Phantom shares create a remuneration system that is often used with key executives of a company. This mechanism serves to attract and retain talent and can allow the company to make significant savings in fixed costs.
As its name suggests, the phantom share is a ghost action or, in other words, an action that is fictitious or not real that is delivered to key employees. This means that employees can enjoy the economic rights that correspond to legitimate shareholders without being formal shareholders or owners. Therefore, shareholders lack the political right that would accompany the status of a legitimate shareholder.
Taking into account the legal and economic problems that may arise from the entry of new shareholders into the capital stock of a company (as in the case of stock options or employee share option plans), the phantom share functions to effectively remunerate key employees of the company without having to modify capital structure or ownership.
The phantom share lacks specific legal regulation in Spain, giving the company and the employee or manager ample freedom to regulate this system’s terms. That is, the parties will decide themselves to include clauses that are deemed convenient; they need only comply with what is typically expected in this sort of shareholder agreement, being that there are not any particular limitations.
As a general rule, and from a practical point of view, the phantom share implies that the company in question will deliver said fictitious shares at a certain value (equivalent to the value of the real shares) to the employee or manager. After a certain period of time or after a certain expectation has been met, the company shall pay the amount of the revaluation of these fictitious shares to the beneficiary of the phantom shares (that is, the difference between the initial value of the phantom shares and the value at the time of payment).
Likewise, it is typical for, in the event of the distribution of dividends to the real company shareholders, the phantom shares to grant the beneficiary the right to receive the amount that would correspond to them as a dividend if they were a real shareholder.
It is important to note that the amounts received by the employee or manager as a result of the phantom shares will generally be considered as work performance— not as a return on movable capital. Therefore, they will be taxed according to the Personal Income Tax (IRPF) and will accrue the corresponding Social Security contributions.
On the other hand, the delivery of phantom shares may be carried out immediately or be contingent on compliance with certain requirements set by the employee or manager, such as a minimum period of stay, compliance with performance objectives, etc.
If you want to know more about the functionality of phantom shares and their place in a company, do not hesitate to contact our team.
This article is not considered as legal advice