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Phantom Shares and Options

Do you want to understand how phantom shares can be used to incentivise your employees? Do you participate in a phantom share scheme and you are unsure what your rights are? Suzy Giele from our team at EM Law is one of the UK’s leading experts on phantom shares as well as other types of share incentive schemes.

Introduction

Phantom share options are arrangements that allow individuals who are given the benefit of the options to receive a cash payment linked to the increase in value of the “real” issued shares in a company.

For example, let’s say that on 6 April 2018 a company’s ordinary shares are worth £1 million.

John Smith, an employee of the company, is a participant in the company’s phantom share option plan. The plan states that if the company’s ordinary shares are worth more than £1 million on 6 April 2019 each of the participants in the scheme are entitled to receive a cash payment of £1,000.

On 6 April 2019 the company’s ordinary shares are worth £1.5 million. John Smith is entitled to a payment from the company of £1,000.

Phantom shares are conceptually similar to share appreciation rights (SARs) which is the term more commonly used by US corporations.

Why use Phantom Shares?

One of the advantages of using phantom shares is that it obviates the need to issue real shares. This means that the employees who benefit from the phantom shares won’t need to sign off on transactions, aren’t entitled to attend general meetings and the balance of power between the shareholders who are issued with real shares is not disturbed. In many ways it makes it simpler for employees to participate in the growth of the company without the complexity and additional considerations that come with issuing real shares.

In the example above, John Smith is entitled to a payment when the company’s shares reach a certain value. However, phantom shares can be granted on an “exit only” basis i.e. when the company is sold. In this instance, if the company is bought for cash, liquidity should not be an issue.

Tax Treatment

There is no income tax liability on the grant of a phantom share option. An employee who receives a pay-out will be subject to income tax and NICs on the amount of cash received in the same way as any other cash bonus. Employer NICs will also apply.

Regulations

Phantom shares need to be structured carefully bearing in mind the requirements of the Financial Services and Markets Act 2000.

For any questions you may have concerning phantom shares contact Suzy Giele.

Phantom Shares EM Law Suzy Giele

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