A Real-Life Example of Dual Class Structures in a Public Company
A Look at Ford's Class A and Class B Shares
Dual class structures in public companies are interesting for a variety of reasons. I originally wrote this article on the topic back in June 1, 2009 after reading through some annual reports. A lot of time was spent on precious metals companies as part of the ongoing series I was rolling out here at Investing for Beginners. Several hours later, I found myself delving into the details of car companies. The Ford Motor Company, in particular caught my eye. I was impressed by the move to repurchase its own debt at 35 cents on the dollar in the open market, enriching long-term investors, so I thought it would be worth a closer examination.
As I was reading their 2008 annual report, I came across a statement that is routine when studying companies with dual-class structures but I realized that many of you may not know how it works. Here's the paragraph: "If liquidated, each share of Common Stock will be entitled to the first $0.50 available for distributions to holders of Common Stock and Class B Stock, each share of Class B Stock will be entitled to the next $1.00 so available, each share of Common Stock will be entitled to the next $0.50 so available and each share of Common and Class B Stock will be entitled to an equal amount thereafter."
Looking at the March 31, 2009 10-Q filing with the SEC, Ford had 2,802,397,653 shares of regular common stock and 70,852,076 shares of Class B stock. As I researched further, I discovered that owners of the regular shares were entitled to elect 60 percent of the Board of Directors, while owners of the Class B shares entitled to elect 40 percent. Based upon the paragraph quoted above, they were also entitled to different amounts if the company went into bankruptcy and there was anything remaining after the debts have been paid.
Why did this exist? The Ford family owns all of the more than 70 million shares of the Class B stock. It is a way for them to ensure they kept control of the company no matter how much stock they have to issue to avoid bankruptcy. Some argue that dual class structures are inherently unfair because you are decoupling ownership from voting power. I'm not sure I agree, simply because everyone accepted those terms when the shares were first issued, so you knew what you were getting into at the outset.
The liquidation provisions, if I'm reading the details correctly, help to ensure that the Ford family walks away with more than the regular stockholders who bought their shares on the open market through a brokerage account in the event of a catastrophic liquidation.
Doesn't Anyone Remember Ford's $10 Billion Dividend?
One thing that interests me is that Ford burned through $21 billion in cash in 2008 as a result of the global economic collapse. Yet, it was only nine years prior to that in 2000 that the company restructured and paid out a $10 billion special dividend. According to an article from that time— keep in mind, this is old—"The Ford family holds all 71 million shares of the company's Class B stock, along with a small number of the company's 1.1 billion common shares. Under rules designed to preserve family control and drafted when the company went public in 1956, the family holds 40 percent of the voting power at the company as long as it continues to own at least 60.7 million shares of the Class B stock—even though the Class B shares make up only 6 percent of the company's overall equity."
The article goes on to point out, "If the family sells too many shares of its Class B stock, whether to pay estate taxes, cover personal expenses or simply participate in a stock buyback, then the family's influence shrinks. If the family's holdings fall to between 33.7 million and 60.7 million shares of Class B stock, the family wields only 30 percent of the voting power. And if the family's holdings fall below 33.7 million shares then all special voting privileges are lost.
When Class B shares are sold outside the family, they revert to common stock. Under the plan at the time I originally published this article, each holder of Ford's common or Class B stock would be given a choice of receiving $20 a share in cash or additional common stock. William C. Ford Jr., Ford's chairman and one of Henry Ford's 13 great-grandchildren, said that the members of the Ford family would take additional stock for all of their Class B stock. Most if not all family members will put the additional distribution into the family's voting trust, he added."
You can accuse the car companies of completely inept management but you certainly have to give credit to the members of the Ford family for putting their money where their mouth is. They are married into the business lock, stock and barrel.