Phantom Share Schemes

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.

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?

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:

Abby Watson

Corporate Solicitor

Abby Watson is a corporate solicitor, specialising in private equity investments, mergers & acquisitions, EMI share schemes, corporate finance and governance and more.

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Adam Kudryl

Corporate Partner

Adam Kudryl is a Partner and Corporate & Commercial Solicitor at Harper James Solicitors, specialising in strategic investments, acquisitions and sales.

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Jas Bhogal

Corporate Partner

Jas is a corporate partner at Harper James Solicitors, advising on corporate governance, mergers & acquisitions, venture capital & investments.

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Shubhu Patil

Corporate Solicitor

Shubhu specialises in early-stage fund raisings, shareholder arrangements and M&A. Prior to joining Harper James she worked at Mills & Reeve and before that at Addleshaw Goddard and Slaughter and May.

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Stephen Evans

Corporate Solicitor

Stephen is an experienced corporate lawyer, with a career including time at DLA Piper and Pinsent Masons. He specialises in mergers and acquisitions and private equity work.

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Kate Wright

Commercial and Corporate Solicitor

Kate is a commercial and corporate lawyer, advising businesses from start-ups up to global companies on everything from investment and franchising to sale and purchase transactions, exits and much more.

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Ian Fraser

Employee Incentives Solicitor

Ian has over 25 years’ experience advising on employee incentive arrangements (including EMI, CSOP, SIP and SAYE plans and growth/hurdle share and phantom equity arrangements).

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