Dual Class Stock: Unfair, But It Can Be a Good Thing

Dual class stock is issued by companies that want to provide the majority of ownership of a company to a specific group of investors. When this type of stock is offered, you will commonly see both Class A and Class B stock associated with a company. One class of stock will have superior voting rights to the other class. Here are the basics of dual class stock and why it could be a good thing.

Dual Class Stock

One of the classes of stock will have more votes per share than the other class. For example, Class A might have one vote per share. Class B may have 10 votes per share. This means that individuals who have Class B stock will be able to control the company with their superior voting rights. The shares with the higher voting rights will typically be given to the owners of the company and other upper-level executives.

Unfair

Many investors look at dual class stock as an unfair proposition. According to these investors, a select few are getting to control the company even though all of the other investors are taking a financial risk as well. When you buy common stock in this type of company, you basically have no say in what happens. You are essentially only investing so that you can get a return based on what the company does. For many people, having shares of stock without any say in what the company does is not considered fair. For others, it is the perfect scenario because they do not have the pressure of having to be informed.

Removes Pressure

There are many investors that like the idea of dual class shares. One of the benefits of having dual class stock is that it removes the pressure that companies often feel when they are always trying to please shareholders. Some companies lose sight of their objective and forget about what they do best in order to try to manipulate the short-term numbers. They are more concerned about quarterly financial statements than they are growing the company over the long-term. When the owners of the company have a controlling interest in the company, the managers do not have to feel the pressure of the shareholders. They simply have to do their job and they know that the company will be in good shape.

Long-Term Vision

Another benefit of having dual class shares is that it puts the majority of the power into the hands of those with a long-term company vision. Most shareholders are only in it for the short-term. They do not necessarily want to hold a stock for 20 or 30 years. However, the owners of a company want long-term success and want the company to do well in the future. Therefore, the decisions that they make will generally be best for the long-term viability of the company. They do not have to make decisions based on how it will affect quarterly statements, or what the shareholders will think.

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