What are Dual Class Stocks?

Key Highlights

• A company offering at least two classes of shares is known as a dual-class stock. Dual-class stock structures are popular among IT firms.
• Company leaders and founders receive a class of stock with substantially higher voting power. However, the general public gets a type of stock with limited voting power.
• Some markets do not list firms that use dual-class stocks.
• Dual-class structures are a bit controversial because a small group of people hold most of the company's voting rights.

What is a Dual-Class Stock?

When a company issues two classes of shares, it is known as a dual-class stock. For instance, Class A and Class B shares can be part of a dual-class stock structure. The dividend distribution schedule and voting rights of these shares may vary. The founders, executives, and their families often receive one class of shares, while the general public gets the other class.

The classes having voting rights are provided to founders and executives. On the other hand, classes offered to the general public have few or no voting rights. The purpose of these shares is to allow the founders, previous investors, and employees to keep a majority stake in the business.

Owners might benefit from stock classes with unequal voting rights. They can raise funds through public equity markets without losing control. These shares are often not listed on a public exchange. Moreover, there isn't a standard term for different shared classes. Class A shares are usually considered superior to Class B shares. On the other hand, this might not always be the case. Because of this, before investing, investors should research the specifics of a company's stock class.

Examples of Dual-Class Stocks

Let’s take a glance at some examples of dual-class stocks.

• Ford

Ford has two classes of shares: Class A and Class B. Despite owning only 5.0% of the company's total equity, the family holds 40% of the voting power through their ownership of class B shares.

• Facebook

Facebook has a dual-class structure for common shares. Class B shares have ten votes each, and Mark Zuckerberg and his close executives own them. With 75% of the class B shares, Zuckerberg has 58% of the voting power in Facebook.

History of Dual-Class Stocks

Dual-class stock structures are becoming more and more common, especially in the technology industry. But they're not exactly a new idea. They operated without any notable incidents up to the car business Dodge Brothers' first public offering (IPO). It only offered shares with non-voting powers. So, the dual-class stock structure was banned.

However, in the 1980s, the exchanges faced intense competition from other exchanges. This forced them to revert their decision and allow firms with dual-class structures. Earlier, only some Asian markets allowed Dual-class structured companies to list themselves. However, the competition among global stock exchanges is continuously increasing. So, the other exchanges are slowly allowing dual-class businesses.

On the other hand, stock index firms like Standard & Poor's, don’t usually accept multiple stock structures. As a result, they do not include businesses with a dual-class structure.

Advantages of Dual-class Stocks

Dual-class stocks offer the following benefits.

1. The company's founders and senior management may be able to make important policy choices with the additional voting power.

2. Company owners remain free from criticism or interference from other shareholders. This may enable the business to be profitable in the long run.

3. Dual shares offer preferential voting rights (PVRs). So, entrepreneurs may retain ownership of their businesses without concern for a hostile takeover.

4. Startups can benefit from dual-class stocks because they enable the owners to raise capital without giving up control.

Disadvantages of Dual-class Shares

The following are some drawbacks of dual-class shares.

1. Many people dislike the dual-class stock structure with PVRs because it gives selected people with more voting rights.

2. Most shareholders have fewer voting rights, even though they provide the majority of the capital. This leads to an unequal distribution of risk, which benefits the founders and senior executives.

3. It may lead to the misuse of authority by founders and senior executives.

4. Public shareholders cannot monitor the company's board and management because of their restricted power.

Conclusion

Dual-class stocks always provide maximum voting power to the executives of a company. These stocks benefit the firm as well as the executives. They protect the business to remain sustainable for the long term. However, Dual-class stocks come with certain drawbacks. Many investors feel that issuing such stocks ignores the shareholders. Even if the firm generates high revenue, investors have no assurance of receiving dividends. In addition, they lack voting rights. Investors should thus be aware of the advantages and drawbacks of dual-class voting shares before investing in them.