What Are Class A Shares?
Class A shares refer to a classification of common stock that was traditionally accompanied by more voting rights than Class B shares. However, there is no legal requirement that companies structure their share classes this way. For example, Facebook awards more voting rights to Class B shares. In any case, the share class with the most voting rights is typically reserved for the company's management team.
Suppose that Class A has the highest voting rights, as was traditionally the case. Then, one Class A share might be accompanied by five voting rights, while one Class B share could have only one right to vote. A detailed description of a company's different stock classes is included in the company's bylaws and charter.
- Class A shares refer to a classification of common stock that was traditionally accompanied by more voting rights than Class B shares.
- Traditional Class A shares are not sold to the public and also can't be traded by the holders of the shares.
- Traditional Class A shares are only one type of Class A share, and companies are free to structure themselves differently.
Understanding Class A Shares
Class A shares can be used to provide a company's management team with voting power in a volatile public market. Suppose these shares carry a higher amount of votes per share. That helps keep control of the company in the hands of senior management, C-level executives, and the board of directors. If multiple share classes did not exist, it would be easier for an outside investor to obtain enough shares to take control of a company. The existence of Class A shares with extra voting power ensures a hostile situation like that cannot happen.
Additionally, traditional Class A shares often provide enhanced benefits to the holder of the shares. These benefits include dividend priority and liquidation preferences, in addition to increased voting rights. That means people who own traditional Class A shares of a company are paid first when the company distributes dividends. They are also paid first in the event of an exit.
Suppose that a public company with debt is sold to a larger public entity. First, all debt holders receive payment. Then, holders of traditional Class A shares are paid. After that, other shareholders might receive payment if anything is left. Sometimes, Class A shares are convertible to more than one share of common stock, which further benefits these shareholders. Suppose that they sell the company for $50.00 a share. Furthermore, the CEO of the company owns 100,000 Class A shares that are convertible into 500,000 shares of common stock. Then, the CEO earns $25,000,000 upon conversion and sale.
Traditional Class A shares are not sold to the public and also can't be traded by the holders of the shares. In theory, that allows the management team and other key executives to focus on the company's long-term goals. That way, they are not bothered by agency problems that may arise if the Class A shares were sellable or tradable. Agency problems occur when a person prioritizes personal goals over the interests of their company.
Types of Class A Shares
Traditional Class A Shares
Insiders own these shares, and they generally have enhanced voting rights and other privileges. Traditional Class A shares are what many people still think of as Class A shares.
Technology Class A Shares
These shares are owned by the general public, trade on public markets, and typically carry one vote. In this arrangement, insiders usually control class B shares, which have ten times as much voting power and do not trade on public exchanges. Finally, Class C shares are publicly owned and traded but do not have any voting power. This Google share class structure is popular among technology companies.
In this system, Class A shares are still premium shares with more voting rights, at least compared to Class C shares. However, Class B shares have the power that was traditionally associated with Class A shares.
Investors should not assume that buying Class A shares makes them insiders or maximizes their voting power.
High-Priced Class A Shares
These shares are publicly owned and traded in theory. However, they are often out of reach for individual investors in actual practice because of their high prices. Rather than a stock split, these firms create Class B shares that sell at only a fraction of the price of Class A shares. On the downside, Class B shares also have only a fraction of the voting power. Price and voting power do not have to be proportional. For instance, Class A shares might cost $3,000 and get 100 votes, while Class B shares cost $120 and get just one vote. Berkshire Hathaway's share class structure follows this general pattern.