What is Dual-Class Ownership
Dual-class ownership is a type of common stock offering in which companies issue shares that have differing rights. In a dual-class ownership structure, the company can issue two classes of shares, Class A and Class B. These classes may have different voting rights, but they represent the same underlying ownership in the company.
BREAKING DOWN Dual-Class Ownership
Often companies that are transitioning from being private to becoming a public companies may use a dual-class ownership structure to maintain control over the company. For example, when Google went public, it issued Class B shares that had no voting rights to ensure that the founders and executives still had control of the company. Google, now trading publicly as Alphabet, has since altered its share class structure with Class B shares having 10 times the voting power as Class A.
Approximately eight percent of U.S. companies in the Russell 3000 Index had a dual or multiple share class structure as of March 2017.
Dual-class or supermajority ownership structures remain a tool in initial public offerings where an entrepreneur or company founder or family wishes to raise capital through the public markets without ceding control of the enterprise. For listing purposes, the major stock exchanges require such dual-class structures be put in place at the time of the IPO.
An established, blue chip company can also elect to change from a single to a dual-class stock structure to provide greater access to investors. Warren Buffett’s Berkshire Hathaway is the most well-known example of this practice. The company’s Class A shares have historically traded at such a high valuation that most investors can not afford to purchase them. By issuing Class B shares at a fraction of the price of the A shares and later conducting a 50-to-1 stock split, Berkshire stock has become much more accessible to retail investors.
Pros and Cons of Dual-Class Ownership
Ordinary class shares, those with fewer or no voting rights, typically trade at a price discount to stocks that only offer a single class of shares. Governance experts say this discount tends to go away during strongly positive markets but that it could be an impediment for companies seeking to issue stock during difficult equity market conditions.
Such a structure can provide added protection in the case of a hostile takeover attempt as the Class A shareholders maintain more control relative to outside shareholders. However, the existence of a dual-class structure can make if difficult to raise additional capital through the equity or debt markets if such a structure is no longer viewed favorably by the investment community.