What Are Dual-Class Shares: Meaning, Advantages and Disadvantages

Dual-class shares refer to a company’s equity being divided into two or more classes. These classes (typically Class A and Class B) carry different voting rights. One class may have multiple votes per share, while the other has limited or no voting rights.

For instance, founders and executives might hold Class B shares with 10 votes each, whereas public investors hold Class A shares with 1 vote each. This allows the founding team to retain decision-making authority even if they own a minority of the equity.

How Dual-Class Structures Work

Under this structure:

• Different share classes are issued at IPO or restructuring
  

• Shares may have varied dividend entitlements as well as voting rights
  

• Control remains with a specific group, usually founders or early investors
  

This separation of ownership from control helps firms make long-term decisions without frequent shareholder interference.

Examples of Dual Class Stocks 

Alphabet Inc. (Google):
Has Class A (1 vote), Class B (10 votes – held by founders), and Class C shares (no voting rights).

Meta Platforms (Facebook):
Issues Class A (1 vote) and Class B (10 votes) shares, with Mark Zuckerberg holding the majority of Class B.

Several benefits drive companies to choose dual-class structures, particularly during IPOs:

Founder Control and Stability

Founders retain decision-making power and influence the company’s strategic direction. This promotes long-term thinking, which might not always align with short-term shareholder expectations.

Long-Term Vision and Innovation

With insulated control, executives can focus on innovation and capital-intensive projects without worrying about market reactions or hostile votes. This structure also helps companies avoid short-term market pressures and shareholder activism.

Defence Against Hostile Takeovers

Dual-class shares act as a safeguard against unsolicited takeovers, preserving the autonomy of management.

While dual-class structures offer certain benefits, they also bring potential drawbacks:

Reduced Shareholder Influence

Shareholders owning a substantial stake might find their ability to influence company policies significantly diluted.

Risk of Mismanagement or Entrenchment

Executives with excessive control may pursue self-serving goals, given the limited oversight from public investors.

Impact on Transparency and Market Perception

Institutional investors often view dual-class shares with scepticism, which can negatively impact stock liquidity, valuation, and overall market sentiment.

While the concept of dual-class shares is more prevalent in Western markets, Indian regulations permit a related structure known as Differential Voting Rights (DVR):

Regulatory Landscape – SEBI Guidelines

SEBI allows Indian firms to issue shares with differential voting rights under specific conditions, including:

• The company should have consistent profitability for three years
  

• DVRs must not exceed 26% of the total post-issue capital
  

• Enhanced disclosures and safeguards must be followed
  

These provisions aim to protect investor interests while allowing companies to adopt flexible governance.

Dual-class shares offer companies a strategic tool to balance control and capital needs. While they support stable leadership and innovation, they can also raise corporate governance issues. Investors must understand how voting rights and share classes affect their role and influence.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

• Securities and Exchange Board of India (SEBI): https://www.sebi.gov.in
  

• Investopedia: https://www.investopedia.com
  

• Council of Institutional Investors: https://www.cii.org
  

• Harvard Law School Forum on Corporate Governance: https://corpgov.law.harvard.edu
  

• NSE India: https://www.nseindia.com