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CALIFORNIA CORPORATE & SECURITIES LAW

California’s Phantom Stock Plan Exemption

Some issuers prefer not to issue actual shares to their employees but want their employees to share in any appreciation in the value of their shares.  A phantom stock plan is one way to achieve this result.  Of course, their are tax (including IRC § 409A), accounting, cash flow and other issues to be addressed before implementing such a plan.  This posting is focused on whether the award of an interest in a phantom stock plan by an employer must be qualified under the Corporate Securities Law of 1968.

Rule 260.105.5 answers the question by exempting from the issuer qualification requirement (Corp. Code § 25110) any transaction whereby an issuer allocates to its employees or employees of its parent or subsidiaries “units” representing a right eventually to receive cash (but not stock) measured by (i) dividends paid on shares of capital stock; (ii) the market value of shares of capital stock of the issuer; or (iii) both.

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