A Brief Overview
Investors today have a wide range of offerings to explore when looking at investments. These include but aren’t limited to stocks, annuities, bonds, options, and mutual funds. Each of these investments exists in a number of different ways and constitute their own little worlds. Take, for instance, mutual funds which can be equity or growth schemes, fixed income or debt-based, balanced or liquid funds among others. In fact, mutual funds are known to have different classes of shares of which class A shares have been examined below.
Defining Class A Shares
Class A shares can be understood to fall under the classification of common stock there were originally favoured by more voting rights in comparison to Class B shares. That being said, there exists no legal requirement that asks of companies to structure their share classes in this manner. Take, for instance, Facebook who allocates a greater number of voting rights to Class B shares. Regardless of this fact, however, the share class which features the most voting rights is ordinarily reserved for a company’s management team.
Let us assume that Class acquires the most voting rights which was originally the case. In such instances, a single Class A share may be tethered to five voting rights whereas a single Class B share would only be tethered to a single vote. A given company’s bylaws and charter outline and provide clarity on the different stock classes that pertain to the company under consideration.
Examining the Scope of Class A Shares
Class A shares are often employed to provide the management team of a company with access to voting power in instances of public markets being volatile. Let us assume that these shares carry with them a greater weightage of votes per share. This would help the senior management, board of directors and C-level executives of the company under consideration with greater control of it.
If companies did not hold different share classes, the possibility for outside investors to acquire sufficient shares to take over control of the company would be far easier. The presence of Class A shares that hold additional voting powers prevents hostile situations such as this from occurring.
Furthermore, ordinarily, Class A shares have been known to provide those that invest in them with superior benefits. These advantages pertain to liquidation preferences, dividend priority and heightened voting rights among others. This implies that those who have Class A shares under their possession belonging to a given company are first paid when the company decides to distribute its dividends. In case of an exit, these shareholders would also be paid first.
Consider the following scenario. A public company holding debt finds itself sold to a bigger public entity. The first course of action would be to pay all debt holders. Following this, those who hold the traditional Class A shares are paid. Only after this would other shareholders receive payments provided there are funds leftover. On occasion, Class A shares may transition to more than one share of common stock. Such scenarios allow such shareholders to additional benefits. Applied to figures, consider the company having been sold at INR 500 per share. Additionally, presume that the CEO of this company owns 100,000 Class A shares that can be converted into 500,000 shares of common stock. By this logic, the CEO is able to amass INR 250,000,000 via the conversion and scale mechanisms.
Traditional Class A shares are not available for sale to the public and holders of such shares are not permitted to trade them. Theoretically, this enables key executives along with the management to help stick to the long-term goals pertaining to the company. Consequently, they are not tangled by agency problems that could occur in the event of the Class A shares being sold or traded. Agency problems arise when individuals place priority on their personal goals over the collective interests of the company.
Understanding the Types of Class A Shares
Class A shares may exist in the following forms.
Traditional Class A Shares
Insiders hold ownership of these shares that are ordinarily tethered to enhanced voting rights along with other privileges.
Technology Class A Shares
The general public can own these shares that trade on public markets and are each worth a single vote. In such scenarios, insiders have control of class B shares that tend to have ten times the voting power and aren’t publicly traded. Class C shares on the flip side are publicly traded and owned but lack voting powers.
High-Priced Class A Shares
Theoretically, such shares are publicly owned and traded. That being said individual investors are often unable to get their hands on them in real-life scenarios owing to the hefty prices they command. As opposed to a stock split, companies generate Class B shares that are sold for a modicum of what Class A shares are priced at. A shortfall of Class B shares here is that they only hold a small portion of the voting power. It is worth noting here that the price and voting power of a class of shares need not be proportional. For example, Class A shares may be priced at INR 3000 and worth 100 votes whereas Class B shares could be priced at INR 500 and be worth a single vote.
When looking at mutual funds, they too come with a wide range of share classes tethered to them including Class C, Class B and Class A shares. Class A mutual funds require investors to pay a fee at the time the purchase of such shares is made. Class A shares mutual funds may also have bulk discounts tethered to them