Dual Class Stock
A dual class stock is when a company issues two share classes. A dual class stock structure can consist of Class A and Class B shares, for example. These shares can differ in terms of voting rights and dividend payments.When multiple share classes of stock are issued, typically one class is offered to the general public, while the other is offered to company founders, executives, and family. The class offered to the general public often has limited or no voting rights, while the class available to founders and executives has more voting power and often provides for majority control of the company.
Dual-Class Shares
Definition
Dual-class shares refer to a company's issuance of two or more classes of shares, each with different voting rights and dividend payments. Typically, one class of shares is offered to the public, while another class is reserved for the company's founders, executives, and family members. The shares offered to the public often have limited or no voting rights, whereas the shares given to founders and executives have more voting rights, usually providing control over the company.
Origin
The dual-class share structure originated in the early 20th century, initially used by some family businesses in the United States and Europe. This structure allowed founders and families to maintain control over the company even after it went public. Over time, more tech companies and startups adopted this structure to ensure that the founding team retained decision-making power during the company's growth.
Categories and Characteristics
Dual-class share structures typically include the following categories:
- Class A Shares: Usually offered to public investors, with limited or no voting rights but potentially higher dividends.
- Class B Shares: Typically held by founders, executives, and family members, with higher voting rights, often multiple votes per share compared to Class A shares.
The main characteristics of this structure include:
- Concentrated Control: Founders and executives can maintain control over the company through high-voting shares.
- Investment Appeal: Public investors can share in the company's profits through Class A shares without worrying about changes in control.
- Potential Risks: Concentrated voting power in the hands of a few may lead to opaque decision-making or conflicts of interest.
Specific Cases
Case 1: Google
Google adopted a dual-class share structure when it went public in 2004. Class A shares (GOOGL) were offered to the public, each with one vote, while Class B shares were held by founders and executives, each with ten votes. This structure allowed founders Larry Page and Sergey Brin to maintain control over the company after it went public.
Case 2: Facebook
Facebook also adopted a similar dual-class share structure when it went public in 2012. Class A shares (FB) were offered to the public, each with one vote, while Class B shares were held by founder Mark Zuckerberg and other executives, each with ten votes. This allowed Zuckerberg to continue controlling major decisions for the company after it went public.
Common Questions
1. Why do companies choose a dual-class share structure?
Companies choose a dual-class share structure primarily to maintain control by founders and executives after going public while attracting public investors.
2. How does a dual-class share structure affect investors?
For public investors, a dual-class share structure may mean less influence in company decisions, but they can still profit through dividends and stock price appreciation.
