A:

First, do not confuse 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 each 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.

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.

For further reading, see The Two Sides of Dual-Class Shares and Good Governance Pays.

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