What is Dual-Class Ownership?
Dual-class ownership is a type of stock structure in which a company issues different classes of stock, each with different privileges.
How Does Dual-Class Ownership Work?
Let's say Company XYZ issues Class A and Class B shares. The Class A shares generally have liquidation preference over all other share classes, meaning that if the issuer were to liquidate, the Class A shareholders would receive cash before other share classes. Class A shares may also have voting and dividend preferences, meaning that Class A shareholders may receive more votes or a higher dividend per share than Class B or C shareholders.
Companies generally set forth the distinguishing features of their stock in their corporate charter and bylaws. Class A shares are generally the first in a series of stock classes maintained by a company.
Companies can list dual-class shares on the New York Stock Exchange, but they cannot reduce the voting rights or existing shares or issue a new class of superior shares after doing so.
Why Does Dual-Class Ownership Matter?
Companies classify stock for many reasons. Some classes of stock might represent ownership in a specific subsidiary, and others might have specific investment purposes, sell at different prices or pay different dividends. Each class may also have ownership restrictions.
Sometimes companies preserve the power of the company's founding family, certain minority owners or management by assigning special voting rights to specific stock classes. In our example, Class A shares, which only the Company XYZ founders hold, may be able to vote, but Class B shares may be nonvoting; alternatively, both classes may be able to vote, but the Class A shares get, say, 10 votes per share and the Class B shares only get one vote per share.
Dual-class shares may seem unfair, and in some cases it is or it reduces the accountability that managers face. However, it is also important to note that certain shareholders may or may not have provided as much capital or talent as the other share classes.