## Facts

- Maria A. Hug and Paul M. Hug married in 1956 and separated in June 1976.
- Paul began working for Amdahl Corporation in November 1972 and received employee stock option grants during the marriage, beginning in 1974.
- The option plan aimed to attract and retain key employees and incentivize increased effort; evidence showed the options could reflect both deferred compensation for past services and an incentive for future services.
- Many options were granted before separation but first became exercisable (vested) after separation.
- In the dissolution proceedings, the trial court reserved jurisdiction to characterize and divide options covering 1,835 shares.
- After a further hearing, the trial court applied a time-rule apportionment and determined options for 1,299.37 shares were community property (divided equally) and 535.63 shares were Paul’s separate property.

## Issues

1. Whether the trial court abused its discretion by applying a time-rule formula to apportion community and separate interests in stock options granted before separation but first exercisable after separation.

## Decision

- The Court of Appeal affirmed.
- The trial court had broad discretion in dissolution matters to select an equitable method to allocate community and separate interests in employee stock options.
- On this record, treating the options as partly attributable to marital efforts and apportioning them by a time rule was not an abuse of discretion.
- The court approved the trial court’s formula, while making clear no single formula is mandatory in all option cases.

## Legal Principles

- Employee stock options may constitute divisible property interests in dissolution and may function as compensation for past, present, and/or future services depending on plan terms and facts.
- Options granted before separation are not automatically separate property merely because they first become exercisable after separation; characterization depends on what the options were intended to reward.
- Trial courts have broad equitable discretion to apportion stock options between community and separate property when options straddle separation.
- A permissible time-rule approach may allocate to the community the fraction: (employment months from start to separation) ÷ (employment months from start to first exercisability), applied to the shares first exercisable under each grant; the remainder is separate property.
- Appellate review is deferential; where substantial evidence supports the trial court’s factual inferences about the option plan’s purposes, the chosen apportionment method will be upheld absent abuse of discretion.

## Conclusion

The court upheld a time-rule allocation of employee stock options granted during employment spanning marriage and separation, holding that options vesting after separation can be partly community property and that trial courts may select equitable apportionment methods, including the approved time-rule formula, based on the evidence.


In re Marriage of Hug, 154 Cal. App. 3d 780 (Cal. Ct. App. 1984)