Stock ownership plans (ESOPs)
In some cases, employers provide company stock to employees in lieu of contributions to, for example, an IRA for the employee or a defined benefit plan. If the stock is publicly traded, the valuation can be as simple as determining the market price for the stock as of the valuation date. If the stock is not publicly traded (closely held), valuation can be problematic. That is, it is possible that a formal valuation of the stock has not been performed. However, in other cases the company may regularly have its stock valued and pass this valuation on to its employees in a description of benefits. These types of valuations are often performed annually and can serve as an appropriate valuation of the marital asset. If the employee’s total ownership in stock is small relative to the total shares of stock outstanding (e.g., less than 5%), accepting the valuation provided in the benefit statement may be appropriate. However, if the percentage is large (e.g., 50%), the owner of the stock has significant control over the company. This control has value that may exceed the declaration of value for benefit purposes. In these cases, the provision and theories associated with business valuation are more appropriately applied than simple stock valuation. The application of these valuation procedures is best delegated to an expert in the field.
The value of stock options can be problematic, especially in a divorce. A stock option is an offer of stock to employees at a specified price for a specified period of time. For example, the company states to its employees, “You can purchase up to 100 shares of stock in our company for the price of $100.00 per share. This offer is good for one year from the date of this offer.” If the market price of the shares of stock is $85.00 per share, the employee would be unwise to participate. The shares are cheaper on the open market. However, if the market price of the shares of stock is $125.00 per share, then participation is a real benefit, and the stock option has value. Simplistically, the value is $2,500.00 [(100 x $125) – (100 x $100)]. However, the value can be affected by numerous factors, including when the options were received, or in some cases, when they were exercised. In addition, certain jurisdictions have developed formulas by means of case law for the valuation of stock options. Consequently, expert advice on the valuations of stock options should be considered in situations where the amounts are material or the parties highly contentious. It is helpful to do a reality check before seeking the advice of experts in the field of stock option valuations. Consider:
- Is the amount material? If the total possible exercised value of the options is small, it is more cost effective to estimate an amount for inclusion in the marital estate (or even eliminate them from consideration) than go through formal valuation procedures.
- Can the options be exercised? If neither party can afford to exercise the options, then they are of value to no one.
Deferred payment plans
It is possible that an employer would devise a plan to compensate employees in the future by making a series of fixed payments commencing when they retire. For example, a company could agree to a fixed amount of $10,000 per year for ten years when the employee retires. There are other examples that could fall into this category. Because these plans are unusual, and the provisions may be complex, they may require the opinion of an expert for valuation.