What's the Deal with Dual Class Shares?
One thing that a lot of people forget is when you purchase a stock you are investing x number of dollars in that firm and with the purchase of each stock unit you also get 1 vote per share. This vote is important when it comes around to annual meetings, takeovers and strategic moves (members of the board being re-elected) as it gives you the ability to vote for/against each move. For retail investors, this may not be of concern but when it comes to institutions or very wealthy clients they want to ensure that they are getting adequate voting rights for the equity they put up.
This is where dual-share structures come in the way. Dual Shares will usually have two ticker symbols one that ends in .A and the other .B - while both are usually the same amount the type A share usually comes with 5-10x more voting rights per share giving the owners of those shares much more sway when it comes to decision makings. Dual Share Structures are not uncommon and they are used when select individuals like founder's, family members and key figures want to retain control of the company. This is where large institutions get angry; suppose a company was selling shares for $1 each and an institution invests $1,000,000 in it - they would receive 1,000,000 votes - the founder on the other hand could get the same number of votes by holding Class A shares (not available to the public) and only pay $100,000 and get the same # of votes assuming a 10:1 ratio. The main argument here is that big investors complain that if they are putting up the majority of the equity they should be able to have an equal say in the direction of the company. They also do not want people who have wrong intentions to control the majority of the votes because that person may end up making wrong moves for the company.
So why do some companies elect to pursue a dual class share structure:
The nature of the market is simple - institutions are there to make money. They do not necessarily care about the long term direction of the company. In essence, they have a short term view of things. Founders on the other hand have a very long term view of things and their intentions may not be to make money but rather solidify their position in the market and then start focusing on profits. To get the most money into the company the only way is to open the floodgates to the market and keep a dual class system so the equity rolls in but the founders keep most of the control.
With this in mind - is it best to shy away from investing in these sorts of companies?
So given all this information and the fact that control lies in the hands of a few people - is it a prudent decision to invest in these shares? In my personal opinion, when I am looking at shares to buy - I am always looking at the product line, current market position and future prospects of the company. This should be the main focus of any research unless you are an ultra-short term trader. While it is important to look at the structure of the company - it should not be the make or break of an investment decision. Many dual class companies have performed very well. The best course of action would be to do some research on the company’s founder and see their track record and see how it meshes with the overall market and your investment thesis.
Recently, there has been another wave in the market - where some companies (Under Armour & Google come to mind for now) that have issued shares with no voting rights at all. However, if you compare the non-voting stocks with the voting ones - you can see that for the most part the prices ARE not identical - indicating that there is a slight premium to holding voting shares.
Disclaimer: All of the above information is my own personal opinion. The decision to own non-voting vs voting shares should be made after doing research on the company. Buying one over the other does not guarantee anything. Please do your research before making any investment decision. Examples are for learning purposes only.
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