What are 'Class B Shares'
Class B shares are a classification of common stock that may be accompanied by more or fewer voting rights than Class A shares. Although Class A shares are often thought to carry more voting rights than Class B shares, this is not always the case: Companies will often try to disguise the disadvantages associated with owning shares with fewer voting rights by naming those shares "Class A" and those with more voting rights "Class B." A detailed description of a company's different classes of stock is included in the company's bylaws and charter.
BREAKING DOWN 'Class B Shares'Class B shares have lower dividend priority than class A shares. However, different share classes do not typically affect an average investor’s share of the profits or benefits from the company’s overall success.
Voting Power of Share Classes
An investor should research details of a company’s share classes when considering investing in a firm with more than one class. For example, a private company deciding to go public typically issues a large number of common shares, but it may provide its founders, executives or other large stakeholders with a different class of common stock carrying multiple votes for each share. Increasing voting shares gives key company insiders greater control over voting rights, the company’s board of directors (BOD) and corporate actions. Because key insiders may maintain majority voting rights without owning more than half the outstanding shares, the insiders may defend the company against hostile takeovers. As long as large stakeholders owning greater voting shares are successfully running the business, individual investors need not be concerned.
Differences Between Class A and Class B Shares
Commissioned mutual fund brokers typically recommend class A shares to individual investors. The shares have a load, or commission, investors pay when buying the shares. Investors purchasing large numbers of shares, or who have shares in other funds offered by the same mutual fund company, may receive discounts on the load. Class A shares may have a lower 12B-1 fee, or marketing and distribution fee, than other share classes.
In contrast, class B shares have no load fee. Investors purchasing class B shares pay a fee when selling their shares. The fee may be waived when holding the shares five years or longer. In addition, class B shares may convert to class A shares if held long-term.
Although the absence of a load means the entire purchase price of the shares is invested into the mutual fund, rather than having a percentage subtracted upfront, class B shares have higher 12B-1 and annual management fees than class A shares.