What are dual class shares?
A company is said to be offering dual-class shares if its share/stock structure consists of two types of shares. For example, Class A and Class B shares can be part of a dual-class stock structure. Typically, dividend payments and voting rights for these two types of shares are different.
In companies offering more than one class of shares, generally, the public gets one class of shares, and the company’s founders and their families, and top executives, get the other. Most of the time, the class of shares given to the general public carries lower or no voting rights. In contrast, the class of shares given to the company's founders and their families, and top executives have more voting rights and often gives them majority control of the company.
Goal of dual-class shares
One of the major goals of companies offering dual-class shares is to give certain shareholders more voting power than others. This helps satisfy the needs of the promoters to retain most of the voting powers while being able to collect funds from the public/retail investors.
The founders and their families usually control companies with dual-class shares. The so-called "super-voting shares" are rarely traded publicly. There is no standard name for the various types of shares, but Class A shares are generally better than Class B shares. In some situations, however, the opposite is true. That's why people who want to invest in a company with more than one class of shares should look into the details of each class of shares.
Some major companies have dual-class stock structures, which allows the founders and their families, and executives to control the majority of the voting power, despite holding a relatively small portion of the total equity capital.
Example of dual-class shares
Google, a subsidiary of Alphabet Inc., is one of the best-known companies with a dual or multiple-class stock structure. When the vast search engine company floated its initial public offering (IPO) in 2004.
The company's stock structure showed three kinds of shares:
• Class A shares: This could be bought by regular investors, and it came with one vote per share. This is usually the case with common stock.
• Class B shares: These were available to only Google executives and those who founded the company. Some people didn't like this share class because it gave these shareholders 10 votes per share.
• Class C shares: These types of shares were given to regular Google employees but didn't have any voting rights. This was a big difference from the shares given to key executives.
Advantages of dual-class shares
• The primary benefit of dual-class shares is that the original shareholders get to keep running the show.
• The company can still have access to public financing without worrying about giving its investors too much voting power.
• The founders can focus on long-term growth. It keeps investors who only want to make money from taking over the company.
Disadvantages of dual-class shares
• The company’s structure is weakened when the founders and top executives have extra voting rights.
• It's challenging to turn the company's structure into a single-class structure.
• A study by the National Bureau of Economic Research (NBER) showed that companies with dual-class share structure have more debt than companies with single-class share structures.
• Shareholders can make bad choices with little to show for it.
History of dual-class shares
Dual-class share structures are becoming increasingly common, especially in the tech industry. But this is not a new idea. It was fine until the Dodge Brothers' automobile company went public and offered only shares with no voting rights to the public.
In response, the New York Stock Exchange (NYSE) made structuring stocks in two classes illegal. In the 1980s, when competition from other exchanges got tough, the exchange had to go back on its decision and let companies with dual-class share structures back on.
Companies with a dual-class share structure can be listed on some of the Asian exchanges, but not all. But since stock exchanges worldwide are increasingly competing, more exchanges are opening to companies with dual-class share structures.
Now you know the definition of dual-class shares/stocks. As can be seen, the founders and other insiders of companies with such a structure can exercise complete control over the company despite owning only a minority stake, thanks to higher voting rights. Almost every founder wants to focus on the company's long-term goals and wouldn’t want retail investors to control the decision-making at the company. Because of this, founders of well-known companies take recourse to the dual class share structure.
Q. What's a dual-class share?
A company offers two kinds of shares in a dual-class share/stock structure: Class A and Class B. As a rule, Class A shareholders get more voting power than Class B shareholders.
Q. Are dual-class shares a good idea?
Since the founders get more voting rights through the dual-class share structure with a tiny shareholding, they can still make all of the important decisions for the company. They can set goals for the long run. This protects the interests of investors who want only to make money from the company.
Q. Is it wrong or unethical for a company to have different classes of shares with varying voting rights?
No, it’s not unfair, since the company informs the public and the investors about the dual-class structure at the time of offering the stock. It’s then up to the investors whether they want to put in their money or not.
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