Class a shares

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• common stock
• shareholders
• corporate governance
• initial public offering (IPO))
• equity
• stock market
• dividend
• arbitrage
• market capitalization
• institutional investors
• stock split
• preferred stock
• board of directors
• capital structure
• voting rights

What Is Class A Shares?

Class A shares are a type of common stock that typically carries superior voting rights compared to other classes of shares issued by the same company, often Class B or Class C shares. This differential voting power is a key aspect of a company's capital structure and falls under the broader financial category of corporate finance. While Class A shares usually confer more control, they may also have different dividend rights or conversion privileges. The creation of various share classes allows companies to raise capital while enabling certain shareholders, often founders or insiders, to maintain significant control over corporate decisions without necessarily holding a majority of the economic ownership.

History and Origin

The concept of issuing different classes of shares with varying voting rights has a long history. Concerns about dual-class structures arose as early as the 1920s, prompting the New York Stock Exchange (NYSE) to implement de facto bans on companies with non-voting or unequally voting common stock. Despite these early objections, the practice persisted, particularly among family-run businesses and media companies, seeking to preserve control.¹⁸, ¹⁹

The debate surrounding dual-class shares intensified with the rise of technology companies in the 21st century. Companies like Google (now Alphabet), Facebook (Meta Platforms), and Snap (Snap Inc.) adopted dual-class structures during their initial public offering (IPO)) to allow founders to retain control and pursue long-term strategies without undue pressure from public investors concerned with short-term profits.¹⁶, ¹⁷ For instance, when Google went public in 2004, its co-founders Larry Page and Sergey Brin, along with then-CEO Eric Schmidt, held Class B shares with superior voting power.

Key Takeaways

• Class A shares typically grant superior voting rights compared to other share classes.
• They are a mechanism for founders and insiders to maintain control over a company.
• The existence of Class A shares is a feature of a dual-class share structure.
• While offering more control, Class A shares may not always have higher economic value per share than other classes.
• The use of Class A shares is often debated in terms of corporate governance and shareholder democracy.

Formula and Calculation

Class A shares do not involve a specific financial formula or calculation in their definition. Instead, their characteristics are defined within a company's corporate charter and bylaws. The key aspects are usually:

• Voting Power: For example, one Class A share might be equivalent to 10 votes, while a Class B share might have one vote.
• Conversion Ratio: Class A shares may be convertible into a certain number of Class B shares, but often not vice-versa. For instance, Berkshire Hathaway's Class A shares are convertible into 1,500 Class B shares.¹⁵
• Dividend Rights: While often equal to other classes, dividend rights can also differ.
• Liquidation Rights: How Class A shareholders are treated in the event of liquidation.

Interpreting Class A Shares

The presence of Class A shares signifies a company's choice to implement a multi-class stock structure, primarily to concentrate voting rights among a select group, typically founding members or long-term management. This structure indicates that the company's control is intentionally insulated from the influence of public shareholders who might otherwise hold a majority of the economic equity. Investors interpret Class A shares as a signal about the company's philosophy on governance, where long-term vision, as defined by the controlling shareholders, may take precedence over short-term market pressures. While this can provide stability and allow for strategic decisions that benefit the company in the long run, it also means that ordinary investors may have limited recourse in challenging management decisions, as their voting power is diluted.¹³, ¹⁴

Hypothetical Example

Consider "InnovateNow Inc.," a hypothetical technology startup going public. The founders want to ensure they retain control to execute their long-term product vision without interference. They decide on a dual-class share structure:

• Class A Shares: Issued to the founders, with each Class A share carrying 10 votes. There are 10 million Class A shares outstanding.
• Class B Shares: Issued to the public during the IPO, with each Class B share carrying 1 vote. There are 100 million Class B shares outstanding.

Even though the public owns 10 times more shares (100 million vs. 10 million), the founders, through their Class A shares, collectively control 100 million votes (10 million shares * 10 votes/share), while the public controls only 100 million votes (100 million shares * 1 vote/share). This structure ensures the founders maintain significant voting power. If the founders also own a portion of Class B shares, their overall control could be even greater. This allows them to steer the company's direction and elect the board of directors.

Practical Applications

Class A shares appear in various aspects of financial markets and corporate strategy:

• Corporate Control: Companies utilize Class A shares to maintain control, particularly prevalent in technology and media industries, where founders aim to protect their long-term vision. Alphabet (Google's parent company) and Meta Platforms (Facebook's parent company) are prominent examples of companies with dual-class structures.¹¹, ¹²
• Initial Public Offerings (IPOs): Many companies going public today, especially in the tech sector, adopt dual-class structures with Class A shares to ensure incumbent management retains significant voting power post-IPO. In the first half of 2021, nearly one in four U.S. companies that went public had a dual-class structure.¹⁰
• Family-Controlled Businesses: Historically, dual-class shares, including Class A shares, have been used by family-controlled enterprises to keep ownership and strategic decision-making within the family, even as the company raises capital from external investors. Ford Motor Company is an example of a long-established company that has utilized a dual-class structure.⁹
• Mergers and Acquisitions: The existence of Class A shares with superior voting power can significantly impact potential mergers and acquisitions, as gaining control of the company might require the consent of the Class A shareholders, regardless of the overall public stock market sentiment.

Limitations and Criticisms

While Class A shares offer benefits in maintaining control, they also face considerable criticism, primarily concerning corporate governance and shareholder rights. Critics argue that dual-class structures, particularly those involving Class A shares with outsized voting power, can entrench management, reduce accountability to public shareholders, and potentially lead to decisions that prioritize the interests of the controlling shareholders over all others.⁸

The "one share, one vote" principle is a fundamental tenet of shareholder democracy, and dual-class structures deviate from this.⁶, ⁷ Institutional investors and proxy advisors often express concerns that such structures can insulate management from the consequences of poor performance and dilute the influence of minority shareholders.⁵ Some research suggests that while dual-class companies may show a value premium shortly after an IPO, this benefit can diminish or even turn into a discount over time.³, ⁴ Concerns regarding potential misuse of power by controlling shareholders holding Class A shares have been highlighted in various cases.²

Class A Shares vs. Class B Shares

The primary distinction between Class A shares and Class B shares lies in their associated voting rights and, occasionally, other privileges like dividend distribution or convertibility.

For example, Berkshire Hathaway has both Class A (BRK.A) and Class B (BRK.B) shares. A Class A share has significantly more voting power and is convertible into 1,500 Class B shares, but Class B shares cannot be converted into Class A shares. The Class B shares were created in response to market demand for a more affordable way for individual investors to own a piece of the company.¹

FAQs

Why do companies issue Class A shares?

Companies issue Class A shares primarily to allow founders, controlling families, or key management to retain significant voting control over the company, even after raising substantial capital from the public. This structure ensures their long-term vision for the company can be pursued without being swayed by short-term market pressures.

Can Class A shares have no voting rights?

While less common for Class A designations, it is possible for some classes of shares to have limited or no voting rights, typically in multi-class structures where other classes (e.g., Class B or C) hold all the voting power. However, "Class A" is generally associated with superior voting rights.

Are Class A shares always more expensive than Class B shares?

Not necessarily. While Class A shares often trade at a premium due to their superior voting rights, especially for companies where control is highly valued, their price relationship to Class B shares can vary. Factors like market demand and liquidity for each class can influence their respective prices. In some cases, like with Berkshire Hathaway, a significant disparity exists, with Class A shares trading at a much higher price per share than Class B. However, stock split activity can also influence per-share pricing without changing overall market capitalization.

Do Class A shares pay higher dividends?

Dividend policies vary widely by company and are not universally tied to share class. While a company could choose to pay different dividend amounts to different share classes, it is more common for all classes of common stock to receive the same dividend per share, or for dividends to be specifically associated with preferred stock.