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Proprietary relations between spouses are a constant source of legal disputes or confusion, especially in today’s changing world, where the concept of property is evolving beyond its tangible dimension. In addition to real estate, pots, and pans, assets may also include rights or claims of the spouses, the legal status of which, alongside other tangible assets, may appear complex.
One such right is options, which, as the number of people working in start-ups and start-up companies grows, are held by an increasing number of people.
What are the options?
An option is a financial instrument that gives an employee of a company the right to acquire under pre-agreed conditions (read more about options here) a benefit, such as a share in a company, in the future. It should be clarified that, in the context of this article, we are talking about options as a right used as an incentive package for employees to acquire a share in their employer’s company. Options are most common in IT companies, especially start-ups, that want to motivate their employees to increase the company’s value. As more and more people are working in start-ups and more traditional companies are also introducing options into their incentive packages, it is appropriate to discuss how such rights relate to the proprietary relations of spouses.
How does an option come into separate or joint property?
Options are not treated differently from other assets in the law. Thus, the rule applies to options: if the spouses do not select the type of proprietary relationship when they enter into marriage, the principle of jointness of property automatically applies. Because of this, if one of the spouses acquires an option after the contraction of marriage, this right is also included in the joint property of the spouses. The law requires the spouse’s consent to exercise the rights arising from the option.
The option would not be included in the joint property if the spouse had concluded the option agreement before marriage. In such a case, the option is instead part of the spouse’s separate property. The option would also be included in a separate property if the spouse received it as an inheritance during the marriage.
The Family Law Act also allows spouses to enter into a separateness of property agreement which recognises a specific item(s) as separate property. Therefore, with the spouses’ agreement, it is also possible to include an option that is part of joint property in the separate property of one of the spouses.
What will happen to the share acquired when the option is exercised?
When an option is exercised, the holder of the option acquires the benefit that was attached to that particular option. In the case of incentive packages, this is generally a shareholding in the employer’s company. However, the proprietary status of the acquired benefit depends directly on the proprietary ownership of the option itself.
Thus, if the option is part of separate property, the acquired benefit will similarly remain part of the separate property of the holder upon exercise. If, on the other hand, the option is part of the joint property of the spouses, the share resulting from the exercise of the option is also part of the joint property of the spouses.
Distribution of an option in the event of divorce
While the solution is simple for an option held as part of separate property, i.e., nothing happens to the shareholding in the event of divorce, and it continues in the ownership of the person whose separate property it belongs to, the situation is more complicated for an option held as part of joint property.
The option belonging to joint property must be divided between the spouses. If the court is obliged to divide the options between the spouses, the division of joint property requested in action for the division of property will be the basis for the division. This may be:
- leaving the unexercised option in the ownership of one spouse and compensating the other spouse for its value in cash or other property;
- sale of the option and division of the proceeds;
- division of the proceeds arising from the exercise of the option.
In the case of a sale or division of an option, the option agreement may contain several provisions which restrict or prohibit such a right. In the case of the most common option agreement, the option is non-transferable, which may exclude the latter two solutions. However, in the case of an already exercised option, the provisions on the transfer of a shareholding may derive from a shareholders’ agreement. Therefore, in case of questions, you should ask a legal expert to analyse your option or shareholders’ agreement.
Operation of a jointly-owned holding
Joint ownership holding may only be operated jointly or with both spouses’ consent. This includes the sale of the shareholding and the exercise of the shareholders’ voting rights, i.e., voting must be done jointly or with both spouses’ consent. As with the exercise of options, dividends paid out are also included in joint ownership. In cases where only one spouse operates the shareholding, obtaining the other spouse’s consent to possess and manage the holding is advisable.
To simplify the operations and transactions (e.g., the exercise of voting rights) involving the jointly owned shareholding, the spouses may also agree in a notarised marital property agreement to this effect, giving one spouse the right to manage the jointly owned shareholding. Similarly, it is possible to agree in a marital property agreement that the consent of one spouse is not required for transactions carried out by the other spouse in independent economic activity. Such arrangements ease the day-to-day management of the jointly held shares. A notarised agreement is the steadiest way of avoiding disputes in the future.
The distinction between options and shares in a company is of the utmost importance in the context of separate and joint property since it determines both the limits of the transactions that can be carried out with them and the proprietary ownership of the proceeds, etc., from them. An option is often a right linked to a specific person. It is advisable to define the proprietary ownership of both options and shares of a company in a marital property agreement to avoid any unpleasantness, thereby ensuring clarity and reducing potential disputes. However, for specific questions relating to option agreements, it is advisable to consult a legal adviser who can further clarify the relationship between the spouses.