Phantom Share Schemes

Key facts: Phantom share option scheme solicitors

  • Phantom share schemes (also referred to as shadow shares) are a type of employee share scheme that allows companies to offer incentives to employees to help the company achieve share price growth in return for a cash bonus instead of becoming shareholders.
  • Shadow shares allow companies to retain control over the existing shareholding and dilution while achieving the same objectives of a share-based incentive scheme.
  • Employers may benefit in the form of low corporation tax when using phantom shares; however, employees will need to pay income tax and national insurance on receipt of the cash bonus.
  • Companies typically place a cap on the use of phantom shares due to the amount of cash they will be required to pay when the triggering targets are met.
  • Phantom share schemes are highly flexible and as such can be set up with conditions which suit the requirements of the organisation – they don’t require approval from HMRC since they are not tax-advantaged. This makes them a type of ‘unapproved’ option scheme.
  • When considering share incentive schemes, there are several options available to employers, such as approved schemes like EMI options, and other unapproved share schemes such as growth shares, hurdle shares, and flowering shares.

What we do: Phantom share scheme legal advice

Shadow or phantom shares refer to the payment of a cash bonus on the achievement of a set share price; but contrary to the name, under a phantom share arrangement, no actual shares are awarded.

Our phantom share scheme solicitors can advise on which of the various employee share option schemes might be best for your business.

With a phantom share option plan, we can advise on:

  • Designing and administering the scheme
  • Structuring good and bad leaver provisions
  • Drafting change of control provisions and performance conditions
  • Combining phantom shares with other share schemes such as growth shares

How do phantom shares work?

Phantom stock schemes work in very similar ways to more traditional share incentive schemes, but the reward made is in the form of cash, rather than shares. The cash bonus awarded under phantom share schemes is typically based on the uplift in company share value. They can be granted on a discretionary basis to employees and non-employee directors and consultants and have no maximum award value, unless the company chooses to cap them for cash-flow reasons.

Employers benefit because staff who are awarded phantom shares are motivated to increase the value of the company but without giving up a shareholding in the business. Instead, the employee obtains an ‘option’ to receive cash upon set conditions, as opposed to an EMI, which provides an option to receive shares.

Phantom shares may be offered (as opposed to share-based incentive schemes) to avoid exceeding shareholding dilution limits or to avoid minority shareholdings which may impact the active running of the company.

Such arrangements do, however, require the ready availability of liquid cash in order to pay employees what they are owed.

HMRC tax implications

For the employer, cash paid in the form of a bonus can reduce the corporation tax owed for the year.
For the employee, on granting of the phantom share option, no tax is payable. However, the scheme is less tax advantageous as tax and national insurance must be paid on the cash bonus being received.

For a general introduction to employee share schemes, don’t forget to read our advice, What are employee share schemes and how do they work?

Who we help: Start-ups, high growth businesses, SMEs and large businesses

We specialise in start-ups and high-growth companies, so we have a wealth of experience advising on and administering a variety of share option schemes.

Why use Harper James’ phantom share scheme solicitors?

Our corporate solicitors are all recruited from top 100 UK law firms or large international businesses, and most have more than 10 years post-qualifying experience. Find out more about the senior solicitors who can help you here:

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