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Understanding Deferred and Option Shares in South Africa Divorce Proceedings

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Understanding Deferred and Option Shares in South Africa Divorce Proceedings

Understanding Deferred and Option Shares in South African Divorce Proceedings 

Divorce proceedings often involve complex considerations regarding the division of assets, especially when it comes to financial instruments such as deferred and option shares.

This article explores the nuanced treatment of these shares under South African law, focusing on their definitions, legal implications, and practical considerations during divorce settlements.

The division of Assets in South African divorce proceedings are governed by The Matrimonial Property Act 88 of 1984 as well as the Divorce Act 70 of 1979.

Different Types of Shares

Deferred Shares [LK2]

These are the shares that do not have any rights to the assets of a company undergoing bankruptcy until all common and preferred shareholders are paid.

It is important to remember that the value at the date of divorce is typically used for asset division purposes.

With these types of shares, the dividend does not have to be paid until payments have been made on all other shares.

The reason why these shares work that way is to compensate managers and to motivate the investors to invest.

They are characterised by their conditional nature and vesting schedules.

Deferred shares represent a particular cash value based on market conditions.

In the context of divorce in South Africa, deferred shares are considered marital assets subject to division under the Matrimonial Property Act 88 of 1984, particularly if acquired during the marriage.

The valuation and distribution of these shares depend on their vesting status at the time of divorce. Courts may consider whether the shares have vested fully or partially, the criteria for vesting, and any forfeiture provisions that may affect their value.

Understanding these characteristics and typical vesting conditions of deferred shares is essential for accurately assessing their value and ensuring fair treatment during divorce proceedings.

Option Shares

These are shares where the holders have the right to purchase shares at a predetermined price and within a specific period.

Here, the investor is given a right- not an obligation- to buy or sell shares at an agreed-upon date and price.

These types of shares can be a better choice when you want to limit risk to a certain amount.

Option shares will typically include an expiration date, meaning that the shares must be bought or sold at that date.

They can be used as incentives in employment contracts with vesting conditions tied to continued employment or achieving certain goals.

Other Forms of Shares

Many other shares can also be involved in divorce proceedings. We will examine Employee Stock Options, Restricted Stock Units and Phantom Shares.

Employee Stock Options (ESOs) are similar to option shares, but they are generally issued to employees as part of their overall employment packages.

The vesting schedules can vary, and they are generally reliant on the employee’s continued employment with the company.

Valuing employee options in the context of divorce proceedings can be complex.

Factors such as the current market value of the underlying stock, the exercise price, the vesting schedule, and the remaining exercise period all influence the valuation.

Courts may consider vested and unvested options as part of the marital estate subject to division.

Restricted Stock Units (RSUs) are units of company stock that are granted to employees as part of their compensation.

SRUs are often subject to taxation upon vesting, and this can affect their value during divorce proceedings.

Unlike stock options, RSUs represent actual shares of stock that are granted to the employee, typically subject to certain restrictions.

These restrictions often include a vesting period and may also include performance conditions that must be met before the RSUs can fully vest.

When RSUs are granted, the employee receives a promise to receive a certain number of shares of company stock at a future date, typically when the RSUs vest.

RSUs generally vest over a specified period, often based on the employee’s continued employment with the company or the achievement of performance goals.

Upon vesting, RSUs are settled by delivering actual shares of company stock to the employee.

The value of the RSUs at settlement is typically based on the fair market value of the company’s stock on the vesting date.

These options are typically part of an employee’s overall compensation package, serving as incentives to align the employee’s interests with those of the company’s shareholders.

They are given to employees to help retain employees, and thus keep up with more productivity from the employees.

Phantom Shares, also known as synthetic equity, are units that simulate the value of company shares without transferring actual ownership

Unlike RSUs or stock options, employees do not receive actual shares. Instead, they receive a promise to receive a cash payment equal to the value of a specified number of shares at a future date.

Due to the fact that Phantom shares do not represent actual ownership, the employees do not have any voting rights.

Stock Appreciation Rights (SARs) are similar to Phantom shares, but they are specifically tied to the company’s stock price.

It is important that guidelines and rules are followed during divorce proceedings so that the division of assets is fair and proper.

This is why the Matrimonial Property Act 88 of 1984 is so important. It outlines how property, including deferred and option shares, is categorised and distributed, particularly under the accrual system.

Chapter 1 of this Act deals with the accrual system. It explains when the accrual system comes into play and how to calculate its value.

This Act sets out when a marriage is subject to the accrual system, what the accrual system does in terms of the dissolution of the marriage, how to determine the accrual of the estate of a spouse, and what is considered excluded from the accrual.

A marriage is subject to the accrual system when the marriage is out of community of property in terms of an antenuptial contract by which community of property and community of profit and loss are excluded.

When the dissolution of the marriage occurs, the spouse with the smaller accrual will have a claim against the spouse with the bigger accrual.

The accrual of the estate of a spouse is the amount by which the net value of his estate at the dissolution his marriage exceeds the net value of his estate at the commencement of that marriage.

Inheritances, legacies and donations are all excluded when the accrual is determined unless it is stated otherwise in the Antenuptial Contract.

Case law will give a broader insight into how the Courts go about the division of assets during divorce proceedings.

Montanari v Montanari (2020) (1086/2018) [2020] ZASCA 48 (5 May 2020)

In this case, the court addressed the treatment of vested and unvested shares, emphasising the importance of determining the marital property’s value at the time of divorce.

Before the Judgment was given on this case, funds vested in living annuities were not deemed to form part of a spouse’s estate for the purposes of calculating that spouse’s accrual.

This led to the fact that many individuals moved their retirement funds into living annuities in order to reduce the amount payable to them as accrual in the instance of pending divorce proceedings.

The Judgment had the consequence that one can no longer keep their living annuities solely within their estate, and these annuities, which are acquired during the duration of the marriage, form part of the accrual when and if divorce proceedings take place.

As stated in the Matrimonial Property Act, the party with the smaller accrual will be able to lay a claim against the party with the bigger accrual in order to create a fair division between the parties.

P A F v S C F (788/2020) [2022] ZASCA 101; 2022 (6) SA 162 (SCA) (22 June 2022)

The court examined the inclusion of option shares in the accrual calculation, highlighting the complexities in valuing such assets and ensuring equitable distribution.

In this case, the parties got married to each other out of community of property with the inclusion of the accrual system.

When the parties decided to get divorced, one party created a trust, and deposited a large amount of money into the trust.

This party claimed that the trust was set up for the child born of this marriage.

The other party to the divorce felt that this trust was only set up in order to frustrate the accrual claim.

The first mentioned party had the bigger accrual claim, but after the trust, it seemed smaller which would have led to the second party’s accrual not being fairly valued.

The KwaZulu-Natal (Pietermaritzburg) High Court granted the divorce and ruled that the donation to the trust and the recording of an alleged loan by the first party’s father to him was done with the “fraudulent intention” to the second mentioned party of her rightful accrual claim.

M v M (82156/14) [2017] ZAGPJHC 354 (20 November 2017)

This case dealt with the valuation and division of RSUs, underscoring the need for expert testimony to assess the value of deferred and option shares accurately.

This case was a bit of an unusual one as the parties had been married and divorced three times.

The parties were married Out of the Community of Property and with the accrual.

This case deals with another type of shares, namely the “alter ego” trust, the term “alter ego” in the context of a trust refers to the idea that a trust, although considered a separate legal entity, may sometimes be closely linked to the actions and intentions of its founder or the trustee.

There was a specific provision set out in the antenuptial contract that in the event of an extramarital affair of the appellant as the reason for the divorce, the appellant would be obliged to furnish assets to the Respondent.

Although the Respondent made multiple claims against the Appellant, the Court ordered the following:

The Appellant’s estate has accrued by an amount of R5 339 645.55, meaning that the respondent is entitled to one half of this amount in the sum of R2 669 822.78.

Analysis of Case Law

These cases illustrate judicial interpretations of how deferred and option shares should be handled in divorce proceedings.

Courts often consider factors such as vesting schedules, valuation methods, and the impact of future performance on asset division

Practical Considerations

Determining the value of deferred and option shares can be complex, often requiring the expertise of financial professionals familiar with valuation methods specific to unvested equity incentives.

Expert testimony is crucial in providing accurate assessments that inform equitable distribution.

The testimony of experts will ensure that shares are properly and correctly valued.

This will play a crucial role in divorce proceedings as it will ensure that the accrual system will fairly be applied.

It is important that precedents from previous cases be used as guidelines when determining the division of shared during divorce proceedings.

Conclusion 

Navigating the division of deferred and option shares in South African divorce proceedings demands a strategic understanding of both legal principles and practical valuation methods.

By adhering to established case law and seeking expert guidance, couples and legal professionals can ensure a fair outcome that respects each party’s entitlements.

This structure provides a comprehensive overview of the treatment of deferred and option shares in South African divorce proceedings, integrating legal principles with practical considerations and case law references to enhance understanding and application.

Read More:

Powers Of Spouses Married In Community Of Property To Purchase Property

Divorce and Trusts: A Guide to Asset Protection

P A F v S C F (788/2020) [2022] ZASCA 101; 2022 (6) SA 162 (SCA) (22 June 2022

M v M (82156/14) [2017] ZAGPJHC 354 (20 November 2017)

 

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