A dual-class stock: what is it?
A company that issues two share classes is said to have dual class stock.
Class A and Class B shares, for instance, could be part of a dual class stock structure.
The dividend payments and voting rights of these shares may differ.
When a company creates multiple share classes of stock, one is typically made available to the general public and the other is kept exclusive for the founders, executives, and family members of the company.
While the class available to founders and executives has more voting power and frequently permits majority control of the company, the class available to the general public typically has little or no voting rights.
KEY POINTS
- A corporation or stock exhibiting a dual-class structure possesses two or more categories of shares with varying voting rights.
- Insiders are generally granted access to a class of shares that confers enhanced control and voting rights, whereas the general public is presented with a class of shares that possesses minimal or no voting rights.
- Proponents argue that these structures enable the founders and current management of the company to adopt a long-term perspective, rather than being subjected to the demands of short-term investors seeking immediate profits.
- Dual-class structures are contentious as they exclude public shareholders from governance and create an unequal distribution of risk.
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Getting to Know a Dual-Class Stock
Voting rights are meant to be available to specific stockholders through dual class stock.
To appease owners who desire funding from the public equity market but do not wish to give up control, classes of stock with unequal voting shares may be created.
These so-called super-voting shares are typically not listed on a public exchange, and founders and their families frequently hold control over dual-class companies.
While many share classes lack a standard nomenclature, Class A shares are typically preferred over Class B shares.
In contrast, this is not true in other situations. For this reason, an investor should research the particulars of each share class if they are considering making a purchase in a company having multiple share classes.
Renowned companies like Ford and Berkshire Hathaway, owned by Warren Buffett, have dual class stock structures that give founders, executives, and families a tiny percentage of total ownership but majority voting power.
For instance, Ford’s dual-class structure gives the Ford family 40% of the voting power even though they only own a small portion of the business.
Charlie Ergen, the CEO of Echostar Communications, is an extreme example; his strong Class A shares gave him nearly 91.8% of the vote.
Important: Dual-class structures allow companies to access public capital without sacrificing control.
Particular Points to Remember
Although dual-class structures are relatively new, they have been around for a while in various forms.
In response to public outcry over the 1926 public offering of automobile manufacturer Dodge Brothers, which included shares for the general public with no voting rights, the New York Stock Exchange (NYSE) eliminated dual-class arrangements in 1940.
But in the 1980s, the exchange brought the practice back because other exchanges were posing a threat.
“Perpetual Dual-Class Stock: The Case Against Corporate Royalty,” United States Securities and Exchange Commission. 24 November 2021, accessed.
Firms cannot reverse any voting rights allocated to the new class once the shares are listed, nor can they create new classes of shares with greater voting rights.
7%
An approximate percentage of US corporations in the Russell 3000 Index have a dual- or multiple-class structure, according to research from Harvard Law School.
Corporate Governance Forum at Harvard Law School: “Dual-Class Shares: Governance Risks and Company Performance.” 24 November 2021, accessed.
A growing number of corporations have chosen to list with a dual-class structure in recent years.
This is particularly true for tech companies, a large number of which employ this strategy to keep control over their business processes.
The most well-known illustration of this tendency is Google, a division of Alphabet Inc. (see below).
Google, a division of Alphabet Inc., is the most well-known example of this tendency.
When Google, an internet behemoth with a market value among the top 30 corporations in the world, awarded founders with ten times the number of votes as regular Class A shares offered to the public, during its initial public offering (IPO), many investors were left feeling let down.
Businesses with dual-class structures are no longer included in a number of stock indexes. The FTSE Russell and the S&P 500 are two instances of these indexes.
Divided Class Stock Debate
Stock structures with two classes are controversial.
Their supporters assert that the structure enables the founders to demonstrate effective leadership and give long-term objectives precedence over immediate financial gain.
By preventing takeovers in the future with their supermajority voting shares, it also aids the founders in keeping control of the company.
The structure, according to critics, allows a small group of favored owners to maintain control while other shareholders—who have fewer voting rights—provide the majority of the funding. In actuality, risk is not shared equally.
Funds from public markets with low economic risk could be obtained by the founder.
A large amount of the strategy’s risk is borne by the investors.
Strong stock classes for insiders may actually impede long-term outperformance, according to academic research.
A moderate strategy has been put forth by a different set of investors.
According to them, putting a time limit on these kinds of organizations and allowing shareholders to gradually gain voting rights can help lessen the negative effects of having a dual-class structure.
Dual Class Structure Examples
subsidiary of Alphabet The most well-known company with a dual-class structure is Google.
The massive search engine company offered two classes of shares when it went public in 2004.
Ordinary investors were allotted Class A shares, which each had one vote.
Founders and executives were granted Class B shares, which conferred ten times the number of votes compared to “ordinary” A shares.
Even though the internet giant’s first public offering (IPO) was regarded as one of the top 30 companies in the world by market valuation, many investors were not impressed.
The company later established a third class of shares.
There is no voting rights attached to these Class C shares.
Other companies that use dual-class systems are Alibaba, Zynga, Groupon, and Meta (formerly Facebook).
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