Dual Class Stock Structure: Everything You Need to Know
A dual class stock structure is one chosen by a corporation that wants to offer dual classes of stock to investors, executives, family members, and owners.3 min read
2. How Does it Work?
3. Dual Class Controversy
A dual class stock structure is one chosen by a corporation that wants to offer dual classes of stock to investors, executives, family members, and owners. Generally, a company will choose to offer dual-class stock if there is more than one type of stock with various classes within each type. Such dual classes will offer different rights in terms of stock ownership.
These varying rights include the amount of dividends paid out to the shareholders, voting rights, and other share characteristics. When offering dual classes of shares, the shares offering greater benefits are not traded on a public exchange. Instead, the shares are first given to the owners, executives, and family members. Thereafter, the second class of shares is offered to the public on the exchange.
Dual Stock: An Overview
Most companies offering dual stock will call them Class A and Class B shares. Class A shares will offer much more than the Class B shares. An example of this could be Class A shares offering multiple votes per share, as opposed to Class B shares offering only one voting right per share.
When the company begins issuing the shares, the owners will be given Class A shares. Thereafter, the owners will issue the Class B shares to other internal professionals, including the employees, advisors, and other consultants working for the company. After that, the company will then issue the shares to the public. Most often, the company will issue only Class B shares, allowing only the owners of the company to have Class A shares.
This allows the owners greater rights, as they hold the additional power of Class A shares. However, most investors prefer not to invest in a company with dual class stock, as this reduces their rights.
How Does it Work?
Companies can have many shares of stock, and not just two classes. Usually, however, the company will offer only two classes, to prevent the complexities that come with identifying the rights given to a shareholder holding a certain class of stock. While the Class A shares provide greater rights, some investors might be given access to Class A shares, particularly if they have a relationship with the owners of the corporation. If so, then they will have access to Class A shares in the same way as the owners.
When dual classes of stock are offered, the company’s owners always do this intentionally, as they want to retain control over the company instead of giving others additional voting rights.
Some of the largest companies have dual classes of stock, including:
- Berkshire Hathaway
- Echostar Communications
At Ford, the Ford family themselves control over 40 percent of the voting power through Class A shares. The remaining Class A shares are held by the Ford founders, company executives, and other more distant family members.
At Berkshire Hathaway, Warren Buffet is the majority shareholder; however, the company offers Class A shares to few others. Such Class A shares offer 1/30th of an interest, whereas Class B shares offer a 1/200th voting right. This allows very little rights when owning Class A or Class B shares in the company.
At Echostar Communications, the CEO holds only 5 percent of the corporation’s stock but controls approximately 90 percent of the voting rights. Similarly, at Google, the executives own all Class A shares whereas the remaining Class B shares are given to all other shareholders. Google’s Class A shares allow 10 votes per share, whereas Class B shares allow only 1 vote per share.
Dual Class Controversy
There is usually great controversy when it comes to offering dual classes of stock. While the supporters of dual class stock want to promote strong leadership, allowing the owners and executives to retain control, the investors don’t want to have minimal voting power compared to the owners and executives. Many investors will not invest in such companies, as they want greater power knowing that they have more significant voting rights to steer the company in a certain direction. Since this area is controversial, there are several studies that include issues on both sides in an attempt to better understand the benefits and drawbacks of offering dual classes of stock.
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