For some time now phantom shares have been widely used by companies in emerging sectors, which raises the question of why they have been so successful and whether they are really a useful mechanism that will continue to gain popularity or, conversely, fall into disuse in the future.
Firstly, it is worth mentioning that the nature of this concept is not regulated by law in Spain, which makes it extremely flexible: phantom shares are the granting by the company of a series of economic rights in favour of certain employees or collaborators, which would, in practice be equivalent to the economic rights of the shareholders. In this way, the employee benefits financially from an additional variable remuneration and the shareholders have the advantage of retaining the capital, avoiding the entry of minority shareholders and thus potential future conflicts.
Although the beneficiaries do not become shareholders, the phantom shares must be linked, in any case, to the company’s share capital and it is common to agree with the employee that if there is a capital increase, the phantom shares granted will be increased proportionally, thus ensuring that these economic rights are not diluted.
Phantom shares have become popular especially in start-ups in emerging sectors that need key technical employees for their business development, and whose profiles are in high demand in the market. However, this mechanism can in fact be useful for any type of company, large or small, newly established, or already consolidated.
As commercial lawyers, we deal with numerous conflicts between shareholders on a daily basis, some of them initiated by minority shareholders who enjoy certain rights by law. Many of these disputes end up in court, involving years of infighting, litigation and tense negotiations that undoubtedly impact the company’s performance and sometimes affect its viability.
Phantom shares, therefore, prevent the entry of minority shareholders into the share capital with their consequent political rights (votes at the General Meeting, ability to request information, audits, etc.) and provide what is usually of most interest to the employee, i.e. economic rights based on the company’s results. In most cases, phantom shares also serve as consideration for the employee’s commitment to remain with the company, serving as a tangible incentive for the employee to remain committed to and motivated by the project.
Therefore, at Martí & Associats we recommend that you take this concept into account. We can provide you with more information and help you to consider whether phantom shares can be useful for your company when it comes to maintaining, building loyalty and motivating your employees and key collaborators.
