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Understanding Dual Class Shares and Why Some Companies Choose This Model

This article explores the concept of dual class shares, the reasons companies adopt this model, its benefits, associated risks, regulatory perspectives, and how investors can approach it.

What are Dual Class Shares

Dual class shares refer to a corporate shareholding structure where two or more classes of shares have different voting rights or privileges. Typically, one class (such as Class B shares) holds more voting power, while the other (Class A shares) may have limited or no voting rights but economic rights such as dividends.

The table given below helps illustrate the fundamental differences between share classes in a dual class share structure and the implications for control and economic rights.

Features

High-Vote Shares (e.g., Class B)

Low-Vote Shares (e.g., Class A)

Voting Rights

High (e.g., 10 votes/share)

Low (e.g., 1 vote/share)

Dividend Rights

Standard or may be lower

Often higher to compensate for limited votes

Ownership Control

Usually held by founders/promoters

Public shareholders

Influence on Management

Strong influence on strategic decisions

Limited control

Liquidity

Potentially less liquid if not publicly traded

Generally more liquid if listed on exchanges

This structure allows founders or promoters to retain control over the company despite holding a smaller economic interest. For example, one Class B share may have 10 votes, while one Class A share may have one vote.

Why Companies Choose Dual Class Share Structures

Companies often adopt dual class shares for several strategic reasons:

  • Control Retention: Founders or key stakeholders can keep decision-making authority even after public listing or raising capital.

  • Long-term Vision: It helps protect company strategy from short-term pressures of market fluctuations or activist shareholders.

  • Protection from Takeovers: Dual class structures act as a shield against hostile takeovers by limiting the voting power of outside investors.

  • Capital Raising Flexibility: Companies can raise funds through issuing lower-vote shares without diluting control.

This model is especially common in tech companies and family-owned businesses.

Benefits of Dual Class Shares

This structure offers various benefits:

  • Stable Leadership: Ensures that management or founders can pursue long-term goals without undue interference.

  • Strategic Continuity: Helps maintain consistent business strategies across market cycles.

  • Attracts Investors: Enables participation in economic benefits while separating control rights.

  • Examples: Firms like Alphabet (Google), Facebook, and Snap Inc. have successfully used dual class shares to balance control and capital needs.

Considerations and Criticisms of Dual Class Shares

Despite its advantages, dual class shares attract certain criticisms:

  • Governance Concerns: Concentrated voting power can reduce accountability of controlling shareholders.

  • Minority Shareholder Risks: Limited voting rights might diminish influence on corporate decisions.

  • Market Perception: Some investors may view dual class structures as a governance risk, impacting share price and liquidity.

  • Regulatory Scrutiny: Global regulators and stock exchanges are increasingly examining and sometimes restricting dual class share issuance.

Balancing control and fairness remains a core challenge.

Dual Class Shares in the Indian Market

India’s regulatory framework, led by SEBI, has cautiously allowed dual class shares under strict conditions to protect minority investors. Several Indian companies have adopted or considered such structures to retain promoter control while accessing public funds.

Key points to consider:

  • Mandatory disclosures and transparency

  • Limitations on voting rights ratio

  • Measures to safeguard minority shareholders’ interests

Investors should closely review company disclosures regarding share classes.

How Investors Should Approach Dual Class Shares

Investors are advised to consider:

  • Voting Rights Analysis: Understand which class they hold and its voting power implications.

  • Control vs Economic Interest: Evaluate if control concentration aligns with company performance and governance.

  • Risk Assessment: Be aware of governance and liquidity risks associated with dual class shares.

  • Holistic Research: Incorporate share class structure into broader fundamental analysis.

This knowledge helps investors make informed decisions about companies with dual class shares.

Conclusion

Dual class shares serve as an effective model for companies to retain control while raising capital, supporting long-term strategies and protection against external pressures. However, this structure carries governance risks and minority shareholder considerations. Investors should understand these dynamics to evaluate their implications carefully.

Disclaimer

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.

Sources

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

  • National Stock Exchange (NSE): https://www.nseindia.com/

  • Bombay Stock Exchange (BSE): https://www.bseindia.com/

  • Investopedia: https://www.investopedia.com/terms/d/dual-class-stock.asp

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

Frequently Asked Questions (FAQs)

What are dual class shares?

Dual class shares are different types of shares issued by a company that have unequal voting rights or privileges.

Companies use dual class shares primarily to maintain founder or promoter control while raising capital.

They allow stable leadership, protect long-term vision, and prevent hostile takeovers.

Governance concerns, reduced accountability, and minority shareholder disadvantages are common risks.

Dual class shares are relatively rare but have been permitted under strict SEBI regulations.

Some shareholders have significantly more voting power, influencing company decisions disproportionately.

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