Dual-class structures in public companies are interesting and somewhat controversial. The Ford Motor Company is a fascinating case study in dual-class shares.
- Some companies offer a dual-class structure, treating stockholders differently depending upon which class of stock they own.
- Ford Motor Company is a famous example; the owners of the regular shares are entitled to elect 60% of the Board of Directors, while owners of the Class B shares are entitled to elect 40%.
- They are also entitled to different amounts if the company goes into bankruptcy and if anything remains after debts have been paid.
Ford Motor Company and Dual-Class Structures
Here's an explanation from a Ford annual report on how its dual-class stocks work: "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."
The owners of the regular shares are entitled to elect 60% of the Board of Directors, while owners of the Class B shares are entitled to elect 40%. They are also entitled to different amounts if the company goes into bankruptcy and if anything remains after debts have been paid.
Why does 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 keep 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. The liquidation provisions 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?
Ford burned through $21 billion in cash in 2008 as a result of the global economic collapse. Yet, it was only nine years before that, in 2000, that the company restructured and paid out a $10 billion special dividend. According to a New York Times article from that time:
"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.
"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 to the business lock, stock, and barrel.