The phantom shares contract constitutes a compensation mechanism for key executives and managers of the company.
Given the many possibilities offered by this mechanism, the phantom shares contract will normally include the following aspects:
· Conditions for the delivery of the phantom shares
· Acquisition value of the phantom shares
· Conditions in which the phantom shares will be distributed (what in the legal practice is called liquidity events) as well as the valuation system of the phantom shares under said assumptions
· Circumstances in which the status of shareholder of phantom shares would be lost.
Advantages of the phantom shares contract
Phantom shares have a series of substantial advantages in comparison with other remuneration systems of key executives or managers. These main advantages can be summarised as follows:
· The beneficiary of the phantom shares does not acquire the status of a company shareholder at any time but simply enjoys the equivalent economic rights. This avoids some of the issues that arise with the entrance of a third party, such as a splitting of the share capital, the exercise of the third party’s political rights, the dilution of company ownership, etc.
· Through the phantom shares contract, it is possible to retain and motivate key employees for the development of the business by aligning the objectives of the company with their own objectives
· Through this instrument, the company reduces fixed costs and converts them into variable costs that depend directly on the progress or favourable development of the business.
In short, the phantom shares contract is an ideal mechanism for those companies that wish to ensure longevity of key executives or managers in the same company without losing political rights to real shareholders or incurring excessive fixed costs. It is therefore an instrument especially suitable for start-ups, private or family companies that aims to protect themselves against the interference of third parties in the share capital.
If you need additional information about phantom share contracts, do not hesitate to contact our team of lawyers.
This article is not considered as legal advice