, that spouse bears the market risk until then. If the stock falls, the settlement is worth less than it appeared. If it rises, it is worth more.

The parties can choose who carries that risk:

1. Offset with other assets. The executive keeps the restricted stock, and the other spouse takes cash, real estate or other liquid assets. The executive carries all the stock risk.
2. Transfer of shares. The other spouse receives shares and carries the risk. The decree should state the valuation date used for any equalization.
3. Sell and split. The executive sells when permitted and pays the former spouse a share of net proceeds by a deadline. Both share the risk until the sale.
4. Collar or floor. The parties agree on a minimum value with a true up from other assets. This takes careful drafting.

There is no single “correct” valuation date. Using the decree date, the first permitted sale date, or an average price each allocates risk differently, and the choice should be deliberate.

Transfers can raise securities questions

Transferring restricted or affiliate held shares to a former spouse can raise Rule 144 and plan transfer questions, and a transfer may interact with an existing 10b5-1 plan. Because the answers depend on the facts, involve securities counsel or the company’s legal department before agreeing to transfer shares in kind. A sale by the executive with a payment of cash proceeds often avoids these issues. See how to handle restricted securities in divorce settlements.

Decree terms to include

• A list of every restricted position and the restriction that applies
• Who bears market risk until shares can be sold, and the valuation date
• Deadlines for transferring shares or paying proceeds once restrictions end
• Whether shares are measured before or after tax
• How the executive will handle trading windows and any 10b5-1 plan
• What happens if the IPO or sale is delayed or does not occur

A final Texas property division generally cannot be changed later (Family Code section 9.007), so these risks must be allocated before the decree is signed.

Related topics

Lockups often follow an IPO of a company whose pre-IPO equity was divided, or a merger triggering change in control terms. They also affect RSUs and stock options, and the tax treatment of any sale.

Talk with a Houston divorce lawyer for executives

Chidi Anunobi is Board Certified by the Texas Board of Legal Specialization and holds an M.B.A. from Carnegie Mellon University. Our firm also handles business litigation, and we coordinate with securities counsel when a divorce involves restricted stock.

We represent executives and their spouses in high net worth divorces from our office at 1415 North Loop West in Houston, serving The Woodlands, Spring, Katy, Fulshear, Sugar Land, Cypress, River Oaks and all of Harris, Fort Bend and Montgomery Counties. Call 832-538-0833 or contact us. Our executive compensation guide covers the full package.

Frequently asked questions

How long is a typical IPO lockup? Lockups are set by agreement with the underwriters; around 180 days is common, but terms vary.

Who bears the risk if the stock falls during the lockup? Whoever the decree assigns it to. If shares are transferred, the receiving spouse usually does unless the decree provides otherwise.

Can restricted shares be transferred to a former spouse? Sometimes, depending on plan terms and securities rules. Securities counsel should review any in kind transfer.

This article is general information, not legal or securities advice.