Key Takeaways

  • Class B non voting common stock offers equity ownership without granting voting rights, often used to raise capital while maintaining control with insiders.
  • This stock class can still offer financial benefits like dividends, liquidation preferences, or priority returns.
  • Dual-class stock structures, including Class A and Class B shares, are common in startups and family-owned businesses to preserve long-term vision.
  • Regulatory scrutiny and investor wariness are increasing around non-voting shares due to potential corporate governance issues.
  • Price differentials between voting and non-voting stock are typically modest, but vary based on market perception and control rights.

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.

Class B Non Voting Common Stock Explained

Class B non voting common stock refers to a class of equity that provides ownership in a company but lacks or has severely limited voting rights. This structure is often employed by companies looking to raise capital while retaining decision-making control among founders or executive leadership.

While Class A shares typically carry full voting privileges, Class B shares may carry limited or no voting rights. For example, some companies grant one vote per Class A share and no votes per Class B share. In some arrangements, Class B shareholders may be allowed to vote only on certain issues, such as mergers or amendments to the corporate charter.

Class B non voting stock is common in companies that aim to protect their long-term strategic goals from the volatility of short-term shareholder pressures. It is especially favored in founder-led firms, startups, and family businesses seeking to remain independent of activist investor influence.

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.

Common Uses for Class B Non Voting Shares

Companies may issue Class B non voting common stock for several strategic reasons:

  • Preserve control: Founders and key executives can maintain voting power while still raising capital.
  • Simplify decision-making: Limits external influence on corporate governance decisions.
  • Reward employees or family members: Equity can be distributed without affecting voting dynamics.
  • Public investment: Permits broader public ownership while avoiding dilution of control.

This approach has gained traction in high-profile tech companies like Google (Alphabet) and Facebook (Meta), which use dual-class share structures to allow innovation-focused leadership without external pressure from shareholders.

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.

Dual-Class Examples: When and Why They’re Used

Dual-class structures commonly involve Class A shares with voting rights and Class B shares with limited or no voting rights. High-profile examples include:

  • Alphabet Inc.: Class A (GOOGL) shares come with one vote per share, Class B with 10 votes per share (held by founders), and Class C (GOOG) with no voting rights.
  • Meta (formerly Facebook): Class A shares carry one vote, and Class B shares, held by Mark Zuckerberg and insiders, carry 10 votes each.
  • Ford Motor Company: The Ford family retains control through Class B stock despite public trading of Class A shares.

These structures allow founders to execute long-term strategies without the interference of quarterly performance pressures or shareholder activism.

Disadvantage of Dual-Class Structures

Dual-class structures discourage some people from investing in such companies, and this reduces the number of investors.

Regulatory Scrutiny and Investor Concerns

The rise of dual-class and non-voting structures has triggered concern among regulators and institutional investors. Key issues include:

  • Reduced accountability: Without voting rights, Class B shareholders have limited ability to influence corporate governance or hold management accountable.
  • Corporate governance risks: Concentrated control can lead to decisions that do not reflect the interests of all shareholders.
  • Stock exchange resistance: Some indices, such as the S&P 500, have excluded companies with non-voting shares from inclusion due to governance concerns.

As a result, investors are increasingly cautious about companies that issue non-voting shares, particularly when transparency and checks on management are lacking.

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.

Market Perception and Liquidity Impact

The price differential between voting and non-voting stock is typically modest, but other factors also influence the valuation of Class B non voting common stock:

  • Market perception of control: If voting rights are seen as crucial in influencing the company’s future, investors may pay a premium for voting shares.
  • Liquidity: Class B shares can sometimes have higher trading volumes, improving liquidity and potentially supporting higher valuations despite lacking voting rights.
  • Company performance: Strong fundamentals and dividend policies can make Class B shares attractive regardless of voting limitations.

Investors must assess their goals—those prioritizing influence may lean toward Class A shares, while income-focused investors may find Class B shares adequate.

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:

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.

Frequently Asked Questions

  1. What is Class B non voting common stock?
    Class B non voting common stock provides equity ownership in a company but typically comes with no or limited voting rights.
  2. Why do companies issue Class B non voting shares?
    They are issued to raise capital while preserving voting control for founders or key executives.
  3. Are Class B shares less valuable than Class A?
    Not always—while they usually lack voting rights, they can still offer dividends and capital appreciation, and the price gap is often small.
  4. Can Class B shares be converted to voting shares?
    Some companies allow conversion under certain conditions, but this depends on the corporate bylaws and stock terms.
  5. Is Class B non voting stock a good investment?
    It can be, especially for investors more focused on long-term capital gains than on influencing corporate governance.

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