Dual Class Shares: Everything You Need to Know
Dual class shares are when a company offers more than one type of stock, and the different classes of stock provide shareholders with different terms.3 min read
2. Dual Class Controversy
Dual class shares are when a company offers more than one type of stock, and the different classes of stock provide shareholders with different dividend payments, voting rights, and other terms. In other words, a dual class stock is the issuing of multiple types of stock by a single corporation.
Understanding Dual Class Shares
When dual class stocks are issued, one share is offered to the general public on the New York Stock Exchange (NYSE). The other class is offered to the company's founders, family members, and executives. The stocks in this scenario are often referred to as Class A and Class B shares.
The class of stock offered to the public comes with limited voting rights, while the stocks offered to the founders, executives, and family members come with voting power. It's the latter type of stock which provides an individual with majority control of a company.
For example, a company will issue Class A stocks to the company's key players, including any founding family members. Class B is offered to the public on the NYSE. Class A stock might carry 10 votes per share, but Class B only comes with one vote per share. As such, Class A shareholders enjoy 10 times more voting power than public shareholders. The reason for this disparity is to allow the founders and executives to retain a majority control of the company.
Many well-known companies have dual class shares to provide founders, executives, and family with majority control in the corporation. For example, Ford Motor Company allows the founding family to maintain control of the company with only 4 percent of the company's shares, but those shares give them 40 percent of Ford's voting power.
U.S. companies can list dual class voting shares on the NYSE. Once the shares are listed, however, the company cannot reverse any voting rights attributed to the newly formed stock class.
Dual Class Controversy
Dual class shares are controversial. Those who support dual class stocks feel that strong leadership is needed in a corporation, and that long-term interests are best over any short-term financial results. It's true that company founders have a long-term vision for the company they created than the investors who are more concerned with quarterly figures. Because of this, proponents of dual class stock argue that the practice protects companies from Wall Street's notoriously short-term mindset.
On the flip side, opponents of dual class stock feel that the practice allows a small group of privileged individuals to maintain control of a company. Other shareholders with less voting power simply provide the majority of the capital without getting any power in return. Essentially, dual class stocks create an inferior shareholder class while providing all the power to a select few. The ones with the most voting power can just pass all the financial risk onto the inferior class of shareholders.
What's more, families controlling stocks with voting majorities can take over company operations and make important decisions without having the experience or ability to do so. Even if they make poor decisions, these shareholders face few consequences.
Another detail worth noting is that shareholders who hold majority voting rights aren't as keen to raise cash by selling extra shares because more stock can dilute their influence. As such, dual class stock companies may be burdened with more debt than corporations offering single class stock.
Other drawbacks to running a dual class stock company include:
- The fact that dual class stocks don't perform as well on the stock market
- Efforts to change a dual class stock company to a single class stock company are difficult
- Efforts to change a board structure, mergers, executive compensation, or other important matters are more difficult
Despite the differences in voting rights, both classes of stock typically enjoy the rights to receive dividends. When you purchase public stock from a dual class stock company, the lack of voting power is fully disclosed, and the shares are offered at a lower stock price. Public shares are considered cheap in the dual class system because majority voting shares are traded at premium rates. New investors with less money to purchase stocks will find dual class shares to be an affordable option.
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