What is B-share?

Every company starts by being a private company where all the shares are held privately with the directors, executives or external investors. However, depending on how much the company wants to keep control with the company management, it may issue numerous classes of shares to distinguish between various shareholders. One such share class is known as B-shares or Class B shares which allow shareholders to have different powers than other issued share classes.

But first, a little about shares and the logic behind partial ownership.

What are shares?

A share indicates a unit of ownership of a company. If you own shares of a company, it implies that you, as an investor, own a percentage of the issuing company. These shares are listed on the stock exchanges through an Initial Public Offering, and investors can buy and sell them based on their current price.

If you buy the shares of a company, you become the company's owner in the proportion of the percentage of the purchased shares. From the day you buy the shares, you are a shareholder. As a shareholder, you are entitled to receive a portion of the company's profit. This amount is called the dividend, and the company declares it as per its financial performance.

What is B-share?

B-shares or Class B shares are a kind of common stock that comes with more or fewer benefits for the shareholder than the other kinds of common stocks. They are securities that reflect the ownership of investors in a company. Once you hold the common stocks of a company, you are entitled to elect the company's board of directors and have voting rights.

B-shares allow the shareholders more or less voting rights than the holders of Class A shares of the company. In most cases, B-shares are held by the company's senior management such as executives, directors etc. However, B-shares may have a lower repayment priority in case the company goes bankrupt. This is because the company is legally bound to repay the public shareholders before it pertains to the company’s management.

Understanding B-share

A public company may separate its shares by issuing Class A and Class B (B-shares) to identify the shareholders that are given more benefits and voting rights than the other shareholders. It allows the company to know which shareholders can take an active part in the decision making process.

B-shares are standard stock classifications that may come with more or less voting rights depending on the company and its stock structure. Although, in most cases, B-shares carry less voting rights than Class A shares, it is not the case with every issue of different common stocks. Many times companies issue B-shares to provide more voting rights to shareholders and distinguish them from Class A shares that come with fewer benefits and less control.

Typically, B-shares come with lower repayment priority at the time of a company’s bankruptcy proceedings. It means that if the company goes bankrupt, the company will repay the shareholders of B-shares only after the shareholders of Class A shares are paid in full. Furthermore, less priority is also given at the time of dividend distribution, where Class A shareholders are paid a dividend first, and then the dividend is distributed to the B-share shareholders.

The voting power of share classes

Voting power is the right of shareholders to vote on various matters of the company. As the company is publicly listed, it has to put to vote certain decisions as it affects the shareholders’ investment. However, companies feel that the power to vote on internal matters should be ideally given to the company management. Hence, companies issue different classes of common stocks that come with different voting rights.

For example, a company may provide Class A shares to outs founders, executives and directors and issue B-shares to the common public. The B-shares may have fewer voting rights than the Class A shares to ensure that the company management votes on vital internal matters and limited controlling power is given to the public shareholders.

Mutual Fund Class B shares

Mutual Fund brokers who earn a commission often recommend purchasing Class A shares to their customers because they have a commission or sales load, which the investors have to pay when buying the mutual fund’s shares. On the other hand, B-shares have no commission or sales load, and the investors pay a fee when selling the fund’s shares.

However, this fee may be waived off if the investors have held the shares for five years or longer with the option of converting the B-shares into Class A shares. It is advised that investors do extensive research before choosing between the two classes as Class A may have a high commission but lower 12B-1 fee, while the B-shares may have a low commission but high 12B-1 fee.

Final Word

It is critical for an investor to research the various classes of shares issued by a company before investing. As B-shares may provide lesser benefits than Class A shares, an investor wanting to be a part of the company’s decision making may opt for Class A shares. However, as B-shares are cheaper than Class A shares, they may be ideal for investors who want to invest a small amount of money.