Dual Class Shares - Explained
What are Dual-Class Shares?
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What are Dual Class Shares?
Some companies issue two types of shares in the market, each type having different rights attached to it. For example, the shareholders with preferred stock are generally entitled to receive a guaranteed dividend; but, they often lack voting power in company's decision-making process. Common shareholders, on the other hand, are allowed to receive a dividend only after the preferred shareholder receive theirs. These shareholders, however, have the right to vote during the annual meeting of the company.
How do Dual Class Shares Work?
Dual-class shares are generally issued by the companies for retaining the power of decision making within the circle of founders, executives, and families. One class of stocks are issued in public which lacks the voting power while the other class is offered only to the executives and family members. It allows the company's founders and executives to control majority voting power with a comparatively small percentage of total shares. Like in Ford the Ford family owns only 4% of the total equity but it has the 40% voting power in the company. They could retain this much power with such a small amount of equity percentage only because they issued two classes of stocks. Another example is Echostar Communication's CEO, Charlie Ergen. He holds only 5% of the total equity but has 90% voting control. Google also issued second-class B shares only to its founders having 10 times more power in voting than the ordinary class A shares. U.S. companies can enlist dual-class voting shares on the New York Stock Exchange, but the companies are not allowed to withdraw the voting rights of a class after it is listed. Also, they cannot introduce a new class of shares with greater voting rights after getting listed. The dual class stock structure has sparked controversy as some believe it is an effective way of managing a business with a strong leadership potential, while others argue in this system a small section of people with greater voting power control the company's management and operations and other shareholders supply the majority of the capital. They also believe this system doesn't go well with market capitalization.
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