Unvested shares in a property settlement: are they up for grabs?

For many executives and professionals, remuneration extends beyond salary and bonuses to include employee share schemes, performance rights and long-term incentive plans.

When a relationship breaks down, an important question often arises: what happens to shares that have been granted but have not yet vested?

The answer is not always straightforward. Whether unvested shares form part of a former couple's property pool will ultimately depend on the nature of the entitlement and the terms of the particular share scheme.

Property or financial resource?

Vested shares will generally be treated as property and therefore included in the asset pool available for division between the parties.

Unvested shares, on the other hand, often come with conditions attached. For example, vesting may depend on:

• the employee remaining employed for a specified period;
• performance targets being achieved;
• the discretion of the employer or board; and
• other conditions that could result in the entitlement being forfeited (such as, termination of employment).

Where those conditions exist, the court must determine whether the employee has a present property interest or merely the prospect of receiving a future benefit. That distinction can significantly affect the outcome of a property settlement.

When are unvested shares treated as a financial resource?

Recent court decisions demonstrate that unvested shares will not automatically be included in the property pool simply because they may have substantial future value. In cases such as Waterman & Waterman [2020], Radcliff & Radcliff [2020] and Russell & Russell [2016], the court considered employee share interests that were subject to future vesting conditions and uncertainty.

Common factors influencing the court's approach included:

• whether the employee had an enforceable right to receive the shares;
• the extent to which vesting remained contingent on future events;
• whether the shares could be reliably valued;
• whether the employer retained discretion over vesting; and
• the likelihood that the employee would ultimately receive the benefit.

Where the entitlement was sufficiently uncertain or contingent, the court treated it as a financial resource rather than an asset.

What does this mean for the outcome of a property settlement?

Even where unvested shares are not included in the property pool, they can remain highly relevant to the overall outcome.

The court may take a financial resource into account when considering the parties' future financial circumstances, earning capacity and future needs. As a result, the existence of valuable unvested share interests may still influence the percentage adjustment and overall division of the available asset pool.

In practical terms, an employee may not be required to immediately divide unvested shares, but the potential future benefit of those interests can still affect the overall settlement.

Key takeaways

The treatment of unvested shares will depend on the specific terms of the relevant share scheme and the particular facts of the case.

Key considerations include:

• the terms of the employee share plan;
• whether the entitlement currently exists or remains contingent;
• the conditions attached to vesting;
• whether the interest can be valued;
• whether it can be transferred or realised; and
• the likelihood of the employee ultimately receiving the benefit.

Some unvested share interests will be treated as property and included in the asset pool. Others may be treated as a financial resource and considered in a different way.

For individuals with employee share schemes, performance rights or long-term incentive plans, obtaining early legal advice is important. Understanding how those interests may be characterised can have a significant impact on both settlement negotiations and the eventual outcome.

Lander & Rogers' family & relationship lawyers have extensive experience navigating financial cases involving all classes of assets. If you require advice about the family law implications of your or your former partner's unvested shareholding, we encourage you to contact a member of our Family & Relationship Law team.