What is a Dual Class Stock
A dual class stock is the issuing of various types of shares by a single company. A dual class stock structure can consist of Class A and Class B shares, for example. Shares can differ, based on distinct voting rights and dividend payments.
When multiple share classes are typically issued: one share class is offered to the general public, while the other is offered to company founders, executives and family. The class offered to the general public has limited voting rights, while the class available to founders and executives has more voting power and often provides for majority control of the company.
BREAKING DOWN Dual Class Stock
Well-known companies, such as Ford and Warren Buffett's Berkshire Hathaway, have dual class stock structures, which provide founders, executives, and family the ability to control majority voting power with a relatively small percentage of total equity. The dual class structure at Ford, for example, gives the Ford family control of 40% of the voting power, while owning only about 4% of the company's total equity. An extreme is example is Echostar Communications CEO Charlie Ergen's holding 5% of the company's stock, yet controlling 90% of the vote with his powerful Class A shares.
Many were frustrated at Google’s IPO when the now-internet giant, boasting a market capitalization among the top thirty worldwide, issued a second Class B shares to founders with 10 times the amount of votes as ordinary Class A shares, sold to the public.
The New York Stock Exchange allows U.S. companies to list dual-class voting shares. Yet once shares are listed, companies cannot reverse any voting rights, attributed to the new class, or issue any classes of shares with superior voting rights.
Controversy Over Dual Class Stock Structure
Dual class stock structures are controversial. Supporters feel that the structure allows strong leadership and the placing of long-term interests over near-term financial results. On the other hand, opponents of the system feel it allows a small group of privileged shareholders to maintain control, while other shareholders (with less voting power) provide the majority of the capital. Academic research has proven that powerful classes of shares for insiders can actually hinder long term outperformance.