what is Dual-Class Stock?
If a single company issues various types of shares, it is referred to as dual-class stock. There are different type of shares issued by the company, one type is for the general public, while the other is offered to company founders, executives and family. The class available to the general public has limited voting rights, while the class offered to founders and executives has more voting power and often provides for majority control of the company.
How does it work?
The company has a different type of shares. Let’s assume the company has Class A shares and Class B shares. The company offers Class A shares to the company founders and top executives.it provides them with the ability to control majority voting power with a relatively small percentage of total equity. The company issues Class B shares to the public via an initial public offering. The class B shares possess limited voting. World-famous companies like Ford, Warren Buffett’s Berkshire Hathaway, Tyson, Cablevision, Hewlett Packard, Viacom, Facebook, Zynga, Groupon, and Alibaba have dual-class stock structures.
Technology starts-ups show a special interest in dual-class stock structure. Alphabet Inc.’s predecessor Google is the most famous example of this trend. Google got criticized when the internet giant, boasting a market capitalization among the top thirty worldwide, issued second Class B shares to founders with 10 times the amount of votes as ordinary Class A shares, sold to the public. Duel class stock allows tech start-ups to access public capital without losing control.
Controversy Over Dual-Class Stock Structure
Dual-class stock structures are controversial. The supporters of this system claim that the structure enables founders to demonstrate strong leadership and the placing of long-term interests over near-term financial results. It also helps founders maintain control over the company.
On the other hand, many shareholders see dual-class stock as an unfair system that allows a small group of privileged shareholders to retain control while other shareholders with lesser voting power, provide a majority of the capital. The people who oppose the system says that although it is good for managers to have ownership in the companies they work for, the disproportionate power offered by a dual-class system is unsavoury. Because managers face fewer consequences for bad decisions and are less motivated to raise additional capital that might weaken their influence.