One of the key requirements of becoming a seasoned and prolific investor is a thorough knowledge of the stock markets and its investment instruments. Stocks or shares are among the most popular investments in stock markets. Here, you must remember that a share or stock is a unit of the company’s capital, and ownership of shares implies part-ownership of the company. Shareholders bear the losses of the company along with receiving rewards through various types of dividend payments. Shares also provide investors with voting rights in the particular company.
But did you know that companies can also offer dual-class shares to investors? As the name suggests, a dual-stock structure indicates that a company has two or more different types of stock offerings. Typically, one type of share is provided to the common investors, and the second type is reserved for company executives, including its founding members, family-members or top executives. There can also be a scenario of the company issuing more than two types of shares. For instance, the company can issue three categories of shares: Category A, Category B and Category C. While class C shares can be provided to the founding or family-members of the company, class B can be offered to its executives. The third class or Category A is offered for the general public.
Additional features of dual shares
Suppose a company issues dual-class shares of two categories: Category X and Category Y. The reserved category Y will be provided to top executives and founders, while the ordinary category X will be offered to general investors. The former category of stocks will differ from the latter in terms of :
- Voting Rights: The class Y shares will have more voting rights as compared to the class X shares. This is known as Preferential Voting Rights (PVRs).
- Dividend payouts: The reserved or limited class of shares (Category Y) can have higher dividend payout vis-a-vis the second type of shares (Category X).
History of dual shares
The practice of providing dual-class stocks started in the United States of America, with automobile company Dodge Brothers’ IPO, that provided stocks with non-voting rights to the general public. Although the New York Stock Exchange (NYSE) banned the dual share mechanism, other US stock exchanges allowed dual-class stocks. In the 1980s, the NYSE also allowed dual shares to be listed in the exchange. This dual-class stock mechanism was adopted by Ford Motor Company in the 1950s, and allowed the Ford family to have 40% voting power, despite owning only 4% of the company’s equity. This mechanism was subsequently adopted by many family-owned businesses and media companies.
Examples of dual-class shares
- An example of the dual-class stock mechanism is the internet giant Google. In 2004, the company announced its IPO with three different classes of shares. Class A shares were provided to general investors,and carried one voting right per share. Class B shares were provided to top executives of the company, and provided 10 votes for each share. Lastly, Class C shares were reserved for Google employees, and carried zero voting rights.
- Another example of the dual-class stock mechanism can be seen in Warren Buffert’s conglomerate company, Berkshire Hathaway. Here, the Class B stocks – for regular investors – are priced at $200, while the Class A stocks have a price of around $299,000 for each share.
Dual-class stocks in US stock exchanges
The popularity of dual-class stocks have soared across the US stock exchanges, and by 2018 around one-fifth of the listed companies provided for dual-class stocks. In 2018, around 19% of the publicly listed companies had dual shares.
Dual-class shares in Asia-Pacific region
Initially, the stock exchanges in the Asia-pacific region such as the Hong Kong Stock Exchange (HKEK) and Singapore Stock Exchange (SKE) did not allow dual-class shares, having PVRs, to be listed. But in 2018 both the stock exchanges – facing stiff competition from US stock exchanges – relaxed the norms, and allowed for listing for dual shares. In 2019, the Shanghai Stock Exchange (SSE) also allowed this mechanism.
Dual-class shares in India
Similar to dual-class stocks, Indian companies can offer shares with Differential Voting Rights (DVRs). As per the Companies Act, DVR shares can be issued only by companies, which have shown profits for the last three years along with zero defaults in filing annual accounts and returns. Such stocks, however, cannot exceed 25% of a company’s share capital. In 2008, Tata Motors issued DVR shares for the first time in India. While restricting voting rights, these shares provided for a higher dividend payment to common investors. Other companies offering DVR shares include Pantaloon Retail India, Gujarat NRE Coke and Jain Irrigation. DVR shares in the country are not popular, and are offered at lower prices as compared to full right voting shares.
Advantages of dual-class stocks
- The extra voting power in the case of dual shares can allow the company’s founders and top executives to make key policy decisions, sans any debate or obstruction from general shareholders. This can allow for long-term profitability of the company.
- The PVRs associated with dual shares allows the founders of companies to retain control over the company, without the risk of any hostile takeover.
- Dual-class stocks can help technology startups by allowing the founders to raise equity without diluting control.
Disadvantages of dual-class shares
- The dual-class stock mechanism with PVRs is often criticized because it provides superior voting rights to an exclusive few. The majority of shareholders – despite providing the bulk of capital – have lesser voting rights. This, in turn, results in a lopsided risk distribution, favouring the founders and top executives.
- It can result in misuse of control by founders and top executives.
- As public shareholders have limited influence, they cannot provide oversights to the company’s board and management.
Thus, dual shares have their distinct pros and cons. As per industry experts, companies could strive to strike a balance between dual and single-class stocks by implementing suitable checks and balances. Companies could limit the time period for dual shares, or increase the voting rights of public shareholders over a period of time. In India, the concept of DVR shares is limited, and offered only by few companies. While starting your investment journey in different types of shares, do remember to rely only on a trusted and reliable financial partner. Zero in on a stockbroking firm, only after considering crucial parameters such as the ease and convenience of opening Demat and trading accounts, brokerage fees, quality of research reports, use of cutting-edge technology in trading platforms and superior customer support.