Non-Voting Common Stock: Everything You Need to Know
Non-voting common stock is a public corporation stock whose owner does not have voting rights at the annual general meeting of the company.3 min read
2. What Are Non-Voting Shares?
3. How Are Non-Voting Shares Offered?
4. What Is the Difference Between Holders of Voting Shares and Non-Voting Shares?
5. What Are Dual Class Structures?
6. Disadvantage of Dual-Class Structures
7. What Is the Agency Problem Created Between Managers and Shareholders?
8. What Is the Price Differential Between Voting and Non-Voting Stock?
9. What Are Samples of Federal Tax Court Cases?
10. What Court Reversed the Tax Court Decision?
11. What Are the Adjustments Required in Estimating the Value of Non-Voting Stock?
12. What Is the Key Factor That Contributes to the Value of Control?
13. What Are the Other Factors Warranting Large Discounts for Lack of Control?
What Are the Rights of the Non-Voting Stocks That Could Compensate for the Lack of Ability to Vote?
Typically, the non-voting stock has other rights that compensate for its lack of voting powers. For example, the majority of preferred stocks that have a guaranteed dividend are non-voting, while most voting stocks depend on the performance of the company to receive dividends.
What Are Non-Voting Shares?
Non-voting shares refer to ordinary shares of a publicly traded corporation that lack voting rights at the annual general meeting of the company.
How Are Non-Voting Shares Offered?
Non-voting shares are offered when the directors or founders of a company want to raise new share capital without losing their control of the company. They do this by offering large numbers of non-voting shares, which the public can buy to own a stake in the company. They retain ownership of the original shares, which gives them voting rights.
What Is the Difference Between Holders of Voting Shares and Non-Voting Shares?
During company takeovers or when disputes arise over the policy direction of the company, holders of voting shares have a stronger influence.
What Are Dual Class Structures?
In publicly traded corporations, dual-class voting structures provide a conducive atmosphere for the founders and board of directors to focus on the long-term and strategic objectives of the company. They don't need to worry about threats of hostile takeovers or the pressure of shareholders who are concerned with short-term gains.
Disadvantage of Dual-Class Structures
Dual-class structures discourage some people from investing in such companies, and this reduces the number of investors.
What Is the Agency Problem Created Between Managers and Shareholders?
Agency problems can occur due to the tendency of insiders to spend company resources for private benefits through excessive compensation, unnecessary expansions, or subsidizing underperforming projects or divisions at the detriment of non-voting shareholders.
What Is the Price Differential Between Voting and Non-Voting Stock?
Several studies have found that the price differential between voting and non-voting stocks is extremely minimal, with most reporting a price differential of only 3-5 percent. This creates a highly lopsided advantage for holders of voting shares.
What Are Samples of Federal Tax Court Cases?
The Simplot case is one of the best examples of the disparity between the price of voting and non-voting stock. In the case, Class A voting shares, which are the minority stake in the company, were given control of the company by the tax court.
This resulted in the allocation of 3 percent of the total value of the company to the minority interest that constituted Class A voting shares, ultimately giving them a 6,000 percent value compared to the Class B non-voting shares. However, the non-voting shareholders appealed the outrageous verdict.
What Court Reversed the Tax Court Decision?
In its ruling over the appeal, the Ninth Circuit Court of Appeals overturned the verdict of the tax court in favor of the non-voting shares. The appellate court concluded that the value of a minority interest in voting shares was not greater than that of a non-voting share in the case under review.
What Are the Adjustments Required in Estimating the Value of Non-Voting Stock?
Multiple adjustments are required when estimating the value of non-voting stock in a company. These adjustments include:
- Discount for lack of control
- Discount for lack of marketability
- Discount for lack of voting rights
What Is the Key Factor That Contributes to the Value of Control?
The most important determinant factor for the value of control is the ability of the controlling shareholder to change the status quo to boost the company's cash flows.
What Are the Other Factors Warranting Large Discounts for Lack of Control?
Some of the factors that can result in large discounts due to lack of control include:
- Excessive compensation and prerequisites for the company management team
- An inefficient capital structure
- Lack of control over the timing of an acquisition, sale, or divestiture
- Lack of control over the timing of dividends or distributions
- Lack of control over irrational activities.
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