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.

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: 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 acquisition arrangements.

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