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What Are Differential Voting Rights (DVR) Shares

29 Nov 2023

Introduction

In the world of corporate governance, companies seek innovative ways to structure their equity offerings and maintain control over decision-making. One such mechanism is the introduction of Differential Voting Rights (DVR) shares. These shares help a company maintain the majority voting rights as well as benefits investors at the same time.

Let's delve into the concept of DVR shares, their types, benefits and limitations associated. Read on to get answers to all your DVR-related questions.

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What are differential voting rights?

Differential Voting Rights (DVR) are a class of shares that grant varying voting rights to different shareholders within a company. They allow certain shareholders to exercise multiple votes per share, amplifying their influence over decision-making processes.

Types of differential voting rights

Some of the types of differential voting rights are:

1. High voting shares

High voting shares provide shareholders with a significantly higher number of votes per share compared to ordinary shares. For instance, while ordinary shareholders might have one vote per share, high-voting shareholders could have up to ten votes per share. This type of DVR ensures that certain shareholders can exert substantial control over crucial decisions.

2. Weighted Voting Rights

Weighted voting rights assign differential voting power based on specific criteria, such as tenure or shareholding duration. This type of DVR aims to reward long-term commitment and incentivise stability within the shareholder base. Therefore, shareholders who have held their shares for a longer period or have a larger stake in the company may be granted additional votes. 

Why companies issue differential voting rights?

Some of the reasons why companies issue differential voting rights are:

1. Retention of control

By issuing DVR shares, companies can raise capital while maintaining control in the hands of founders and key executives. This strategy enables these individuals or entities to retain a higher percentage of voting power compared to their economic ownership. As a result, they can safeguard their influence over strategic decisions.

2. Enhanced capital raising

DVR shares attract investors interested in a company's growth potential but willing to accept a limited role in decision-making. This can particularly appeal to venture capital firms and other investors seeking exposure to promising startups or high-growth companies.

3. Protection against takeovers

Differential voting rights can serve as a defence mechanism against hostile takeovers. By concentrating voting power in the hands of a select group, a company can deter external entities from gaining control by acquiring a substantial number of shares.

Benefits of differential voting rights

There are various ways in which you can benefit from DVR shares, such as -

1. Capital attraction

DVR shares allow investors to gain exposure to high-growth companies that offer significant potential for returns. Thus, they can align their interests with the company's long-term growth prospects by accepting a limited role in decision-making.

 2. Risk mitigation

DVR shares can provide stability and continuity to the company's operations by granting certain shareholders greater voting power. This can help mitigate the risk associated with sudden shifts in leadership or strategic decision-making.

3. Liquidity opportunities

DVR shares allow investment in companies that may not otherwise be accessible or available in the public market. This can open up new opportunities for diversification and potentially higher returns.

Limitations of differential voting rights

Some of the important limitations of DVRs are:

1. Corporate governance concerns

DVR shares raise concerns about corporate governance practices. They concentrate power in the hands of a few individuals or entities, potentially compromising checks and balances.

2. Investor protection

Minority shareholders may face challenges in protecting their rights and ensuring fair treatment in companies with DVR structures. This can happen as their ability to influence decision-making is limited.

3. Shareholder disenfranchisement

Differential Voting Rights can result in a significant power imbalance. It can lead to disenfranchising certain shareholders and diminishing their say in the company's direction.

The bottom line

Differential Voting Rights (DVR) introduce a distinctive dimension to equity ownership by giving certain shareholders disproportionate voting power. Hence, as companies continue to navigate the evolving landscape of capital structures, DVR shares might remain a topic of debate in corporate governance.

 

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