Some companies have shares that have different rights. Dual-class shares refer to the class of shares which have superior voting rights. These shares allow founders and the top executives to have control over the company even if they have fewer stakes in the company. They give more power with a smaller number of stocks. These shares have different voting rights, dividend payments and features.
This dual-class share structure has been a topic of debate ever since it was introduced. Let’s have a look at the advantages and disadvantages of this structure:
1. The control is in the hands of the owner, founders, and top management of the company. This control is necessary to protect the company from short-term pressures of the market.
2. It allows management to focus on growth and long-term strategy.
3. It affects the overall performance of the company.
4. The company does not have a short-term financial focus that usually investors have.
5. The company can save on low compensation benefits through outsourcing.
6. In case of startups and companies with small-cap, dual shares keep control with the owners.
7. The shares usually cannot be traded. Hence the company has loyal investors.
1. The most apparent problem of dual-class shares is that they are fundamentally unfair as they tend to create a limited class of shareholders
2. The manager that holds majority stocks and the remaining shareholders have discrepancies which reduce accountability
3. The management can make bad decisions, and it may only have a few consequences
4. Massive control from the inside can weaken the structure
5. Companies with this type of structure can be more burdened with debt than companies with a single-class shares
6. It is not easy to change this structure into a single-class one
7. The company is less motivated to raise funds.
When a company does not want to give up control but wants to have public markets to raise finance, they issue dual-class shares. It needs to strike a balance to protect the interests of both shareholders and founders.