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. Class B shares may also have lower repayment priority in the event of a bankruptcy.
- Class B shares are issued by corporations as a class of common stock with fewer voting rights and lower dividend priority than Class A shares.
- Such a dual-class structure might be instituted if the original owners of the company wanted to sell the majority of their stake in the firm, but still maintain control and make key decisions.
- Class B shares may also refer to mutual fund shares that carry no sales load.
Class B Shares
Understanding Class B Shares
Different share classes within the same entity typically confer different rights to the stockholder. For example, a public company may offer two classes of common stock outstanding: Class A common stock and Class B common stock. This dual-class structure is typically decided on when a company first goes public and issues stock in the secondary market through an IPO.
Class B shares typically have lower dividend priority than Class A shares and fewer voting rights. However, different classes do not usually affect an average investor’s share of the profits or benefits from the company’s overall success. Some companies offer more than two classes of shares (for instance, Class C and D) for various reasons. Sometimes, a company will offer a second class of shares that have a lower share price in order to attract individual investors as opposed to institutional shareholders - for instance, with Berkshire Hathaway's Class A shares (BRK.A) trading at around $330,000 (as of September 2020) and its Class B shares (BRK.B) at a more palatable $220 per share.
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.
Although Class A shares are often thought to carry more voting rights than Class B shares, this is not always the case: Companies will sometimes 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."
Mutual Fund Class B Shares
In terms of mutual fund designations, commissioned mutual fund brokers typically recommend Class A shares to individual investors. The fund shares have a sales load, or commission, that investors must pay when buying the fund's 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 mutual fund shares have no load fees. Investors purchasing Class B shares may instead pay a fee when selling their shares, but 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.