Eleanor Finch
A dual-class stock structure involves a company offering two types of stocks, usually Class A and Class B, with different voting rights and dividend payouts. Companies with dual-class structures often offer one class with limited voting power to the public, while the other class with more voting power is reserved for executives, founders, and family members. This allows companies to maintain control and avoid takeovers. However, dual-class structures are controversial as they give voting control to a small group of shareholders, while the general shareholder population bears most of the risk. Well-known companies with dual-class structures include Google, Ford, and Berkshire Hathaway.
| Characteristics | Values |
|---|---|
| Number of classes | 2 or more |
| Purpose | To differentiate between stocks with different dividend payouts and voting rights |
| Classes offered to the public | One class with limited or no voting rights |
| Classes offered to company insiders | One class with more voting rights |
| Classes offered to company founders | One class with super-voting rights |
| Classes offered to company executives | One class with more voting rights |
| Classes offered to family members | One class with more voting rights |
| Classes offered to employees | One class with no voting rights |
| Trading | One class may be traded publicly while the other may not |
| Pricing | Different classes may trade at different prices |
| Dividend payments | Different classes may have different dividend payouts |
| Voting rights | Different classes may have different voting rights |
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What You'll Learn
Common stock
Overall, common stock represents a claim on part of the company's assets and earnings, with the potential for capital appreciation over the long term.
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Preferred stock
There are several types of preferred stock, including:
- Prior preferred stock: This is the highest-priority preferred stock. If the company has enough money to meet the dividend schedule on only one of the preferred issues, it makes the payments on the prior preferred.
- Preference preferred stock: Ranked behind a company's prior preferred stock, preference preferred stock has greater priority than other issuances of preferred stock.
- Convertible preferred stock: These preferred issues can be exchanged for a predetermined number of the company's common-stock shares.
- Cumulative preferred stock: If the dividend is not paid, it will accumulate for future payment.
- Non-cumulative preferred stock: Dividends for this type of preferred stock will not accumulate if they are unpaid.
- Exchangeable preferred stock: This type of preferred stock carries an embedded option to be exchanged for some other security.
- Participating preferred stock: These preferred issues offer holders the opportunity to receive extra dividends if the company achieves predetermined financial goals.
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Dual-class stock
A dual-class stock structure is when a company issues two share classes with different voting rights and dividend payments. Typically, one class is offered to the general public with limited or no voting rights, while the other class is offered to company founders, executives, and family, with greater voting power and majority control of the company.
The creation of dual-class stock structures is designed to give specific shareholders voting control. This allows founders to sell equity in their company without giving up control. For example, Google's parent company Alphabet Inc. has a multi-class share structure consisting of Class A and Class B shares. The founders, Sergey Brin and Larry Page, hold Class B shares, which have 10 votes per share, while Class A shares held by regular investors have one vote per share.
Dual-class structures have been around for some time, but they have recently become more popular, especially among technology startups. The New York Stock Exchange (NYSE) banned dual-class structures in 1940 but reinstated the practice in the 1980s due to competition from other exchanges. Several stock indexes, such as the S&P 500 and FTSE Russell, have stopped including companies with dual-class structures.
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Voting rights
The voting rights of shareholders are determined by the class of stock they own. Companies can create different classes of shares with varying voting rights to satisfy owners who want to retain control while still allowing the public equity market to provide financing.
Common stock, also known as ordinary shares, typically provides voting rights. These shares represent ownership in a public company and entitle purchasers to a portion of the profits earned. Common shares are usually standardised, with each share having the same rights and benefits. However, companies can create different classes of common stock, such as Class A and Class B shares, with each class having different voting rights. For example, Class A shares may have more voting rights than Class B shares, or vice versa.
Preferred stock, on the other hand, typically does not come with voting rights. Preferred stock is a different type of asset that is not standardised and can be customised to offer differing rights. It often guarantees a fixed dividend and ranks above common stock in a company's capital structure. In the event of liquidation or bankruptcy, preferred shareholders will be paid before common shareholders.
A dual-class stock structure is when a company offers two types of stocks with different voting rights. In most cases, one class with limited voting power is offered to the public, while the other class with more voting power is reserved for company executives, founders, and family members. This structure is designed to give specific shareholders voting control and is often used by tech companies.
The number of votes per share can vary significantly between different classes of stock. For example, Google's Class B shares held by founders Sergey Brin and Larry Page have 10 votes per share, while the Class A shares held by regular investors have only one vote per share.
By creating different classes of shares with varying voting rights, companies can control who has more influence over their direction and protect themselves from takeovers. However, dual-class stock structures are controversial as they allow a small group of privileged shareholders to maintain control while the general shareholder population bears most of the risk.
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Shareholders
Preferred stock, on the other hand, is a different type of asset that can be customized to offer differing rights. Preferred stock typically guarantees a fixed dividend and does not include voting rights. It also ranks above common stock in a company's capital structure, meaning that preferred shareholders will be paid first in the event of liquidation or bankruptcy. Preferred stock is generally considered a safer investment than common stock due to its fixed dividends and priority in payouts.
Companies may choose to issue different classes of stock to achieve various goals. One reason could be to protect themselves from a takeover by concentrating voting power within a certain group, such as company founders or executives. This is often done through dual-class stock structures, where one class with limited voting power is offered to the public, while the other class with more voting power is reserved for company insiders. Another reason for creating multiple share classes is to extend or restrict shareholders' voting privileges. For example, a company could create three different share classes within common stock, giving each class different voting rights to control who has more influence over the company's direction.
It is important to note that shareholders' rights and benefits depend on the type of stock they own. Common stockholders typically enjoy voting rights and may receive dividends in proportion to the company's profits. They also have the advantage of being able to sell their shares at any time, which is not always the case with private companies. On the other hand, preferred stockholders have priority in payouts and are guaranteed fixed dividends, but they do not usually have voting rights.
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Frequently asked questions
A dual-class stock structure involves a company offering two types of stocks, typically designated as Class A and Class B. These classes differ in terms of voting rights and dividend payments, with Class A shares normally superior to Class B shares.
Companies issue dual-class stocks to give specific shareholders voting control. It allows founders, executives and family members to retain control over the company and prevent takeovers.
Common shares are an ownership interest in a public company and entitle purchasers to a portion of the profits earned. They are the most common type of stock and are usually divided into classes, most popularly Class A and Class B shares.
Preferred shares, also known as preferred stock, are a different type of asset from common stock. They offer distinct advantages, such as fixed dividend payments and priority in the event of liquidation, but do not include voting rights.
