Restricted stock share units (RSUs)

What are they?

· RSUs are a form of share-based employee incentive and/or compensation that have become popular since the mid-2000s. Whilst in the past RSUs were usually issued at board level, they have now become the incentive of choice for all levels of employees around the world.

· RSUs are shares that are “restricted” during a vesting period, which may last several years, during which time they cannot be sold. The date of vesting is usually subject to a Schedule which can be either time based, or performance based, or both. Once vested, the RSUs are just like any other shares in the company and can be sold.

· For tax purposes the entire value of vested RSUs must be included as ordinary income in the year of vesting. Prior to vesting no tax is payable on them.

· Holders of RSUs have no voting rights and do not receive income by way of dividends, although some companies can let the dividends accrue to offset the tax that will become liable on payment.

· Unvested RSUs are normally lost if the employment is terminated for any reason, including retirement however it is worth checking whether there are any other contractual circumstances in which RSUs are held forfeit, including their treatment in the case of death or disability.

How are they treated on divorce?

· Unlike stock options or warrants, which may expire worthless, RSUs can be attributed a value based on the underlying share values and taking into account the length time before vesting and any performance-based criteria to which they are subject.

· Valuation will always require expert advice, and the valuer will need to consider the price of the stock at the date they were granted, the prevailing share price, likely expectations of future value, employee performance. Any tax that would be payable on vesting and sale would have to be factored in.

· As with all other assets, the court will take into account the existence of RSUs when determining the appropriate financial award. Whether or not the court will share the value of the RSUs between the parties will depend on all the circumstances of the case, and in particular whether the RSUs were earned in respect of work carried out during the marriage.

If you have any queries about the treatment on divorce of RSUs, or other forms of financial or equity-based compensation and would like further advice, please contact Hunters’ Family Department partner Hetty Gleave for more information.