What Does it Mean for Shares to Lapse?

The term “lapsing” applies to shares of restricted stock. Such stock is issued when one company acquires another and wants to retain the top talent at the new acquisition, or wants to woo top talent away from another company. Restricted shares are given as a lure to get and keep talented people because they offer recipients substantial wealth with no investment required, provided the recipients comply with the stock restriction terms.

Meaning of Lapse

Stock shares granted to an employee as an incentive normally come with a restriction prohibiting you from selling, trading or pledging the shares for a fixed time period, typically three to five years. When the sale restriction lapses, meaning it has expired, you become vested in the stock because you now own the shares outright. You're free to sell, transfer or pledge the shares as you please. Lapsing refers to the restrictions, not to the stock shares themselves.

Another Restriction

Restricted stock generally includes a requirement that the employee cannot leave the company during the sale restriction period. If you do leave during that time, you forfeit your restricted shares; it would be as if you never received them. Once the sale restriction lapses, an employee can leave the company and take the shares.

Like Free Stock

Restricted stock has its advantages. Employees who comply with the restriction terms receive valuable stock for free. They are insulated from stock market vagaries. Unlike stock options that have value only if the company's stock price rises after the option grant date, restricted stock always is worth whatever the market price per share is on the date the sale restriction lapses. During the sale restriction period, the recipient can vote the shares and collect any dividends.

Drawbacks

There are some negatives with restricted stock. The employee is tied to the company with a "golden handcuff" for the duration of the sale restriction period, on pain of losing the shares. The employee will owe income tax on the market value of the shares as of the date the sale restriction lapses, not the date the stock is actually sold. The holding period for long-term capital gains tax treatment of sale proceeds begins when the sale restriction period lapses, not when the employee first received the stock.

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About the Author

Herb Kirchhoff has more than three decades of hands-on experience as an avid garden hobbyist and home handyman. Since retiring from the news business in 2008, Kirchhoff takes care of a 12-acre rural Michigan lakefront property and applies his experience to his vegetable and flower gardens and home repair and renovation projects.

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