What is a dual-class stock?

Dual-class stocks are a stock offering structure in a company when they issue two classes of shares. For example, a dual-class stock structure might consist of class A and class B shares. These shares may differ in terms of voting rights and payment of dividends.

When multiple classes of shares are issued, one class is usually offered to the general public and the other class to the founders, executives, and their families.

Classes offered to the general public often have limited or no voting rights whereas classes available to founders and executives are largely considered top stocks due to their high voting rights. These stocks are designed for the company's founders and former investors or employees to maintain control of the majority of the company.

Stock classes with unequal voting rights serve owners who want to finance from public equity markets without giving up control. In most cases, such shares are not publicly traded, and the company founders and their families remain the controlling group. There is no uniform nomenclature for multiple share classes. Class A shares are usually designated to be better than Class B shares. However, in other cases, the opposite may also be true. For this reason, investors need to investigate the details of a company's stock class when considering investing.

Example of dual-class stock

Prominent companies like Ford and Warren Buffett's Berkshire Hathaway boast a dual-class stock structure that provides founders, executives, and their families the ability to influence majority voting with a relatively small percentage of total capital. Investors are grateful for Warren Buffet’s decision to go with a multiple share class structure since that’s the only way they could ever have invested in Berkshire Hathaway.

In Ford's dual-class structure, the Ford family controls 40% of voting rights even though it owns a small percentage of the total capital. Echostar Communications makes for an extreme example where CEO Charlie Ergen controls around 91.8% of the vote with his compelling Class A shares.

One very popular example of a dual (or multiple) class structures is Google, a subsidiary of Alphabet Inc. When the tech giant launched its initial public offering in 2004, it claimed to rank market capitalization among the top 30 in the world. The company disclosed a stock structure with three classes of shares:

• Class A shares were offered to regular investors. Like common stock, the stock class provided one vote per share.
• Class B shares were reserved specifically for Google executives and founding members. The stock class, in particular, provided shareholders with 10 votes per share.
• Class C shares were provided to regular Google employees. The stock class did not grant any voting rights, in stark contrast to the shares granted to key executives.

Disadvantages of dual-class stock

• Dual-class shares are considered fundamentally unfair as they create a limited class of shareholders
• Discrepancies in shareholders’ rights reduce accountability
• Bad decisions made by the management may not have fair consequences
• Excessive control from the inside can weaken the structure
• Companies with this dual or multiple stock structures can be more burdened with debt than companies with single-class shares
• It is cumbersome to change this structure into a single-class one
• The company remains less motivated to raise funds

Dual-class stock controversy

There is considerable controversy regarding the dual-class share structure. Proponents suggest that the structure allows company founders and executives to display leadership by setting the tone and pace of the company. Due to their relative position with the company, they may use additional voting rights to support decisions that support the company's long-term vision, viability, and profitability.

In addition, allowing founders to own a class of shares with more voting rights enables them to assert greater control over the company to prevent any potential unwanted takeover attempts.

Critics, on the other hand, argue that while a few shareholders with privileged voting rights give them full control, the majority of shareholders still provide the majority of their capital. Therefore, risk distribution is imbalanced in favour of executives and founders.

Academic research has shown that powerful classes of shares for insiders may hinder long-term performance. Support grows consistently for some form of a middle ground — where there may be a dual-class structure, but one kept in check to some extent. This can be accomplished in many ways, including limiting the amount of time such a structure exists or letting regular shareholders accumulate additional voting interests.

Dual-class shares remain a topic of debate. Investors must pay attention to the impact of such a structure on the company’s fundamentals and performance.