Dual-class stocks refer to a stock offering structure within a company. A dual-class structure means that a company offers two types (or classes) of stocks.
The purpose of offering class A and class B stocks, for example, is to differentiate between stocks with different dividend payouts and decidedly different voting rights. In most cases, a company offers one class of stock to the general public. The stock class typically provides more limited voting rights attached compared to the other class of stock.
The additional class of stock is typically reserved for executives within the company, company founders, and family members. If a company issues more than two classes of stocks, one may be offered to executives, and another will be given to founders and family.
The additional stock classes are largely regarded as higher-tier shares because they include more voting power. The shares in the higher-tier class are designed to assist company founders (and their family members) and original investors or employees in easily maintaining their majority control of the company.
A dual-class stock structure involves one company offering at least two classes of stock – one class with limited voting power is offered to the public, while company executives and founders receive a class with significantly more voting power.
Today, many tech companies favor dual-class stock structures, although some exchanges will not list companies utilizing them.
The controversy surrounding dual-class structures is largely related to the fact that while a small pool of individuals possesses the majority of company control through voting rights, it is the general shareholder population that provides most of the capital and, therefore, is exposed to the most risk.
An Example of Dual-Class Stocks
One of the most well-known examples of a dual/multiple class stock structure is that of Google (a subsidiary of Alphabet Inc.). When the massive search engine launched its initial public offering (IPO) in 2004, it claimed a market capitalization ranking in the top 30 around the world.
Because of the fact, the company revealed a stock structure with three classes of shares:
Class A shares were offered to regular investors; the share class offered one vote per share, as is typically the case with common stock.
Class B shares were specifically reserved for executives within Google and the company’s founding members; the share class, specifically, rubbed some people the wrong way because it offered ten votes per share to shareholders.
Class C shares were offered to regular Google employees; the share class provided no voting rights – a rather sharp contrast to the shares granted to key executives.
Another well-known example of dual-class shares is Berkshire Hathaway. Many investors are quite thankful for Warren Buffet’s decision to go with a multiple share class structure because that’s the only way they could ever have invested in Berkshire Hathaway.
Class B stock in Buffet’s conglomerate company is only about $200 a share; however, Berkshire Hathaway Class A goes for around $299,000 a share, which is well out of the price range of most stock investors.
Dual-Class Stocks Throughout History
Dual-class stock structures continue to gain a lot of popularity, specifically in the technology sector. They aren’t a new concept, however. They existed without significant incident until the Dodge Brothers’ automotive company made its IPO and offered only non-voting rights shares to the public.
In response, the New York Stock Exchange (NYSE) outright banned dual-class stock structuring. The exchange was forced to backtrack and reinstate companies with dual-class structures after facing serious competition from other exchanges in the 1980s.
Certain Asian exchanges, for example, allow dual-class structured companies to be listed, while others do not. However, the trend toward increased competition among stock exchanges worldwide means that more and more exchanges are open to dual-class companies.
In contrast, however, stock index companies – such as Standard & Poor’s – are less inclined to accept dual stock structures and, therefore, do not include companies with a dual-class structure in their stock indices.
The Controversy Surrounding Dual-Class Stocks
There is a sizeable amount of controversy when it comes to dual-class stock structures.
Supporters suggest that a dual-class structure simply enables a company’s founders and executives to set the tone and pace for the company. Due to their position relative to the company, they are likely to use extra voting power to support decisions that favor the company’s long-term survivability and profitability.
Additionally, allowing founders to own a class of shares with more voting rights enables them to retain greater control over the company in order to thwart any potential unwanted takeover attempts by using their majority voting shares.
Critics of the dual-class structure argue that a small group of shareholders with super privileged voting rights affords them all the control, while the mass majority of shareholders are still providing the bulk of the capital. Risk distribution is, therefore, unevenly balanced in favor of executives and founders.
More and more, support grows for a sort of middle ground where a dual-class structure can exist but be kept somewhat in check. It can be accomplished in a number of ways, including limiting the amount of time such a structure exists or by letting regular shareholders accumulate additional voting interests.
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