Common Stock Classes
First, it is important to clear up a point of confusion: do not mistake different classes of common stock with preferred stock. Preferred shares are an entirely different type of security, affording their owners priority dividend payments and a higher position on the priority ladder in the event of a company's liquidation or bankruptcy. Common stock represents the lower-ranked (and much more prevalent) form of equity financing. However, a company can choose to issue different classes of common stock to certain investors, board members, or company founders.
Generally, companies that choose to have multiple classes of common stock issue two classes usually denoted as Class A and Class B shares. Common practice is to assign more voting rights to one class of stock than the other. For example, a private company that decides to go public will usually issue a large number of common shares, but the occasional company will also provide its founders, executives, or other large stakeholders with a different class of common stock that carries multiple votes for every single share of stock. Commonly, the "super-voting" multiple is about 10 votes per higher class share, although occasionally companies choose to make them much higher. Usually, Class A shares are superior to Class B shares, but there is no standard nomenclature for multiple share classes. Sometimes Class B shares have more votes than their Class A counterparts. Because of this, investors should always research the details of a company's share classes if they are considering investing in a firm with more than one class.
- Companies that have multiple classes of common stock denote them as Class A, Class B, etc. shares.
- Common practice is to assign more voting rights to one class of stock than the other.
- Typically Class A shares are the generic common stock.
- The share class with more voting power are known as super-voting shares.
Voting and Super-Voting Shares
Usually, the purpose of the super-voting shares is to give key company insiders greater control over the company's voting rights, and thus its board and corporate actions. The existence of super-voting shares can also be an effective defense against hostile takeovers since key insiders can maintain majority voting control of their company without actually owning more than half of the outstanding shares.
Voting issues aside, different share classes typically have the same rights to profits and company ownership. Thus, even though retail investors may be limited to purchasing only inferior classes of common stock for a given company, they still enjoy a proportionally equal claim to the company's profits. In these cases, investors see their fair share of a company's returns on equity, although they do not enjoy the voting power their shares would normally provide in the absence of dual classes.
Provided the large stakeholders who own the disproportionate voting shares are successful in running the company, this should be of little concern to investors, especially the typical retail investor who has a very tiny stake in the company anyway. Normally, the existence of dual-class shares would only be a problem if an investor believed the disproportionate voting rights were allowing inferior management to remain in place in spite of the best interests of shareholders.
Share classes are also associated with mutual funds, but in those cases refer not to voting rights but to the fee structure that investors are subject to.
Example of Multiple Share Classes
One good example of multiple class shares is the case of Google and its parent entity, Alphabet, Inc. The ticker symbol GOOG stock represents Class C shares, while GOOGL stock represents Class A shares. Class C shares (GOOG) have no voting rights, while Class A shares (GOOGL) have one vote each. These classes were instituted after a stock split resulting from the formation of Alphabet as the parent company. Anyone who owned Google stock before the split got one share of the voting GOOGL stock and one share of the non-voting GOOG stock. There are also Class B shares of Google stock, but these do not trade on the stock market Instead, the Class B shares are owned by Google insiders and early investors and each get 10 votes, making them super-voting shares.