Phantom Shares enable shareholders to involve their employees in the success of their company. Thus, the employees receive a bonus when a profit distribution or when selling the company. The premium is calculated according to the virtual shares that the employee is entitled to. As a result, the virtual participation of employees via phantom shares also has a side effect on the company’s balance sheet. The effect that phantom shares have on the balance sheet is due to the fact that the bonus flows as compensation to the employee. Therefore, because a bonus is a liability to the employee, the bonus reduces the value of the company accordingly. Therefore, a shareholder should take into account that phantom shares appear to the buyer as a reason for a purchase price reduction. Finally, the buyer also acquires a liability of the company upon purchase. So if the purchase price falls as a result, the employee also receives a correspondingly lower bonus on his phantom shares.

If a company wants to involve its own employees in success, then there are various possibilities. If the company is an AG, the granting of shares is usually the easiest solution with which the employees can be directly involved. However, virtual holdings in the form of phantom shares are sometimes also used by stock companies. In particular, the participation of Supervisory Board members via phantom shares is interesting here, because it can avoid the prohibition of participation via shares of the company. In addition, virtual participations do not require resolutions of the general meeting.

In contrast, the direct participation in the granting of shares in a GmbH is much more complicated. Virtual investments through phantom shares have significantly better framework conditions. Because phantom shares usually only lead to a share in the profit from the sale of the company. To be precise, it is a participation in the sales proceeds of the company that the shareholder indirectly assigns to the employee through his company. As a result, phantom shares play an indirect role in the balance sheet.

Why do phantom shares appear on the balance sheet as a liability?

First of all, it should be noted that the company makes the agreement for virtual participation through phantom shares with the respective employee individually. Thus, the regulations for granting phantom shares are part of the employment contract. Basically, phantom shares entitle the employee to receive a bonus at the time of a profit distribution to the shareholder, but usually when the company is sold. So you can see in it a debt-law payment claim. For this reason, a distribution of profits or the sale of the company leads to a liability of the company to its employees. The bonus is calculated on the basis of the virtual shares that the employee is contractually entitled to. For this purpose, the same value per share is used as for the shares of the shareholder.

Therefore, phantom shares appear on the company’s balance sheet as an employment liability. Thus, both the liabilities to the employee and his share of the associated levies are recorded in the context of wage tax and social security. The same applies to the social security costs borne by the employer in this context.

Even before a payment of a premium to the employee actually leads to a liability by phantom shares in the balance sheet, you have to check the formation of provisions. Since the bonus in this case depends on an event for which neither the exact date nor the exact amount of the liability is known, there is a commercial and tax obligation to make provision for the phantom shares in the balance sheet. The greater the probability that the agreed premium will be paid out, the more significant the provision. In addition, the amount of the provision depends on the time value of the virtual shares.

On the other hand, the conclusion of the employment agreement for the granting of phantom shares between the company and the respective employee has no direct impact on the balance sheet. This is to be seen as an advantage in particular when using the balance sheet to obtain loans, because as a rule no provision for the agreed phantom shares in the balance sheet is necessary shortly after the contractual agreement with the employee. However, this only applies if the contractual conditions for the actual availability of the phantom shares are only given from a later date. As a result, phantom shares are not a restriction on the balance sheet statement for obtaining loans, especially in the early days, shortly after the start of a company.

4. How phantom shares reduce the purchase price on the balance sheet

At shareholder level, phantom shares show only indirect effects. Nevertheless, these indirect effects are also of great importance.

Although the management involves the shareholders in the decision to grant phantom shares. However, the liabilities to employees arising at the time of the sale of the company have the effect that the buyer may cite this factor in the sales negotiations as a reason to set a lower purchase price. The prospective buyer receives information on the provisions for the phantom shares in the balance sheet. Thus, the shareholder is also affected by the granting of the virtual participation to the employees, albeit, as already mentioned, indirectly.

And of course, this also applies to the virtual employee involved via phantom shares. Therefore, it can be said that the phantom shares of an employee reduce both their own value and that of the shareholders.

So the sales negotiations place high demands on balancing the indirect and direct effects of the phantom shares in the balance sheet. Although the liability of a bonus payment is an expense that reduces the taxable profit of the company, the liability in such a case is usually of considerable magnitude. The mere fact that taxes for social security are also incurred by the employer significantly increases the liability on the balance sheet.