At the margin, a ban on dual-class stock would encourage more technology companies to remain private, or motivate listed technology companies to go private, eliminating common investors’ chance to buy even the inferior voting stock.
Full Answer
What is the difference between a dual class and dual class stock?
However, in dual-class, one has one vote, while the other class, usually held by the founder, has many, many votes and it's disproportionate to their economic interest. Early in the last century, this structure existed in this country, but was considered such a real problem that it was outlawed by the Stock Exchange in the 1920s.
Would a ban on dual-class shares be costless?
So, in our view, outright ban on dual-class shares would not be costless. For example, one principal reason for decline in the number of initial public offerings is the increasing reluctance of technology companies to list their stock, which is largely caused by rising shareholder activism.
Which companies have had dual-class stock?
Renown companies, such as Ford, Tyson, Cablevision, Hewlett Packard, Berkshire Hathaway, Viacom, and Hollinger International, have had dual-class stock, and with good reason. This is their way of not getting caught up in short-term financial focus that investors are accused of often having.
Can a company list dual-class voting shares?
The New York Stock Exchange allows U.S. companies to list dual-class voting shares. Once shares are listed, however, companies cannot reduce the voting rights of the existing shares or issue a new class of superior voting shares. (For more information, see The NYSE And Nasdaq: How They Work.) Many companies list dual-class shares.
What are the advantages and disadvantages of dual class shares?
The advantage of a dual-class share structure is that it protects entrepreneurial management from demands of ordinary shareholders. The disadvantage of a dual-class share structure is that it protects entrepreneurial management from demands of ordinary shareholders.
Why does it matter if there are different classes of stock?
A company's board might set different share classes for many reasons. One of the most common reasons is to keep voting control of the company in a few, well-defined hands by establishing different voting rights for different shareholders.
Why might a company issue more than one class of stock?
The biggest reason for issuing multiple classes of common stock is to allow for the assignment of greater voting rights (known as “super-voting” rights) for one class over another.
Why do NYSE and Nasdaq allow dual class share structure?
The rationale behind this, according to the committee, is that it would allow companies greater flexibility in capital management.
Do all classes of common stock must have voting rights?
Common stock represents an ownership interest in a corporation. Unless otherwise provided in the articles of incorporation, common stockholders have the following rights: Voting rights. This is a key difference: preferred shareholders usually do not have the right to vote.
Why do stocks have A and B?
When more than one class of stock is offered, companies traditionally designate them as Class A and Class B, with Class A carrying more voting rights than Class B shares. Class A shares may offer 10 voting rights per stock held, while class B shares offer only one.
What is dual-class stock?
Key Takeaways A company or stock with a dual-class structure has two or more classes of shares with different voting rights. Typically insiders are given access to a class of shares that provide greater control and voting rights, while the general public is offered a class of shares with little or no voting rights.
Why do some companies have two stocks?
There are some companies that trade with two different symbols on the same stock market because they offer two classes of shares, one with voting rights and another without voting rights.
What do you mean by dual-class stock?
A dual-class stock structure basically means that a company has given disproportionate voting rights to one group of shareholders, typically its founders. In most companies, one share of stock equals one vote.
What are the benefits of dual class shares?
Dual-class shares refer to the class of shares which have superior voting rights. These shares allow founders and the top executives to have control over the company even if they have fewer stakes in the company. They give more power with a smaller number of stocks.
Does Apple have dual class shares?
After the equal equity, the Apple company uses dual-class share structure. The manager owns one share representing several shares. This method is effective. It could help manager to concentrate their power and right so that they could make effective and developing decisions.
Does Google have dual class shares?
Key Takeaways. Alphabet, Google's parent company, has two listed share classes that use slightly different ticker symbols. GOOGL shares are its Class A shares, also known as common stock, which have the typical one-share-one-vote structure. GOOG shares are Class C shares that confer no voting rights.
What is dual class stock?
A dual class stock is when a company issues two share classes. A dual class stock structure can consist of Class A and Class B shares, for example. These shares can differ in terms of voting rights and dividend payments. When multiple share classes of stock are issued, typically one class is offered to the general public, ...
Why are dual class stock structures so controversial?
Their supporters argue that the structure enables founders to demonstrate strong leadership and the placing of long-term interests over near-term financial results. It also helps founders retain control over the company as potential takeovers can be avoided through their supermajority voting shares.
Which companies have dual class stock?
Well-known companies, such as Ford and Warren Buffett's Berkshire Hathaway, have dual class stock structures, which provide founders, executives , and families the ability to control majority voting power with a relatively small percentage of total equity . The dual-class structure at Ford, for instance, gives the Ford family control of 40% ...
Is Google a dual class company?
As mentioned earlier, Alphabet subsidiary Google is the most famous example of a company with a dual-class structure. When it listed in 2004, the search giant unveiled two classes of shares in its offering. Class A shares were reserved for regular investors and had one vote per share. Class B shares were reserved for founders and executives and had 10 times as many votes as those for other classes. 5
What is dual class stock?
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.
What is voting stock?
Voting Shares Voting shares are shares of a company that entitle the shareholder to vote on key issues of the company. It is generally one vote per share. The shares. . In most cases, a company offers one class of stock to the general public.
Why are higher tier shares considered higher tier?
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.
What is stock class?
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, ...
What is the largest stock exchange in the world?
New York Stock Exchange (NYSE) The New York Stock Exchange (NYSE) is the largest securities exchange in the world, hosting 82% of the S&P 500, as well as 70 of the biggest. outright banned dual-class stock structuring.
Why do companies have dual class?
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.
What is a class C share?
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.
What is dual class stock?
That's the truth behind dual-class shares. They allow shareholders of non-traded stock to control terms of the company in excess of the financial stake. While many investors would like to eliminate dual-class shares, there are several hundred companies in the United States with dual Class A shares and Class B shares, ...
Who controlled the class B shares of the company?
Former CEO Conrad Black controlled all of the company's class-B shares, which gave him 30% of the equity and 73% of the voting power. He ran the company as if he were the sole owner, exacting huge management fees, consulting payments and personal dividends.
Why are unequal voting shares created?
Designed to give specific shareholders voting control, unequal voting shares are primarily created to satisfy owners who don't want to give up control, but do want the public equity market to provide financing. In most cases, these super-voting shares are not publicly traded and company founders and their families are most commonly ...
Why are super voting rights reluctant to raise cash?
Shareholders with super-voting rights are reluctant to raise cash by selling additional shares — that could dilute these shareholders' influence . The study also shows that dual-class companies tend to be burdened with more debt than single-class companies.
Which company has Warren Buffett as a majority shareholder?
Berkshire Hathaway ( BRK.A, BRK.B ), which has Warren Buffett as a majority shareholder, offers a B share with 1/1,500th the interest of its A-class shares, but 1/10,000th of the voting power. 4. EchoStar ( SATS) demonstrates the extreme power that can be had through dual-class shares: founder and CEO Charlie Ergen controls nearly 91% ...
Is super class stock unfair?
They can be seen as downright unfair. They create an inferior class of shareholders and hand over power to a select few, who are then allowed to pass the financial risk onto others. With few constraints placed upon them, managers holding super-class stock can spin out of control.
Is super voting stock publicly traded?
In most cases, these super-voting shares are not publicly traded and company founders and their families are most commonly the controlling groups in dual-class companies.
Why do people keep dual class stock?
Typically, dual-class stock was set up so that a selling founder of a family company or whatnot could retain control of a company despite taking the company public and selling their stock to others. Retaining stock with super voting is a way to preserve control, even though your economic interest has declined.
What is dual class voting?
However, in dual-class, one has one vote, while the other class, usually held by the founder, has many, many votes and it's disproportionate to their economic interest. Early in the last century, this structure existed in this country, but was considered such a real problem that it was outlawed by the Stock Exchange in the 1920s.
Why do investors rely on Delaware courts?
That's why investors rely on Delaware courts to prevent self-dealing, by enforcing the duty of loyalty as well as ensuring careful behavior by directors through the duty of care.
What happens when management makes a bad decision?
In a dual class company, if the management makes a bad decision, the economic impact on the manager is limited because of their small economic stake. Thus the incentive to make good decisions (and conversely punished if they do not) is limited.
Why is Charles' proposal not satisfying?
Even with public dual-class companies, Charles’ proposal is ultimately not satisfying. Charles claims that boards are elected to protect stockholders. In fact, boards are elected to protect the corporation, not just stockholders.
Is dual class stock a perfect response?
Now, dual-class stock is not a perfect response. It's got problems. Charles identified some of them. However, the current system controlled by stockholder capitalism has led to a casino capitalism that has caused enormous problems in our country.
What is dual class stock?
A dual-class stock structure is an arrangement where a company has more than one class of stocks and every class has different dividend payments, voting rights or other features. It is a capital structure where founders hold shares of common stock with greater than 1x voting rights, while other common stock stockholders hold shares ...
How much voting power does one class of shares have?
In such a basic structure, one class of shares has 1x voting power while the other class has about 10x voting power - but otherwise, the two classes are identical. Of course, founders can always opt for slightly more advanced dual-class stock structures.
What are the downsides of dual class financing?
The downside of implementing a dual-class structure is low – at worst, you might need to unwind the arrangement and revert to a single class structure at the time of a financing if you have low leverage but need to get a deal done. In most cases, that’s about it, as far as any major disadvantages are concerned.
How many votes does each share of common stock have?
An instance of such rights is that each share of common stock is entitled to one vote on all matters, subject to stockholder approval. Founders have always been loath to give away the powers that they’ve earned with their blood, sweat, and tears once investors start taking interest in a startup.
How many votes did Zimmer and Green get?
Well, Zimmer and Green chose a dual-class stock structure to retain their powers, which granted them 20 votes for each vote held by other investors.
Is high vote shares good?
Primary among such presuppositions is the belief - common to many founders - that while high vote shares are all well and good in the case of super-successful companies like Google or Facebook, the same stock structure won’t be right for their startup. Especially since VCs won’t find it acceptable.
Is the dual class stock system unfair?
Shareholders who own shares of common stock often feel that the dual-class stock system is unfair. This is because even though they might be the ones who make up the major part of the capital, a group of special shareholders (owning Class B shares) still have the right to overrule the majority.
Dual-Class Stock Explained
Robin Hartill is a Certified Financial Planner (CFP) who writes about money management, investing, and retirement planning. She has written and edited personal finance content since 2016.
Definition and Examples of Dual-Class Stock
When a company issues dual-class stock, it issues at least two classes of shares, often referred to as “Class A” shares and “Class B” shares. One class is a “super-voting” class that’s issued to company founders, executives, and in some cases their family members. The other class is available to the general public and has limited voting rights.
How Dual-Class Stock Works
During the first half of 2021, 24% of companies that launched an IPO issued dual-class stock. Issuing multiple classes of shares appeals to founders who want to retain control over their companies. 2
Notable Happenings
The Council of Institutional Investors has pushed for legislation that would change dual-class structures. It would ban companies from listing in the U.S.
What percentage of Russell 3000 companies have dual class shares?
Approximately 7 percent of Russell 3000 companies currently have a dual class share structure in place. For the purposes of this analysis, we define companies with dual-class share structures as companies where the separate class of stock offers its holders superior voting rights compared to common shareholders, and the class with the superior voting rights represents more than 5 percent of the company’s total voting rights.
What are the environmental issues that companies with dual class share structures face?
Finally, companies with dual-class share structures are more likely to face environmental or social controversies, according to ISS ESG’s Norm-Based Research, which tracks company adherence to international norms on human rights, labor standards, environmental protection, and anti-corruption.
What are dual class companies?
Dual-class companies include some of the most successful and highly-valued companies in the world, such as corporate giants Facebook Inc., Alphabet Inc. (parent of Google), and Berkshire Hathaway Inc.
Do directors of dual class companies miss board meetings?
In addition, directors of dual-class companies are more likely to miss board meetings, which many investors consider a minimum measure of directors’ fulfillment of their fiduciary duty to shareholders.
Is dual class a major policy issue?
Some index providers have introduced rules to apply exclusions of dual-class companies from the construction of some indexes. No matter the response, it becomes clear that dual- class shares are now a major policy issue for the investment community with potentially broader implications for multiple stakeholders.
Do dual class shares have an edge?
Dual-class share structures do not necessarily offer an edge on performance, as the results appear inconclusive. Dual-class companies appear more profitable than their peers, but they fail to show significant improvement in performance compared to their counterparts.
Why are dual class stocks important?
Dual-class stocks can help keep startups within the founders’ home country.
What is dual class stock?
A dual-class stock structure means that a company has more than one class of stocks, and every class has different voting rights, dividend payments, or other features. Such a company issues one class of shares to the company founders and top executives and another class to the public in IPO. If the founder’s shares count for 10 votes each, but ...
What happens when a company goes public?
When a company goes public, the founders are asking shareholders to trust them. It is understandable if shareholders feel antsy about keeping control solely with the founders. However, if companies practice dual-class stocks, which are peppered with clauses that keep the company from becoming a dictatorship, they can strike a balance.
What was the Ford Motor Company's structure in the 50s?
However, during the 50s, the Stock Exchange allowed the Ford Motor Company to have a structure, where the Ford family could retain control in spite of limited economic interest. Other family businesses, like Estee Lauder, adopted this structure too. Soon, the practice permeated media companies, such as the Washington Post and the New York Times, ...
Which companies have dual class stock?
Renown companies, such as Ford, Tyson, Cablevision, Hewlett Packard, Berkshire Hathaway, Viacom, and Hollinger International, have had dual-class stock, and with good reason. This is their way of not getting caught up in short-term financial focus that investors are accused of often having. A founder often has a long-term vision for ...
When did special class stock start?
It started in the 1950s. The practice of owning special class stocks started in the 1950s US Stock Exchange, according to Directors & Boards . Prior to that, the 1920s saw the practice of one share, one vote. However, during the 50s, the Stock Exchange allowed the Ford Motor Company to have a structure, where the Ford family could retain control in ...
Can you change from a dual class system to a single class system?
Also, once set, it does not seem easy to change from a dual-class system to a single-class system, because the special class can always vote such a suggestion out. In fact, any changes in significant matters, such as executive compensation, mergers, or board structure, become harder to bring about in a dual-class system.
An Example of Dual-Class Stocks
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 s…
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 t...
More Resources
- 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 resources below will be useful: 1. Corporate Structure 2. Employee Stock Ownership Plan (ESOP) 3. Founders Stock 4. Market Capitalization
What Are Dual-Class Shares?
Who Lists them?
- Many companies list dual-class shares. The dual-class stock structure at Ford (F), for instance, allows the Ford family to control 40% of shareholder voting power with only about 4% of the total equity in the company.3 Berkshire Hathaway (BRK.A, BRK.B), which has Warren Buffett as a majority shareholder, offers a B share with 1/1,500th the interest of its A-class shares, but 1/10,0…
Good Or Bad?
- It's easy to dislike companies with dual-class share structures, but the idea behind it has its defenders. They say the practice insulates managers from Wall Street'sshort-term mindset. Founders often have a longer-term vision than investors focused on the most recent quarterly figures. Since stock that provides extra voting rights usually cannot b...
The Bottom Line
- Not every dual-class company is destined to perform poorly. Berkshire Hathaway, for one, has consistently delivered great fundamentals and shareholder value. Controlling shareholders usually have an interest in maintaining a good reputation with investors. Insofar as family members wield voting power, they have an emotional incentive to vote in a manner that enhances performance. …