Shares that carry ownership restrictions and confer different rights and privileges to different shareholders
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A share class or share classes are usually created from various types of shares in a company. The type of shares and share classes that a company can create is determined and guided by its articles of association, also referred to as articles of incorporation.
Shares classes that are created by a company carry ownership restrictions and confer different rights and privileges to diverse shareholders. The rights and privileges are with regards to voting and non-voting rights, non-receipt or receipt of dividends, dividend timing and quantum, the entitlement of profits, rights to capital, and other factors depending on the circumstances of the company.
Types of Shares
The types of shares in which share classes are created from are largely common shares and preferred shares. The diagram below outlines the share types:
Rationale for the Creation of Multiple Share Classes
Companies create different share classes for the following reasons:
To keep control of the company and retain strategic decision-making (usually by founder members)
To attract investment
To direct dividend income to certain shareholders and determine income distribution patterns
To retain voting rights to a powerful group of shareholders and restrict voting to another class
Public companies can issue different sorts of shares classes out of splitting ordinary shares. The classes differ from company to company and fund to fund. The most common classes are as follows:
Class A Shares
Public companies can issue Class A shares to new investors when they float their stock through an IPO. Class A shares typically come with one vote for each share. Holders of Class A shares are also entitled to a dividend and rights to a share of capital in the case of the company being wound up. Hence, they may enjoy fewer benefits than Class B when it comes to dividends, liquidation, and voting rights.
Class B Shares
Class B shares are created by corporate companies out of common and preferred shares. The shares characteristically offer more voting rights income entitlements and rights to capital. Holders of Class B shares can receive as much as 10 votes or more per share and are typically reserved for the founding members and early investors.
Class C Shares
Class C shares normally don’t provide voting rights. Examples of companies with Class C shares on their share register include Alphabet (GOOG), CommerceHub (CHUBK), and Under Armour (UA.C). Some Class C shares offer very few voting rights – such as Coca-Cola Company (1/20) and Match Group (1/100).
Class D Shares
Class D mutual fund shares are also termed no-load funds. They do not include front-end load charges, back-end load, or level load charges. They also come with the lowest expense ratio compared to other share classes. Class D shares are usually available through discount brokers, and fees are charged per transaction – payable to the broker.
Class I Shares
Class I shares are institutional shares that are made available to institutional investors and shareholders, and high net-worth investors. They can carry higher minimum investment amounts of $25,000 or more. Other investors can choose to pool their investments together through 401(k) plans and invest through mutual fund Class I shares.
How to Choose Between Share Classes
Investors need to speak to a financial advisor when choosing a class of shares to invest in. It is also crucial to find an investment advisor who is not affiliated with any specific fund or biased towards a certain fund. Investors should be able to explain and update their financial status, investment objectives, and investment horizon.
Class A and Class B shares are typically suitable for long-term investment and financially capable investors who can meet the high expense ratios. Class C shares are typically suitable for short-term investments, which is appropriate for investment beginners.
The low expense ratio for Class C shares is also appropriate for small and individual investors. Other considerations include discounts provided by a share class, whether it is a loaded or no-load fund, the expense ratio an investor can handle, and the affordability of the minimum investment amount.
Benefits of Different Share Classes
Raising capital for start-up companies by issuing non-voting stock ensures that there is no dilution of control by founding members and no participation in a profit-sharing plan by other shareholders.
Assigning high voting powers to a specific share class guarantees promoters and founder members retention of management control.
Corporations can also control the dividend due to each investor by issuing specific share classes.
Protection of the company in case of winding up where other share classes would receive a return on capital, while others will be limited or denied.
Ensuring specific shareholders receive dividends before other share classes are eligible.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
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