All About Dual Class Shares

A thorough understanding of the stock market and the investment tools is essential to becoming a successful and experienced investor. Stocks, or shares, are one of the most popular investments on stock markets. Remember that a stock or share is a unit in the company's capital. Ownership of shares means you are part-owner of the company. The company's losses are shared by shareholders, while the shares of its stockholders receive dividend payouts. Investors can also vote for the company through shares.

Did you know that investors can be offered dual-class shares by companies? Dual-stock structures, as the name implies, allow a company to offer two or more types of stock. Common investors receive one type of share, while executives (including its founders and family members) get the second. The company may issue more than one type of share. The company can issue three types of shares, such as Category A, Category B, and Category C. Class C shares can only be given to the founders or their family members, while class B shares can be offered to its executive directors. The general public can also purchase the third class, Category A.

Additional features of dual shares

Let's say a company issues dual-class shares in two categories. The top executives and founders will receive the reserved category Y, while general investors will get the ordinary category. In terms of:

• Voting Rights The class Y shares have more voting rights than the class X shares. This is called Preferential Voting Rights, or PVRs.
• Dividend payouts The reserve or limited class of shares (Category 1) can have a higher dividend payout than the second type (Category 2)

History of dual shares

Dual-class stock offerings began in America with the IPO of Dodge Brothers, an automobile company. This facilitated the provision of stocks with non-voting rights for the general public. The New York Stock Exchange (NYSE), however, banned dual-share stocks. However, there are other US stock exchanges that allow dual-class stocks. The NYSE allowed dual shares to be listed on the exchange in the 1980s. Ford Motor Company adopted this dual-class stock system in the 1950s. It allowed Ford's family to have 40% of the company's voting power, while only owning 4%. Many family-owned media and media companies adopted this mechanism.

Examples of dual-class shares

• Google is an example of a dual-class stock scheme. The company's 2004 IPO was announced with three classes of shares. The general investor received Class A shares, which had one vote per share. The company's top executives received Class B shares, which provided them with 10 votes per share. Finally, Class C shares were reserved only for employees of Google and had zero voting rights.
• Warren Buffert's conglomerate Berkshire Hathaway is another example of dual-class stock mechanisms. The Class B stocks, which are for regular investors, are priced at $200. While the Class A stocks, which are for more serious investors, have a value of approximately $299,000 per share, they can be purchased for around $200.

Stocks of dual-class stock on US stock exchanges

Dual-class stocks are gaining popularity on the US stock exchanges. In 2018, around one-fifth the listed companies offered dual-class shares. Around 19% of publicly traded companies had dual shares in 2018.

Double-class shares in the Asia-Pacific region

Initially, the stock markets in Asia-pacific, such as the Hong Kong Stock Exchange, (HKEK), and the Singapore Stock Exchange, (SKE), did not allow dual-class shares with PVRs to be listed on their stock exchanges . In 2018, both stock exchanges were able to allow dual shares to be listed, despite being under intense competition from US stock markets. This was also permitted by the Shanghai Stock Exchange (SSE), in 2019.

Dual-class shares in India

Indian companies may offer shares with Differential voting Rights (DVRs) similar to dual-class stock. DVR shares are only allowed to be issued by companies that have made profits over the past three years and filed annual returns and accounts in a timely manner. These stocks cannot, however, exceed 25% of a company’s share capital. Tata Motors first issued DVR shares in India in 2008. These shares restricted voting rights but provided common investors with a higher dividend payout. Pantaloon Retail India and Gujarat NRE Coke are other companies that offer DVR shares. DVR shares are less popular than full-right voting shares and are sold at a lower price.

Dual-class stock advantages

• Dual shares give the founders of the company and their top executives more voting power. This allows them to make important policy decisions without any opposition from the general shareholders. This could lead to long-term financial success for the company.
• Dual shares have PVRs that allow the founders to keep control of the company without fear of hostile takeovers.
• Dual-class stock can be a great option for tech startups because it allows founders to raise equity and not dilute control.

Dual-class shares have disadvantages

• Dual-class stock with PVRs is frequently criticized for its superior voting rights. Despite providing the majority of capital, most shareholders have less voting rights. This results in a more balanced risk distribution favoring the founders and top executives.
• It could lead to top executives and founders misusing their control.
• Public shareholders are limited in their influence and cannot give oversight to the board or management of the company.

Conclusion:

Dual shares come with their own pros and cons. Industry experts suggest that companies should try to find a balance between single-class and dual stocks by using appropriate checks and balances. Companies could reduce the time limit for dual shares or increase voting rights over a time frame. DVR shares are not available in India. Trustworthy and reliable financial partners are essential when you begin your investment journey in shares. Consider the following key parameters before you decide to invest in a stockbroking company: ease of opening Demat or trading accounts; brokerage fees; quality of research reports; use of cutting-edge technology in trading platform and customer support.