What is a dual‑class stock?
A dual‑class (or multi‑class) stock structure is when a company issues two (or more) classes of common shares with different economic or voting rights. For example, Class A may carry one vote per share while Class B carries 10 votes per share. Often the high‑voting class is held by founders, executives or family members; the low‑voting class is the one sold to the public.
Key takeaways
– Dual‑class structures separate economic ownership from voting control.
– They let founders keep control while raising public capital.
– About 7% of U.S. Russell 3000 companies use a multi‑class structure (Harvard Law School study).
– Dual classes are controversial: supporters argue they protect long‑term strategy; critics say they concentrate power and reduce shareholder accountability.
– Index providers (e.g., S&P, FTSE Russell) have rules that can affect inclusion of dual‑class companies.
How dual‑class stock works (the mechanics)
– Voting rights: Classes differ primarily by voting power per share. “Super‑voting” shares give a small group controlling votes.
– Economic rights: Dividend rights and liquidation preferences are often similar across classes, but they can differ and must be checked in the charter.
– Transferability: Some super‑voting shares are non‑transferable or convert to lower‑voting shares if sold—read the charter.
– Public vs. insider allocation: Typically the public gets the low‑voting class; founders/insiders keep the high‑voting class.
Why companies use dual classes
– Preserve founder control: Enables founders to implement long‑term vision without being outvoted by short‑term shareholders.
– Protect against hostile takeover: Concentrated voting blocks make acquisitions more difficult.
– Raise capital without diluting decision‑making: Founders can sell equity while keeping control.
Short history and regulatory context
– Dual class structures are not new. They were effectively banned by the NYSE in 1940 after public concern in the 1920s, but the NYSE allowed them again in the 1980s.
– Once a company lists with a given class structure, exchanges typically prohibit subsequent creation of classes with superior voting rights.
– Index rules: Some major indexes exclude or limit multi‑class companies; S&P Dow Jones and FTSE Russell have made changes to voting‑rights policies that affect inclusion.
Prevalence and notable examples
– Prevalence: A Harvard Law School Forum review found roughly 7% of Russell 3000 companies had multi‑class structures (Harvard Law School Forum on Corporate Governance).
– Famous examples:
– Alphabet (Google): At IPO, Class A (public) = 1 vote; Class B (founders/executives) = 10 votes; later added Class C (no vote).
– Meta (Facebook), Alibaba, Zynga, Groupon, Ford (Ford family controls large voting share), Berkshire Hathaway (two classes with different economics but different vote implications), EchoStar (CEO Charlie Ergen controls the majority vote).
– Sources for examples: Alphabet IPO materials, Ford proxy, EchoStar SEC filings.
Arguments for and against
– Supporters:
– Helps founders keep focus on long‑term strategy and innovation.
– Shields companies from short‑term market pressures or opportunistic takeovers.
– Critics:
– Concentrates power in a small group that may take actions contrary to other shareholders’ interests.
– Reduces accountability and can make management less responsive to performance.
– Shareholders assume economic risk but have limited control.
– Evidence: Academic studies and governance analyses (see Harvard Law School Forum) suggest multi‑class structures can be associated with poorer long‑term performance in some cases; results vary and depend on structure and enforcement.
Special considerations and governance safeguards
– Sunset provisions: Time‑limited super‑voting rights that expire after a set period or upon certain events (e.g., transfer of shares).
– Vote accumulation: Allowing public shareholders to accumulate voting power over time.
– Transferability limits: Rules that cause super‑voting shares to convert if sold.
– Strong board independence and disclosure: Independent directors and transparent reporting can reduce governance risk.
Practical steps — for investors considering a dual‑class company
1. Read the charter and prospectus:
– Confirm vote per share for each class, dividend rights, conversion and transfer rules, and any sunset clauses.
2. Identify who controls the high‑voting class:
– Size of holding, family links, or single individual control.
3. Check transferability and conversion triggers:
– Do super‑voting shares convert if sold? Are they heir‑preservable?
4. Look for governance protections:
– Sunset provisions, independent board majority, special voting thresholds for related‑party transactions.
5. Review historical performance and management track record:
– How have founder‑controllers performed in prior ventures?
6. Consider index inclusion/liquidity effects:
– Dual‑class status can affect index eligibility and therefore ETF/ index fund flows.
7. Evaluate exit/liquidity risk:
– Class C (no vote) or limited voting classes can affect takeover premiums and M&A dynamics.
8. Factor in activist and litigation risk:
– Concentrated control may reduce activist oversight but increase litigation risks for minority shareholders in some scenarios.
Practical steps — for founders/boards considering a dual‑class structure
1. Define clear objectives:
– Why do you need a dual class? How will it serve long‑term strategy?
2. Design safeguards:
– Include sunset clauses (e.g., voting consolidation after X years or upon IPO share transfer), conversion events, or vote caps.
3. Ensure robust disclosure:
– Explain governance, voting distribution, and potential conflicts in offering documents and proxies.
4. Strengthen board independence and oversight:
– Commit to an independent lead director, independent audit/compensation committees, and clear executive evaluation metrics.
5. Assess market and index consequences:
– Understand that some indices and institutional investors avoid multi‑class firms; this can affect valuation and demand.
6. Consult legal and governance advisors:
– Structure must comply with exchange and securities regulations; IP/charter drafting matters.
7. Consider an exit or contingency plan:
– Plan for succession, transfer, and potential desire to unify shares later.
Practical steps — for policymakers or institutional investors (policy options)
– Promote disclosure and investor education about rights differences.
– Encourage sunset provisions or accrual mechanisms to gradually equalize voting.
– Use index inclusion policies to create market incentives toward single‑class governance.
Conclusion
Dual‑class stock structures are a trade‑off: they can protect visionary founders and foster long‑term innovation, but they also concentrate power and can reduce shareholder accountability. Investors should perform detailed charter and governance due diligence; founders should balance control with credible governance safeguards (e.g., sunsets, independent boards) to maintain market trust and access to capital.
Selected sources and further reading
– Investopedia. “Dual‑Class Stock.” https://www.investopedia.com/terms/d/dualclassstock.asp. Accessed Nov. 24, 2021.
– Harvard Law School Forum on Corporate Governance. “Dual‑Class Shares: Governance Risks and Company Performance.” Accessed Nov. 24, 2021.
– U.S. Securities and Exchange Commission. “Perpetual Dual‑Class Stock: The Case Against Corporate Royalty.” Accessed Nov. 24, 2021.
– Alphabet. “2004 Founders’ IPO Letter.” Accessed Nov. 24, 2021.
– S&P Dow Jones Indices. “S&P Dow Jones Indices Announces Decision on Multi‑Class Shares and Voting Rules.” Accessed Nov. 24, 2021.
– FTSE Russell. “FTSE Russell Voting Rights Consultation – Next Steps.” Accessed Nov. 24, 2021.
– Ford Motor Company. “2021 Proxy Statement,” p. 98.
– EchoStar Corporation. SEC Schedule 14A filings.
If you’d like, I can:
– Walk through a specific company’s charter and show how to evaluate its class structure; or
– Provide a one‑page investor checklist you can use when screening dual‑class stocks. Which would you prefer?