What is a Class A share?
Corporations will commonly issue various classes of stock shares, each with different amounts of voting rights and benefits. Traditionally, Class A shares issued by a company will give shareholders more rights than other classes of shares issued. However, you should note that it is not a requirement that companies give Class A shareholders the most rights and benefits over other shareholders, but this is usually the case.
Increased voting rights
Class A shares traditionally provide shareholders with more voting rights than other shares. For example, one company may provide Class A shareholders with five votes per share while Class B shares will only provide shareholders with one vote on corporate decisions.
One of the main reasons for the differential in voting power between share classes is to ensure that an outside investor is not able to accumulate enough shares to take control of the company in a hostile manner.
Class A shares will traditionally provide shareholders with added benefits that are not provided to other classes of stock shares. These benefits will usually include dividend priority which means that no other class of shares can be paid dividends before traditional Class A shares. Also, Class A shareholders are the first to be paid out when a company is acquired by another corporation or when a company is forced to liquidate and wind down the business entity.
Avoiding agency issues
Class A shares have traditionally been designed to prevent agency problems, which occur when key executives and management personnel prioritize their personal objectives over the long term success of the company. This issue is addressed by not having Class A shares being sold to the public while also prohibiting holders of these shares from trading them. Class A shares are usually only available to executives and management personnel.
Technology Class A shares
It is not a legal requirement for corporations to structure their share classes in the traditional manner. In fact, it is common for technology sector companies to choose an alternate structure where Class A shares are available to the public while Class B shares are held by only
company insiders. With this structure, it is the Class B shares which have additional voting rights and other benefits not afforded to Class A shareholders. Additionally, Class C shares in this structure are publicly traded but lack voting rights.
High-priced Class A shares
Another way a company can structure its share classes to make it more difficult for a hostile takeover is by issuing high-priced Class A shares. Although these shares are ostensibly tradeable for the public, they are mostly out of reach of most investors due to the high cost of purchasing a whole share to obtain voting rights. One thing to be aware of is the large differential in voting rights between Class A and Class B shares with this structure. For example, Class A shares might cost $3,200 with 100 votes while Class B shares may have only one vote at a cost of $150.
Investing in the stock market
Of course, most average people who are not corporate executives or management personnel do not have access to traditional Class A shares. On the other hand, everybody is allowed to invest in the publicly traded stock market. However, you will need to have significant knowledge of how financial markets work to craft a stock investment plan that is best for your financial objectives.
Any opinions are those of the author and not necessarily Raymond James. Any information provided is for informational purposes only and does not constitute a recommendation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.