A listed company can go a step further and differentiate between its ordinary shares based on the level of voting rights it makes available to its shareholder. These differentiated categories are known as classes of shares – each class representing shares that come with pre-defined voting rights.
Companies choose to do this for an array of reasons. For instance, at times founders safeguard their interests and say in strategic decision-making events by owning a class of shares that entitles them to exclusive voting rights or to defend the company from hostile takeovers. And at times, groups of powerful shareholders may own a class of shares that restrict voting rights for another class of shareholders. In some cases, share classes can also determine income distribution patterns by directing dividends to certain shareholders.
This multi-class share structure has been adopted by leading companies such as Google to enable strategic ownership of the company. When the company was restructured into Alphabet Inc in 2015, founders Larry Page and Sergey Brin did not receive majority ownership of the company’s stock. As a result, to gain control over major decisions they created three share classes – A, B, and C. Class A was held by regular investors who could exercise one vote per share. This was followed by Class B shares with 10 votes per share that were held by Larry Page and Sergey Brin. Lastly, Class C was held by employees with no voting rights. In short, this structure gave most voting rights to the founders.
Here are some factors that define what share classes depend on:
Dividends
Shareholders can have the right to a preferential dividend, an entitlement that secures them dividend before other shareholders. The dividend could also be subjected to achieving certain targets or the occurrence of certain landmark events. And in certain kinds of share classes, there could be no dividend payout at all.
Voting rights
Certain shares account for more number of votes, while others come with no voting rights. Shares with lessor votes or no voting rights at all may also be priced lower than votes that make the security holder eligible to cast a vote.
Entitlement to the capital on bankruptcy/ on winding up
Based on classes of shares, companies distribute portions of the capital after all the debts are paid off. In other words, based on the class of shares you own, the company pre-determines the holder’s right to capital distribution.
Shares can be classified into various categories such as:
Class A shares
These shares are issued by companies that float IPOs. Holders of these shares typically get one vote and are entitled to dividends and the right to share capital in case the company dissolves.
Class B shares
These shares are created by corporate companies by converting common and preferred shares. They come with more voting rights (as much as 10 votes, if not more), and entitlement to capital & income. These shares are usually reserved for the company’s founding members.
Class C shares
These shares have no voting rights
Class D shares
These are more specific to mutual funds and are also called no-load funds. This means, buyers are not required to pay font-end load charges (Expenses incurred on buying the shares), back-end load charges (cost incurred selling the shares), or level load charges (annual charge deducted from mutual fund assets). To add on – they relatively come with the lowest expense ratio
Class I shares
These are institutional shares that are provided to investors and shareholders and high net worth individuals. They have higher minimum investment amounts and also come with options where investors can pool their investors to buy stakes in funds
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