What are Class A Shares?
This article discusses the concept of Class A shares, the advantages and disadvantages of Class A shares, as well as the different types of Class A shares that may be issued by companies.
Some companies issue several classes of equity shares which may possess differential rights for their holders. These categories of shares include Class A shares, Class B shares, Class C shares, and so on. Class A shares are traditionally issued to the promoters and senior management of the company. They may carry higher voting rights compared to other categories of equity shares to give these key personnel greater sway over the strategic decision-making of the company. For example, a company might issue Class A and Class B shares, with each Class A shareholder entitled to 10 votes for each Class A share held, while a Class B share might entitle its holder to just one vote.
However, some companies issue Class B shares with greater voting rights compared to Class A shares, although this is not the norm. Take the example of Meta (formerly Facebook) which has issued Class A shares that have lower voting power compared to the company’s Class B shares. Investors can gain knowledge about the different types of shares issued by the company, and their associated rights in the company’s bylaws, IPO prospectus, or the Memorandum and Articles of Association.
Class A shares are also typically entitled to higher dividend payouts compared to other classes of shareholders. They also get priority on dividend payments – dividend is first payable to Class A shareholders, and then distributed to other share categories. Class A shareholders also get priority in the return of their share capital in the event of the company’s bankruptcy, compared to other classes of equity shares issued by the company.
What are the different types of Class A shares?
Typically, there are three types of Class A shares. These include:
- Traditional Class A shares: These provide holders with enhanced voting power, dividend rights, and priority in the event of the company’s liquidation.
- Class A shares that are highly priced: Some companies do not pay dividends, and nor do they issue stock splits. As a result, their share prices are very high and out of bounds for most investors. For example, Class A shares of Berkshire Hathaway are currently priced at over USD500,000. To enable smaller investors participate in the financial performance of the company, Berkshire Hathaway has also issued Class B shares, which closed at $360.16 on September 22, 2023.
- Technology Class A shares: Companies like Google have three types of shares: Class A, Class B, and Class C. Class A shares are issued to the public, can be traded on stock exchanges, and have one vote. Class B shares are issued to corporate insiders and have many of the features associated with traditional Class A shares. Class B shares do not trade on public exchanges. Finally, Class C shares are publicly traded and are owned by the public, but do not have any voting power.
What are the benefits of issuing Class A shares?
Class A shares provide several benefits to their issuers. These include:
- Greater control: The higher voting power inherent in Class A shares ensures that effective control remains in the hands of company insiders who are issued Class A shares. These personnel are familiar with the company’s operations. Hence, interference in the day-to-day running of the business by laypersons can be avoided.
- Higher dividend payouts: Holders of Class A shares are entitled to comparatively higher dividend payouts, in contrast to other classes of shares issued by the company. In addition, payment of dividends to Class A shareholders is prioritized over the claims of other equity shareholders.
- Priority in return of capital in the event of the company’s liquidation: Usually, a company must pay back share capital to Class A shareholders first if the company is declared bankrupt. The claims of other equity shareholders will be made good only after the claims of Class A shareholders are met.
- Avoidance of hostile takeovers: As Class A shares possess greater voting power and have restrictions on trading them on the open market, it becomes very difficult for outsiders to gain the required votes and mount hostile takeover attempts.
- Conversion benefits: Sometimes, Class A shares have conversion features that entitle the holder to several shares of common stock in exchange for one Class A share. Consider that the founder of a company is holding two lakh Class A shares, each of which are convertible into five shares of common stock. If the founder decides to convert his or her Class A shares into common stock, he or she would be entitled to 10 lakh shares of common stock.
Despite the benefits mentioned above, Class A shares may carry restrictions on stock trading. This is because corporate insiders who are issued Class A shares are expected to focus on the efficient running of the business, without benefiting from or concentrating on factors that influence short-term stock price movements.
There may also be restrictions on the issue of Class A shares to the public. Traditionally, Class A shares are issued to corporate insiders, promoters, and other senior management personnel. Hence, the ordinary investor may not be able to wholly participate in the company’s performance.
Hence, an investor must decide which category of share is most suited to his investment needs and risk profile.