Article summary
This article discusses the concepts of Class B shares for both equity shares and mutual funds. It also delves into some of the reasons why companies might issue Class B shares. Finally, it provides some of the caveats that investors must understand before pursuing financial opportunities in Class B shares.
Class A and Class B shares are types of common stock issued by companies. Some companies issue both Class A and Class B shares with both categories of shares carrying different voting rights, separate rights to dividend payouts, and varied rights to get back the share capital invested in the event of a bankruptcy. A dual class equity share structure comprising Class A and Class B shares is typically decided upon by a company when it issues shares via an initial public offering or IPO. Sometimes, a company may also possess several categories of equity shareholding besides Classes A and B, e.g., Class C, Class D, etc.
What are Class B shares?
Class B shares typically possess lower voting rights than Class A shares. However, some companies issue Class B shares that may have higher voting power compared to Class A shares. This could be a ruse employed by the company’s management to disguise a disadvantageous category of shareholding. Therefore, investors should make a thorough investigation of the company’s capital structure before purchasing the company’s shares. Investors can usually find out the capital structure of a company, and the associated rights of different classes of shareholdings by reading the by-laws mentioned in its prospectus published at the time of its IPO, its charter, or by its Memorandum of Association and Articles of Association.
Besides differences in voting power, Class B shares are also usually entitled to a lower dividend payout compared to Class A shareholders. In addition, holders of Class B shares could also be subject to lower repayment priority compared to Class A shareholders in the event of the company’s bankruptcy.
Mutual fund Class B shares
Buyers of shares in mutual funds are typically subject to a front-end sales load or commission, depending on the number of shares purchased. Bulk purchases of shares, or stakes in several mutual funds that are offered by the fund’s family, are factors that could reduce the sales load payable by Class A shareholders in mutual funds.
In contrast, mutual fund shares that carry no sales load are referred to as Class B shares. Investors who purchase Class B shares in a mutual fund need not pay a commission up-front to the issuer while making a purchase. Instead, Class B mutual fund shareholders may be subject to a fee when disposing of their Class B shares.
Why do companies issue Class B shares?
There could be several compelling reasons why companies issue Class B shares. Some of these may include:
- Maintaining control of the company’s strategic decision-making: As Class B shares typically offer lower voting power compared to Class A shares, they provide promoters with the opportunity to raise capital from financial markets without ceding control of the operations of the company.
- Making company stock more accessible to retail investors: Sometimes a company’s share price may be priced very high. Some companies announce stock splits to make the share price more affordable for ordinary retail investors. Other companies may issue different share classes like Class B shares which would trade at a lower market price compared to Class A shares, making the former more accessible to retail investors. For example, Warren Buffet’s Berkshire Hathaway Inc. has two categories of stock – Class A, and Class B. One Class A share of the company closed at $546,215 as on 22nd September 2023. This is far beyond the affordability range of retail investors. Only institutional investors or very High Net Worth Investors (HNWI) can afford to purchase Berkshire Hathaway’s Class A shares. Consequently, the company has also issued Class B shares, which closed at $360.16 on September 22, 2023. There is a huge price differential between the two classes of shares. As Berkshire Hathaway has never offered a stock split or dividends, Class B shares provide an opportunity for retail investors to participate in the company’s stock price appreciation.
- Protection against hostile takeovers: The issue of Class B shares implies different voting rights. As a result, company insiders who may possess Class A shares have greater voting power and the ability to withstand or resist hostile takeovers. As Class B shares are purchased on the open market, they will not provide the buyers with commensurate voting rights. This would hamper the ability of outsiders to mount challenges to the company’s existing status quo.
- Internal stake: Company senior management, directors, and other key personnel are also issued Class B shares, as a way of maintaining their stake in the company.
In conclusion
To conclude, investors must employ caution while purchasing Class B shares. While they may trade at lower prices than other share categories, they often provide the shareholder with both lower voting power, and lower dividend entitlements. Not only that, recovery of capital in the event of bankruptcy is contingent upon the claims of other categories of shareholders being met. For more details on this, we recommend consulting a financial advisor.