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 may issue two or more classes of shares, Class A and Class B, typically. These classes may have different voting rights, but they represent the same underlying ownership in the company.
- Dual-class ownership is when a company issues more than one class of shares, each representing ownership, but one class having more voting rights than the other(s).
- Companies may do this to retain control over the company.
- Stocks without voting right may trade at a discount to stocks with voting rights.
How Dual-Class Ownership Works
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.
Approximately seven percent of U.S. companies in the Russell 3000 Index had a dual- or multiple-class structure, according to a Harvard Law School study.
Dual-class or supermajority ownership structures remain a tool in initial public offerings (IPO) 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 (BRK.A) shares have historically traded at such a high price that most investors can not afford to purchase them. By issuing Class B (BRK.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 it difficult to raise additional capital through the equity or debt markets if such a structure is no longer viewed favorably by the investment community.
Real-World Example of Dual-Class Ownership
Google, now trading publicly as Alphabet Inc. (GOOG, GOOGL) has done their share classes a bit differently. Instead of GOOG.A and GOOG.C, for example,they have two different ticker symbols.
Owners of ticker symbol GOOG have no voting rights, representing Alphabet's Class C shares, while owners of GOOGL do. The stocks trade very similarly, but do have small differences in daily price moves. The price difference between the stocks often varies by a few dollars.