Dual Class Stock

SEC Release IA-1092

What is a double class stock?

A double class share is the issue of different types of shares by a single company. A two-class share structure can be made up of class A and class B shares, for example. Shares may differ based on voting rights and separate dividend payments.

When several share classes are generally issued: one share class is offered to the general public, while the other is offered to founders of companies, managers and families. The class offered to the general public has limited or no voting rights, while the class available to founders and leaders has more voting power and often provides for majority control of the company.

Understanding double class stock

Well-known companies, such as Ford’s Berkshire Hathaway and Warren Buffett, have dual-class share structures, which offer founders, leaders and families the ability to control majority voting with a relatively small percentage of equity totals. Ford’s two-class structure, for example, gives the Ford family control of 40% of the voting rights, while holding only about 4% of the company’s total capital. An extreme example is that of the CEO of Echostar Communications, Charlie Ergen, who holds 5% of the company’s shares, while controlling 90% of the votes with his powerful class A shares.

Although they have become popular in recent times, dual-class structures have existed for some time in various forms. The New York Stock Exchange (NYSE) banned two-class structures in 1926 after an outcry against the public offering of the auto company Dodge Brothers, which consisted of non-voting shares for the public. But the exchange re-established the practice in the 1980s following competition from other exchanges. Once the shares have been listed, companies cannot cancel the voting rights allocated to the new class or issue share classes with higher voting rights.

In recent times, the number of companies opting for a two-class structure when listing has increased. In particular, technology startups listed on the public markets use this strategy to keep control over their outfits. Alphabet Inc.’s predecessor, Google, is the most famous example of this trend. Many were frustrated by the IPO of Google when the now Internet giant, with a market capitalization among the top thirty in the world, issued second class B shares to the founders with 10 times more votes than ordinary shares Class A, sold to the public.

Several stock market indices have stopped including companies with two-class structures in their indices. The S&P 500 and FTSE Russell are examples of this trend. Stock markets in Asia have moved to take advantage of this and have relaxed their rules for listing companies. The Hong Kong Stock Exchange, which has now started to authorize two-class structured stocks, and the Singapore Stock Exchange are examples of Asian stock exchanges competing with their Western counterparts for companies with such stock structures.

Key points to remember

  • Two-class structures refer to companies or shares with two or more share classes with different voting rights for each class.
  • Tech companies particularly like this structure because it allows tech startups to access public capital without sacrificing control.
  • The two-class structures are controversial because they do not allow public shareholders to express themselves in the management of the company and to spread the risks unevenly.

Controversy over the structure of double-class stocks

Double-class inventory structures are controversial. Their supporters argue that the structure allows the founders to show strong leadership and place long-term interests on short-term financial results. It also helps the founders to keep control of the business, as potential buyouts can be avoided through their majority voting shares. ) provide the majority of the capital. Indeed, there is an uneven distribution of risks. The founder is able to access public market capital at minimal economic risk. The shareholders bear a significant part of the risk linked to the strategy. University research has shown that powerful insider share classes can actually hinder long-term outperformance. A third category of investors proposed a middle path. According to them, the effects of a two-class structure can be limited by imposing a time-limited restriction on these structures and by allowing shareholders to accumulate voting rights over time.

Examples of double class structures

As mentioned earlier, Google, a subsidiary of Alphabet, is the most famous example of a dual-structure business. When it went public in 2004, the research giant unveiled three share classes in its offer. Class A shares were reserved for regular investors and had one vote per share. Class B shares were reserved for founders and managers and had 10 times more votes than those of other classes. Finally, class C shares were intended for employees and class A shares and had no voting rights. Facebook, Zynga, Groupon and Alibaba are other examples of companies with double class structures.

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