A dual-class stock is a type of stock that has two different share structures. Typically, one class of shares is available to the general public, while another class is limited to insiders, like company founders, executives, and their relatives. The dual-class structure has become popular in recent years with firms making internal public offerings (IPO).
Want to know more about dual-class stock? We’ll discuss how dual-class stocks work and some well-known companies that have issued two classes of shares. Find out why companies often choose this route, as well as why dual-class stock is controversial among investors.
Definition and Examples of Dual-Class Stock
When a company issues dual-class stock, it issues at least two classes of shares, often referred to as “Class A” shares and “Class B” shares. One class is a “super-voting” class that’s issued to company founders, executives, and in some cases their family members. The other class is available to the general public and has limited voting rights.
The structure is common in family-controlled or founder-led companies to avoid ceding control to the public. Usually, the super-voting shares convert to the lesser-voting shares if founders or executives sell them.
Google parent company Alphabet is an example of a company that uses a multiclass structure. Alphabet has three classes of shares that break down as follows:
- Class A shares: Shareholders get one vote per share.
- Class B shares: Shareholders get 10 votes per share.
- Class C shares: Shareholders aren’t entitled to voting rights.
Only Class A and Class C shares can be publicly traded., Founders Larry Page and Sergey Brin owned 85.3% of outstanding Class B shares as of Dec. 31, 2020, according to the company’s Form 10-K filing. That represented approximately 51.5% of the voting power for the Google parent’s common stock. As a result, Page and Brin maintain substantial control over the election of the company’s board of directors, as well as events like a potential merger, takeover, or significant transaction.
A few examples of other companies with dual-class stock include:
- Berkshire Hathaway
Dual-class stock is most common in the media and entertainment industry. Other industries where dual-class shares are prevalent include food and beverage, household and personal items, and software.
How Dual-Class Stock Works
During the first half of 2021, 24% of companies that launched an IPO issued dual-class stock. Issuing multiple classes of shares appeals to founders who want to retain control over their companies.
Proponents of dual-class stock argue that the structure helps company leaders maintain a long-term focus instead of ceding to pressure from investors. By issuing two or more classes of shares, a corporation can raise substantial funding through an IPO while keeping control in the hands of early investors, founders, and key employees. Some supporters argue that if dual-class stock were banned, many founders would opt to keep their companies private to avoid losing control.
However, institutional investors have pushed for a “one share, one vote” structure. They argue that having a single class of shares makes a corporation’s board of directors accountable to all shareholders. A Harvard Law School study found that 52% of companies with dual-class share structures don’t have an independent lead director or an independent chair on their board, compared to just 12% for companies with a one-share, one-vote structure.
The Harvard study found mixed results as far as how companies with multiple share classes perform compared to their single-share class peers. Dual-class companies appear more profitable starting out, however, their rate of improvement of profitability is lower.
The Council of Institutional Investors has pushed for legislation that would change dual-class structures. It would ban companies from listing in the U.S. with multiple classes of shares that have unequal voting rights without a sunset provision that takes effect within seven years of the IPO—unless all classes of shareholders approve maintaining the unequal structure. The group played an important role in convincing the S&P 500 and Russell 2000 to stop adding new companies with dual-class stock to their indices in 2017.
- When a company issues dual-class stock, it issues two classes of shares. One class has greater voting power and is limited to company insiders, while the other class is available to the general public and affords limited voting rights.
- Family-controlled and founder-led firms are most likely to issue dual-class stock to avoid losing control over their companies.
- Institutional investors have pushed for a one-share, one-vote structure, arguing that it makes the board of directors accountable to all shareholders.