Business Legal Services

Phantom Share Schemes

Service overview: Employee incentives solicitors - Phantom share schemes

  • Phantom share schemes (also referred to as shadow share schemes) 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.
  • Phantom share schemes allow companies to retain control over the existing shareholding and equity dilution while achieving the same objectives of a share-based incentive scheme.
  • Employers may benefit in the form of corporation tax deductions when using phantom share schemes; 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 need to meet specific legislative requirements since they are not tax-advantaged.
  • When considering share incentive schemes, there are several options available to employers, such as HMRC tax advantaged schemes like EMI options, and other non-tax advantaged share schemes such as growth shares, hurdle shares, and flowering shares.

Get in touch


What we do: Employee incentives - Phantom share schemes legal advice

Shadow or phantom shares refer to the payment of a cash bonus on the achievement of set targets; but no actual shares are awarded. Phantom share schemes may be “phantom options”, which entitle employees to payments equal to the share price at the date of exercise less a notional exercise price or “phantom shares” which entitle employees to payment equal to the whole share value as at a date of vesting. Phantom rights can also be structured over any asset, e.g. fund or partnership units.

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

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

  • Designing and administering the scheme
  • Valuation of the shares or underlying assets
  • 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  schemes normally work in very similar ways to more traditional share incentive schemes, but the payout 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 share rights are motivated to increase the value of the company but without shareholders giving up a shareholding in the business. Instead, the employee obtains a right to receive cash upon set conditions, as opposed (for example) to an EMI, which provides an option to receive shares.

Phantom share rights 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 when the rights pay out.

For more information, don’t forget to read our FAQ: Phantom share schemes article.


HMRC tax implications

For the employer, cash paid in the form of a bonus should be deductible for corporation tax purposes and 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 than HMRC tax advantaged arrangement or non-tax advantaged share acquisition arrangements such as growth/hurdle shares 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

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


Testimonials

What our clients say

Easy to work with, quick responses, quick feedback if changes needed, gets things done. We consider the arrangement very worthwhile for Storelectric and would recommend to others.
Tallat Azad MD, Storelectric
Harper James have been fantastic. They always provide quality advice with quick turnarounds and, every time, we're pleasantly surprised when the invoice comes in!
Mark Nicholson CEO, Vivacity Labs
Easy to work with, quick responses, quick feedback if changes needed, gets things done. We consider the arrangement very worthwhile for Storelectric and would recommend to others.
Tallat Azad MD, Storelectric
Harper James have been fantastic. They always provide quality advice with quick turnarounds and, every time, we're pleasantly surprised when the invoice comes in!
Mark Nicholson CEO, Vivacity Labs

Why use our 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:


Pricing plans

Legal support designed
to fit your business needs

Our three transparent pricing packages are designed to give you the widest possible access to high-quality legal advice, whatever the size and nature of your business:

City

Straightforward access to senior solicitors at a competitive rate.

An affordable solution for businesses needing one-off legal support. Receive ‘City’ partner-level expertise at a fraction of ‘City’ prices.

On-Demand

Providing you with priority access to a dedicated panel of highly experienced solicitors.

Fully account managed quarterly subscription service for businesses with more complex legal needs.



What next?

Please leave us your details and we’ll contact you to discuss your situation and legal requirements. There’s no charge for your initial consultation, and no-obligation to instruct us. We aim to respond to all messages received within 24 hours.

Your data will only be used by Harper James Solicitors. We will never sell your data and promise to keep it secure. You can find further information in our Privacy Policy.

Our offices

A national law firm

A national law firm

Our commercial lawyers are based in or close to major cities across the UK, providing expert legal advice to clients both locally and nationally.

We mainly work remotely, so we can work with you wherever you are. But we can arrange face-to-face meeting at our offices or a location of your choosing.

Floor 5, Cavendish House, 39-41 Waterloo Street, Birmingham, B2 5PP
Stirling House, Cambridge Innovation Park, Denny End Road, Waterbeach, Cambridge, CB25 9QE
13th Floor, Piccadilly Plaza, Manchester, M1 4BT
10 Fitzroy Square, London, W1T 5HP
Harwell Innovation Centre, 173 Curie Avenue, Harwell, Oxfordshire, OX11 0QG
1st Floor, Dearing House, 1 Young St, Sheffield, S1 4UP
A national law firm

To access legal support from just £145 per hour arrange your no-obligation initial consultation to discuss your business requirements.

Make an enquiry