WHAT IS
A DUAL-CLASS SHARE?

Dual class shares occur when a company splits its stock into two different categories. Simply put, a single company can create a dual-class share structure either when it launches an IPO or following a restructuring process. The main aim of creating a multi-class share vehicle is to give certain investors a greater say in the direction of the company. More specifically, dual-class shares in the UK and other countries create unequal voting rights.

You can find a more comprehensive explanation of this in the following section. However, the important point to take from our dual-class share definition is that this is a two-tiered system. It refers to investors who have access to, and ownership of, one set of shares (Class A), and another group of people who have access to, and ownership of, the second type of share (Class B). The voting rights differ between Class A and Class B shares.

Most commonly, when it comes to the question of what share class means, Class B shares are the most powerful. That means there are, typically, fewer Class B shares, but they have more voting power than Class A. In general, Class B shares are available to founders and select investors in a company i.e., those on the inside. Therefore, it is possible to say that in some cases, dual-class shares benefit those with access to Class B options.

How Do Dual-Class Shares Work?

Classes of shares of stock are used to give disproportionate voting rights within a company. However, before we get into class listings, let’s quickly discuss a typical share structure. Most public companies sell shares on the basis of 1:1. In other words, one share equals one vote. Although someone can own more shares than someone else, the fundamental value of each share is the same.

Under a dual-class share structure, this is not the case. There may be some shares with X amount of voting power, and another share class with Y amount of voting power. We will show you how this looks in practice later on. Before that, here is an outline of a class of share as Companies House would define it.

What is a class of shares?

A class of shares is a type of listed stock that has certain voting rights that may not be equal to those of another class. Splitting power in this way is known as creating a multi-class share vehicle and, in general, the stock is split into two classes to create a dual structure.

What are the different classes of shares?

The main types of share classes are A and B. However, there could be additional classes if the company decides to go beyond the common dual-class share structure. Creating a new class of shares is a matter of personal preference for the company, but it is mainly done to give certain groups more power. Indeed, share class rights often favour those who founded the company or had an interest in its success from an early stage.

In fact, Class B shares are often referred to as the founders’ class because they are reserved for people who created a company. In turn, Class B have more voting power than Class A. It may also be the case that Class B shares are given to special partners and investors. As such, this category can also be referred to as “advisor class” shares.

Labelling them as “founder” and “advisor shares” is a good way to remember that they are  reserved for a few influential figures within a company. Therefore, anyone within this category has more voting rights than people with Class A shares under a dual structure.

One final point to note here is that this class of shares meaning does not define the power balance. In other words, Class B shares don’t always have the greatest voting power. The structure may be such that Class A has the greater voting power of the two Classes.

Share Class Explained: An Example

That answers what different classes of shares are. It also explains why a company would create a new class of shares with Companies House. The question to answer now is what does a dual share class in the UK look like in practice?

We’ll go through some dual-class shares companies in the next section. For now, here’s a basic example of a multi-class share vehicle:

Company A issues 300 shares.

It has two share classes in the UK:

• Class A = 200 shares and 1,000 votes
• Class B = 100 shares and 2,000 votes

In this example, Class A shareholders represent 66.6% of the company and have 1,000 votes. This means Class A investors have 33.3% of the voting power.

In contrast, Class B shareholders represent 33.3% of the company and have 2,000 votes. This means Class B investors have 66.6% of the voting power.

Therefore, in this simple example of dual-class shares, you can see that those in Class B have twice as much power when it comes to voting as those in Class A.

Examples of Dual-Class Share Structures

Now that you have a better understanding of a dual-class share structure, let’s look at some real-life examples. You can invest in these companies’ shares on eToro. Although dual-class shares may not matter if you are trading ETFs or CFDs, they could still play a role in your investment portfolio. Buying shares may be an option if you want to consider things such as dividends or having the option to vote in company matters. However, it is important to remember that for dual-class shares, your voting rights may carry less influence than those who hold Class B shares.

It is important to understand how large companies operate as this can impact their market performance.

Companies with Dual-Class Shares

Here are three major companies with dual-class shares that you can trade on eToro:

Alphabet

The Alphabet share structure was the subject of some controversy in 2004. To clarify,  Alphabet is Google’s parent company, which had its IPO in 2004. The proposal for the IPO outlined that there would be two Alphabet share classes: A and B. As per the terms, Class B have 10 votes per share. Class A have one vote per share.

The justification for this was to allow Google to achieve its long-term vision by giving certain voters more power. Google has since created Class C shares that have no voting rights. Naturally, the Alphabet Class B share price would be higher than that of Class A if the shares could be traded publicly. However, only Google Class A shares can be bought and sold by the general public on eToro.

Alibaba

Alibaba dual-class shares follow the same dynamics as other major stocks you can trade online. The Chinese company initially wanted to be listed on the Hong Kong Stock Exchange using a dual share structure. However, the exchange rejected this idea. As such, Alibaba went to the New York Stock exchange, which allowed the owners to create a share structure that gave them over 50% of the voting power.

Facebook

Facebook dual-class shares are weighted in favour of Class B. Founder and owner of the company, Mark Zuckerberg, owns Class B shares. These represent approximately 14% of Facebook, but have 10:1 voting rights. That means Zuckerberg’s Class B shares give him 60% of the voting power.

That’s a list of companies with dual-class shares and, from the names you see, you might expect that this is standard practice. The reality is that this type of share structure is not standard and is not well-liked by certain investors.

Controversies of Dual-Class Shares

The New York Stock Exchange (NYSE) banned dual-class shares in 1926. The ban was because of Dodge Brothers. The automotive company sold shares to the public without any voting rights. This means the owners retained a certain number of shares and 100% of the voting power. NYSE bosses at the time thought this was not fair and banned the practice.

However, NYSE reversed the ban in 1980 due to increased competition from other exchanges that do allow it. Today, a study into dual-class shares corporate governance by Harvard Law School shows that around 7% of Russell 3000 Index companies have a multi-class structure. One of the companies, as we have already mentioned, is Google (under its parent company, Alphabet).

Google class shares caused controversy in 2004 when Class B was given 10X the voting power of Class A. During the IPO, the founders issued this statement:

“The standard structure of public ownership may jeopardize the independence and focused objectivity that have been most important in Google’s past success and that we consider most fundamental for its future.”

Some people reacted badly to this, but the IPO went ahead. While it may not be the most desirable share structure, it is the one the owners felt was best for the company.

Summary

Dual-class shares may be controversial, but they are used by several big companies. The main things to keep in mind about a multi-class share vehicle are:

• That a dual-class share structure gives more power to one set of shareholders
• Certain shares will be tradeable by the general public and have less voting power
• Others will be restricted to certain people and have more voting power

That is the nature of a multi share class vehicle, which is an aspect of stocks and share structures that is worth being aware of.

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