What is a dual-class stock?

Dual-class stocks have been around since the 1920s, but they have really gained momentum in recent years. They seem to be getting traction with investors because companies such as Google (Nasdaq: GOOG), LinkedIn (NYSE: LNKD), and Facebook (Nasdaq: FB) use this type of investment structure. It can also be an attractive option for start-up companies that want to raise money, but don’t want their management and founders to lose control in later rounds of growth.

The defining characteristic of a dual-class company is that it has two different types of publicly traded common equity. One class is called “regular,” while the other is known as “super.” Regular stock has all of the rights that shareholders are supposed to have, but super shares give their holders special privileges, like more voting power or seats on the board.

What Are The Reasons For Dual-Class Stocks?

There are many reasons why companies choose dual-class structures for their stocks; here are some of them:

• Control – Companies can keep their original founders in control by issuing super shares with extra voting rights. Founders know what it takes to start a business and make it grow—letting go may be hard once things get big. When you issue super shares, your management team can retain control without having to worry about outside investors getting involved after a successful IPO. There is always a chance that this could happen, but super shares make this less likely.
• Financial and Tax Incentives – If a company is looking to raise capital, issuing regular shares means that they may have to give up more of their business than they’d like in return for the money. With dual-class structures, companies can issue super shares with extra voting power to insiders, which give them an advantage when it comes to making decisions that affect major financial matters such as mergers and acquisitions, issues of new stock or debt, and so on.

The History of Dual-Class Stocks:

Dual-class stocks were used by bigger corporations in the early part of the 20th century. For example, RJR Nabisco (NYSE: RN) was a publicly traded company that issued both shares with different voting rights. Regular issues (Class A) were traded publicly, while super class (Class B) was only held by insiders like the Rockefeller family. When two companies who owned Class A stocks decided to merge together in 1989, investors sued because they wanted equal control over the new entity; this made it difficult for the merger to go through. However, after much deliberation, the courts allowed the merger to proceed with unequal voting power for each stock.

After RJR Nabisco successfully merged with its partner company and then went public again, smaller companies started using dual-class stocks because it could give them enough capital without forcing them to give up so many of their assets in an IPO. During this time period, Google, Facebook, and LinkedIn were all private companies working on their own initial public offerings (IPOs). They issued super-voting class B shares or Class A shares with different voting rights.

Today, dual-class structures are still used by many smaller companies that want to grow but don’t want to lose control of their company’s direction. Over time, this trend could become more popular with bigger corporations as well.

What Are The Potential Drawbacks?

Some people say that issuing dual-class structures can be a red flag for investors who are considering buying new stock in an IPO—after all, it’s not hard to see what the founders are trying to do here. There is also concern about whether or not some shareholders will have more voting power than others despite being in the same boat when it comes to ownership. Companies who have super-voting shares have to establish what’s called a “sunset provision,” which means that the structure is only valid until something happens (e.g. an IPO or other major event).

When companies decide to go public, shareholders get equal rights; if you buy one share of Google (GOOGL), for example, you get one vote and can weigh in on all company matters. Super shares would give Google founders Larry Page and Sergey Brin more voting power, but they would lose this advantage once they decided to go public.

What about the Controversy?

Dual-class structures are complicated because there’s not just one way for them to be set up. Those who want the founders and management team to retain control of major business decisions may vote in favor of these structures, but those who don’t like this idea might do the opposite. There is no “one size fits all” solution with dual-class shares.

Conclusion:

The Bottom Line: While super-voting shares don’t seem like a good fit for most companies, they can be useful in certain situations—like keeping two companies from merging with each other after an acquisition or helping private companies raise capital before going public.