What Is a Dual Class Stock?
Let me explain what a dual class stock is. It's when a company issues two classes of shares, like Class A and Class B, which can differ in voting rights and dividend payments.
In this structure, one class usually goes to the general public with limited or no voting rights, while the other goes to founders, executives, and family, giving them more voting power and often majority control.
Key Takeaways
- A dual-class structure means two or more share classes with different voting rights.
- Insiders get shares with greater control, while the public gets ones with little or no voting rights.
- Supporters claim it lets founders focus on long-term goals instead of short-term profits.
- These structures are controversial because they limit public shareholders' say and unequally distribute risk.
Understanding a Dual Class Stock
You need to know that dual class stock is set up to give specific shareholders voting control. It's for owners who want public financing but not to lose control.
Usually, super-voting shares aren't publicly traded, and founders or families hold them in dual-class companies. Class A shares are often superior to Class B, but sometimes it's the reverse, so research the details before investing.
Companies like Ford and Berkshire Hathaway use this to let founders control majority voting with little equity. For example, the Ford family controls 40% of voting power with a small equity stake, and Echostar's CEO controls 91.8% of the vote with Class A shares.
Remember, dual-class structures let companies access public capital without giving up control.
Special Considerations
Dual-class structures aren't new, but they've grown popular lately. The NYSE banned them in 1940 after a 1926 controversy with Dodge Brothers' non-voting shares, but reinstated them in the 1980s due to competition.
Once listed, companies can't reduce voting rights or issue superior ones. About 7% of U.S. companies in the Russell 3000 have this structure, per a Harvard study.
This is common in tech startups to keep control, like Google's IPO where Class B shares for founders had 10 times the votes of public Class A shares. Indexes like S&P 500 and FTSE Russell now exclude such companies.
Dual Class Stock Controversy
These structures are debated. Supporters say they enable strong leadership and long-term focus, avoiding takeovers with supermajority votes.
Opponents argue a small group keeps control while public shareholders provide most capital and bear strategy risks unevenly.
Research shows insider super-shares can hinder long-term performance. Some suggest time limits on structures or letting shareholders gain voting power over time.
Examples of Dual-Class Structures
Google, now Alphabet, is the prime example. In its 2004 IPO, Class A shares had one vote, Class B for founders had 10, frustrating investors given its huge market cap. It later added Class C with no votes.
Other examples include Meta (formerly Facebook), Zynga, Groupon, and Alibaba, all using dual classes to retain founder control.
Other articles for you
A journal is a detailed record of a business's financial transactions used for reconciliation and transfer to other accounting records.
The Average True Range (ATR) is a technical indicator that measures market volatility by averaging the true range of asset prices over a specified period.
A take-out loan is long-term financing that replaces short-term loans, often used in real estate to secure better terms after construction.
Roll forward is a trading strategy to extend the life of derivatives like options, futures, or forwards by closing the current contract and opening a new one with a later expiration.
Intangible assets are non-physical resources like patents and goodwill that hold significant value for businesses despite lacking physical form.
Intraday trading focuses on securities traded within a single day to capitalize on short-term price movements for quick profits.
Deregulation involves reducing or eliminating government oversight in industries to foster competition and growth, though it carries risks to consumers and the environment.
The lower of cost or market method values inventory at the lesser of its original cost or current market value to record potential losses accurately.
A VA loan is a government-backed mortgage program designed to help veterans, active service members, and eligible spouses purchase or refinance homes with favorable terms.
Voluntary conveyance is the elective transfer of real property title without adequate consideration, covering scenarios like avoiding default, fraud, charity, and gifting to descendants, unlike involuntary transfers without owner consent.