What are Dual Class Share Structures?
Back in the old days, if you owned a share in a company, you had a vote which came with that share. If company management then wanted to pursue a new strategy, they would need to propose that strategy to all investors and collect a majority vote at an Annual General Meeting of investors. If the majority of investors voted in favour of pursuing the strategy laid out by company management, the company was allowed to go ahead and implement the new strategy.
One shareholder, one share, one vote - simple, right? Not so fast…while this was the case prior to the 1950s, in recent times, things have become a little more complex.
Family controlled or founder-led companies sometimes decide to split the shares into two “Classes” - usually called “Class A” and “Class B” - one class typically has somewhere between 10-100 votes per share, while the other class has either 0 or 1 vote per share.
Ford Motor Company was the first to do this in the ‘50s, with other family controlled giants following suit in the years which followed. The idea was that even if the family only(!) had a 10% stake in the company, they would still control well over 50% of the voting rights, enabling the family to keep making decisions in the long term best interests of the company.
As a more recent example, Google decided to split its shares into Class A and Class B ahead of its IPO in the 2000’s. Each "Class B” share carried 10 votes per share, owned by Google founders and early employees (and typically not traded on stock exchanges), while each “Class A” share was sold into the public markets at IPO (this is what you would buy as an individual investor).
Facebook, Snap and even Lyft this year are among a growing list of tech companies which have implemented similar share splits in more recent years.
This “splitting" of a company’s shares into a dual class share structure ends up concentrating the strategic decision making power in the hands of those who have more votes - usually company founders / management / controlling family.
Those which split the shares up argue this is in the long term interests of the company as they would apply long term vision / thinking to any strategic decisions which are to be made, as opposed to leaving it in the hands of the public markets, where investors can sometimes apply a short-term mentality depending on their own investment horizons (think of Google being forced to sell Waymo or Facebook not being allowed to buy Instagram or Whatsapp all those years ago just because public investors didn’t think it was the best use of the company’s money at the time).
Public market investors, on the other hand, argue against this on the basis that it is fundamentally un-democratic to shift power over how a company is run in this way, and by doing so these companies end up risking being mis-managed in the future with public investors having little or no power to stop this from happening.
That said, public investors with less voting power can always decide to sell their shares if they prefer not to expose themselves to this risk, and it is also worth noting that owning either class of shares usually gives you the same financial return (via capital growth and/or dividends).
The debate rages on to this day, with the investment community gravitating towards something of a compromise on the topic, where dual class share structures are accepted by investors provided there is a “back-up” plan in place which would force a company to revert to a one-share, one-vote structure in case there was a specific “event” such as a founder stepping down or a family selling down its stake in a company to below any meaningful threshold.
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Dual-class share structures can be either useful or harmful, and it’s worth thinking through their consequences on a case-by-case basis if the company you’re looking to invest in has this structure in place.
After all, would you let this stop you from investing in companies like Google, Facebook or even Berkshire Hathaway? Probably not 😅
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
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