Tracking stock, or targeted stock, is a class of common stock that tracks the performance of a firm’s division, separate operation, or SPV, and is traded independently from the firm’s ordinary shares. Although it resembles a regular share, it does not confer direct ownership rights; it merely entitles the holder to financial returns on sale and, depending on the issuer’s policy, may also entitle them to dividends or interest. The first tracking stocks, introduced during the tech boom of the 1990s, were publicly traded and listed on stock exchanges. They also offered benefits such as increased disclosure and transparency for specific segments while preserving the parent’s control over the rest of the business.

Although tracking stocks can be publicly traded, they are now rarely used. When adopted, they offered investors a way to gain exposure to a specific division or project rather than the entire firm. Strategically, they allowed parent companies, especially those burdened by broad diversification or reputational issues, to isolate and showcase the value of high-performing segments. ¹ They could also function as a tool to delay a spin-off or divestiture by separating the segment economically while keeping it legally within the parent. In M&A, a tracking stock can be used for capital raising through an IPO or SPO of a particular division, allowing the company to retain control while financing a targeted initiative. ² Because shares are frequently used as currency in M&A transactions, the same logic can apply to tracking stock when a firm either does not wish to, or cannot, pay using cash or traditional equity. ³

Figure 1. SEC, 'Prospectus, AT&T Wireless Group Tracking Stock (2000)

For publicly issued tracking stocks, no SPV is required. Although the assets are not legally separated, the operations of the division are ring-fenced, and the parent company issues the stock directly. These stocks usually trade under a separate ticker from the parent. Financial statements are prepared for both the tracked division and the remainder of the company, though they are ultimately consolidated in the group accounts.

A tracking stock reflects only the economic performance of the tracked division. Voting rights depend on the specific structure but are typically limited ⁴ or absent, and they attach to the parent company rather than the division. Like ordinary equity, tracking shares offer no preferential rights and have no seniority over creditors. Dividends, when paid, are linked to the earnings of the tracked division. In liquidation, holders generally have no claim on the company’s assets, though some structures may grant a proportional claim on the residual assets of the overall firm.

Because the life cycle of a division may diverge from that of the parent, tracking stocks may later be recombined or spun off as part of corporate restructuring.

Problems may arise when management manipulates P&L statements to make the tracked division appear more profitable than it truly is. This distorts financial reporting and undermines the purpose of issuing a tracking stock in the first place. To limit such manipulation and ensure that tracking stock aligns with management-incentive objectives, specific contractual protections should be put in place. For publicly traded tracking stocks, safeguarding the integrity of P&L reporting is essential. Oversight by an independent board committee can help protect shareholder interests and reduce conflicts between different shareholder classes. Another risk inherent to publicly traded tracking stocks is increased volatility. Without the stabilising effect of diversified corporate segments, tracking stocks often exhibit sharper price swings.

Public tracking stocks have fallen out of favor, partly because corporate financing options have expanded and investors now prefer clean structural separations over hybrid equity classes. Empirical evidence suggests that tracking stocks have underdelivered on their promise, mainly due to structural complexity, conflicts of interest, and investor confusion. Preferred alternatives include spin-offs, carve-outs, or convertible debt.

Although the term suggests an equity security, phantom stock is fundamentally contractual in nature. Its value mirrors the actual earnings or valuation of the referenced stock, providing a benchmark for future cash payouts to its holders. This allows firms with various corporate structures to use phantom stock as an incentive mechanism without altering their capital structure.

Although phantom stock is not limited to any particular class of holders or transaction type, it is especially valuable in M&A scenarios. Granting phantom stock to management after an acquisition, carve-out, or spin-off gives them a form of “skin in the game,” even if it does not guarantee perfect alignment or influence. It can also be granted to key personnel before an acquisition, e.g., in family-owned businesses, where it may be paired with board representation. Phantom stock can likewise be issued to other employees as part of a retention strategy.

This purely contractual right to future cash settlement is often embedded in the Share Purchase Agreement (SPA) during an acquisition. There are no ownership rights in the underlying assets, unlike with Restricted Stock Units (RSUs), and no voting rights are granted. As a result, phantom shares do not dilute equity and do not give the holder any claim in a liquidation scenario. Unlike stock options, holders are not required to purchase shares at exercise. Dividend equivalents or stock-split adjustments may be paid depending on the arrangement. Phantom stock is economically similar to Stock Appreciation Rights (SARs), although it reflects the full value of the underlying stock, not only the appreciation from grant to vesting. In some jurisdictions, phantom stock may offer tax advantages over actual equity issuance, as payouts are treated as tax-deductible compensation expenses.

Valuation depends on the company’s fair market value at grant, at vesting, and at payout. This valuation may be determined through formal appraisals, recent financing rounds, or a valuation formula specified in the plan documents. The payout per phantom unit is ordinarily tied to increases in specified performance metrics. For private firms, repeated valuations can be costly or administratively burdensome; however, in an acquisition context, the target company is usually already valued, which simplifies the process.

Phantom stock is recognised as a liability on the company’s balance sheet, reducing available cash. Multiple large settlements may strain liquidity. As the company’s value increases, so does the liability, which can distort financial results if the plan is substantial. To match the value of regular stock, phantom awards may need to be granted at a higher nominal amount, as post-tax proceeds to the holder may be lower. ⁵

To ensure the holder remains aligned with the company’s growth over time, phantom stock typically includes a vesting schedule, based either on time, performance, or a combination of both. Vesting provisions may also include accelerated vesting upon a change of control, as well as forfeiture provisions triggered by specific conditions. The contract must be drafted carefully to make the non-equity nature of the instrument explicit, since ambiguity can expose the company to legal disputes. ⁶

Davidson T and Harper J, 'Off Track: The Disappearance of Tracking Stocks' (2014) 26 Journal of Applied Corporate Finance.

SEC, 'Tracking Stocks'.

Giddy I, 'Tracking Stock' https://pages.stern.nyu.edu/~igiddy/trackingstock.htm.

Kochian J L, Leblang S E, and Sison J, 'The Standard of Review for Dell’s IPO' (2018) https://corpgov.law.harvard.edu/2018/11/19/the-standard-of-review-for-dells-ipo/#:~:text=On%20October%203%2C%20Dell%20filed,C%20and%20the%20DVMT%2C%20so.

J.P.Morgan, 'How phantom equity can help your startup' (2025) https://www.jpmorgan.com/insights/business-planning/understanding-phantom-equity-and-stock-plans-for-startups#section-header%231.