What are Share Classes?
Share classes refers to the division of a company's equity into different classes, which have different rights.
How Do Share Classes Work?
Companies generally set forth the distinguishing features of their share classes in their corporate charter and bylaws.
Class A shares for example, are generally the first in a series of stock classes maintained by a company. They 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.
Share classes may also have different voting and dividend preferences, meaning that cass A shareholders may receive more votes or a higher dividend per share than cass B or C shareholders.
Why Do Share Classes Matter?
Companies classify stock for many reasons. Some classes of stock might represent ownership of 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 certain minority owners or management by assigning special voting rights to specific stock classes. It is important to note that these shareholders may or may not have provided as much capital as the other share classes.