Supervoters and Stocks: What Investors Should Know About Dual-Class Voting Structures
The financial world of investing is filled with mathematical complexity, from the quantitative analysis behind certain trading strategies to the calculus used to determine the pricing of derivatives. But investors in most publicly traded companies can rely on one rather simple ratio: 1 to 1.
That's the ratio that describes the voting structure at most companies: one share to one vote. When it comes to voting on everything from board member elections to whether the company should be sold, an investor who owns one share may cast one vote, an investor who owns 10 shares may cast 10 votes, and so on.
But that is only true in the so-called single-class share structure. In recent years, some high-profile initial public offerings (IPOs) have drawn attention to an alternative type of voting structure: dual-class voting structures. Under dual-class structures (and occasionally multi-class structures), certain shareholders get more voting power than others.
The "supervoters," as some call them, are typically company founders and management, though the ranks of the supervoter might also include employees and pre-IPO investors. The dual-class structure allows them to exercise disproportionate control over the company by allowing multiple votes for every share owned. For example, supervoters might receive 10, or even 50, votes for every share owned while ordinary shareholders are still entitled to one vote per share.
Dual-class structures were largely the province of media companies that sometimes said such structures were necessary to maintain journalistic integrity.
Most public companies still have a single-class share structure; however, a growing number of U.S. firms have adopted a dual-voting structure following Google’s groundbreaking dual-class IPO in 2004.
Dual-class stock is often designated Class A and Class B, where Class B is generally, but not always, the one with more potent voting status. Both classes are common stock. Note: Supervoting class stock is not the same as preferred stock. Common stockholders have voting rights—preferred stockholders do not.
Learn more about common and preferred stock.
The ostensible rationale behind dual-class structures is that they allow company leaders (particularly those who retain controlling interests in their firms) more freedom to work toward important long-term goals without having their power challenged by any shareholders who prefer actions or policies aimed at short-term gains. Company leaders might also view the dual-class structure as a defense against a hostile takeover by making it more difficult to win a shareholder majority to overthrow existing management.
Even if a company has a dual-class structure in place at the time it goes public, such structures need not be permanent and often have predetermined end points, or “sunset provisions.” In fact, time-based sunsets have gone from being relatively rare only a few years ago, to quite common.
Whether dual-class structures are good or bad for companies and their investors is a long-running point of contention. Some argue that such structures let company managers "have their cake and eat it, too" by allowing them to retain control of their firms while raising more money than they could otherwise. Holding fewer shares of their own companies also leaves company leaders less vulnerable to risks should their decisions go awry.
For the individual investor, deciding whether to buy shares in a dual-class company is—as with other investing decisions—a matter of doing your homework and determining your personal preferences.
Consider the following: Do you approve of the way a company's "supervoting" leaders have steered the company thus far? Are you comfortable with having disproportionate voting rights? Do you believe that the dual-class structure will serve the company well in the future?
To determine a company's voting structure, check media reports or its registration filings on the Securities and Exchange Commission's EDGAR database.
