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Understanding Dual Class Stocks

11 Dec 2023

Introduction

Dual-class shares are shares that have different voting rights and dividend payments. Typically, there are two classes of shares: Class A and Class B. 

Class A shares have one vote per share and are offered to public investors. Class B shares have multiple votes per share, usually ten or more, and are held by the company's founders, executives, and insiders. Class B shares also have the right to convert into Class A shares at any time, but not vice versa. That means the Class B shareholders can maintain their voting power even if they sell some of their shares, while the Class A shareholders cannot increase their voting power by buying more shares.

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What are the advantages of dual-class shares?

Dual-class shares have some benefits for both the founders and executives and the public shareholders. For the founders and executives, these shares allow them to:

  • Protect their long-term vision and strategy from short-term pressures and interference by the public shareholders. They can focus on the innovation and creativity of their products and services without worrying about quarterly earnings, market fluctuations, or shareholder activism.
  • Enhance their innovation and creativity by having more freedom and flexibility to pursue risky or unconventional projects that public shareholders might not otherwise fund or support. 
  • Benefit from the increase in the share price and the dividends, and they can also reinvest their earnings back into the company to fuel its further development and expansion.

For the public shareholders, dual-class shares offer them the opportunity to:

  • Invest in high-growth and high-potential companies that might not otherwise go public or raise capital. 
  • Benefit from the expertise and leadership of the founders and executives who have proven track records and reputations. 
  • Enjoy higher returns and dividends if the company performs well and achieves its goals. 

What are the disadvantages of dual-class shares?

Dual-class shares expose founders and executives to:

  • Criticism and scrutiny from the regulators, the media, and the public for having disproportionate power and influence over the company. They might also lose the trust and confidence of the public shareholders, who might feel disenfranchised and marginalised by the lack of voting rights and representation.
  • Loss of accountability and responsibility for their actions and decisions. They might become complacent or arrogant and need to pay more attention to the public shareholders and other stakeholders' feedback and opinions. 
  • Pressure and stress to deliver on their promises and expectations, as they might face intense competition and disruption from other companies and industries and need help to adapt and innovate in the changing market and customer demands. 

For the public shareholders, dual-class shares limit or eliminate their:

  • They have little or no voting rights to elect the board of directors, approve significant corporate actions, or influence the policies and practices of the company. They also need more voice to express their views and concerns or demand transparency and accountability from the founders and executives.
  • They bear most of the risk and loss if the company suffers from financial or operational problems, legal or regulatory issues, or reputational or competitive damages. They have no or little recourse or compensation if the founders and executives make bad or unethical decisions that affect the company and its shareholders.
  • Their shares have lower marketability and attractiveness due to the reduced demand and supply of dual-class shares. They also have a lower valuation of their shares due to the discount and premium applied to the dual-class shares based on their voting rights and dividend payments.

Conclusion

Dual-class shares are a type of stock structure that gives different voting rights to various classes of shareholders. They have some advantages and disadvantages for the founders, executives, and public shareholders. They also require careful and thorough evaluation and investment before making effective decisions on whether and how to invest in dual-class shares. 

 

Related Articles:  Simple Breakdown of Cash and Carry Arbitrage | Profit Strategies: Reverse Cash and Carry Arbitrage

 

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