Definition and Examples of Dual-Class Stock
How Dual-Class Stock Works
Notable Events
Definition and Examples of Dual-Class Stock
Dual-class stock is a type of stock that has two different classes of shares. Typically, one class of shares is available to the general public, while the other class is restricted to insiders, such as company founders, executives, and their family members. The dual-class structure has become common in recent years with companies offering internal public offerings (IPOs).
Would you like to learn more about dual-class stock? We will discuss how dual-class shares work and some well-known companies that have issued dual-class shares. Discover why companies often choose this route, as well as the reasons behind the controversy surrounding dual-class stock among investors.
How Dual-Class Stock Works
When a company issues dual-class stock, it issues at least two classes of shares, often referred to as “Class A” and “Class B.” One class is the “super-voting” class that is issued to the company’s founders and executives and, in some cases, their family members. The other class is available to the general public and contains limited voting rights.
This structure is common in family-controlled or founder-led companies to avoid losing control of the company. Typically, super-voting shares convert to shares with lesser voting rights if founders or executives sell them.
Alphabet, the parent company of Google, is an example of a company that utilizes a multi-class structure. Alphabet has three classes of stock as follows: Class A shares: shareholders receive one vote per share. Class B shares: shareholders receive 10 votes per share. Class C shares: shareholders have no voting rights.
Class A and Class C shares can be publicly traded. According to the annual report filed by Google on December 31, 2020, the company’s founders Larry Page and Sergey Brin held 85.3% of the outstanding Class B shares, which represents approximately 51.5% of the voting power of Google’s common stock. Thus, Page and Brin retain significant control over the election of the company’s board of directors, as well as events like a potential merger or acquisition or a major deal.
Other examples of companies with dual-class stock include: Berkshire Hathaway, Facebook, Pinterest, and Lyft.
Note: Dual-class shares are most common in the media and entertainment industries. Other industries where dual-class stock is prevalent include food and beverages, household and personal products, and software.
How Dual-Class Stock Works
During the first half of 2021, 24% of companies that launched initial public offerings issued dual-class shares. Issuing multiple classes of stock is appealing to founders who want to maintain control over their companies.
Proponents of dual-class stock argue that the structure helps company leaders maintain a long-term focus rather than succumbing to pressures from investors. By issuing two or more classes of stock, a company can raise significant funding through an initial public offering while keeping control in the hands of early investors, founders, and key employees. Some proponents say that if dual-class shares are banned, many founders will choose to keep their companies private to avoid losing control.
However, institutional investors have pushed for a “one share, one vote” structure. They argue that having a single class of stock makes the company’s board accountable to all shareholders. A study conducted by Harvard Law School found that 52% of companies with dual-class stock structures do not have an independent CEO or independent chair on their boards, compared to only 12% for companies with a “one share, one vote” structure.
It has been shown
The study conducted by Harvard University presents mixed results regarding the performance of multi-class companies compared to their single-class counterparts. Multi-class companies initially appear more profitable; however, their rate of profitability improvement is lower.
Notable Events
The Council of Institutional Investors has pushed for legislation that alters dual-class stock structures. It will prohibit companies incorporated in the United States from having more than one class of stock with unequal voting rights without a sunset provision taking effect within seven years of the initial public offering – unless all classes of shareholders agree to maintain the unequal structure. The group played a significant role in convincing the S&P 500 and Russell 2000 indices to stop adding new dual-class stock companies to their indices in 2017.
Key Takeaways
When a company issues dual-class stock, it issues two classes of shares. The first class has greater voting power and is limited to insiders of the company, while the other class is available to the general public and has limited voting rights. Companies controlled by families or led by founders are most likely to issue dual-class shares to avoid losing control of the company. Institutional investors support the “one share, one vote” structure, arguing that it holds the company’s board of directors accountable to all shareholders.
Source: https://www.thebalancemoney.com/what-is-dual-class-stock-5217348
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