Why some stock shares are out of your reach

Some companies issue multiple share classes as a way to keep decision-making power in the hands of a select few.

Adam Zoll 22 September, 2014 | 6:00PM

Question: What does it mean when a company issues different share classes of its stock? And how do I know which share class to buy?

Answer: Companies whose ownership structures include more than one share class of common stock typically are set up this way to concentrate decision-making power in the hands of a relatively small group of key stakeholders. For example, a company might offer A and B share classes, with owners of each receiving the same dividend payout per share (assuming the company issues a dividend) but with A shares providing 10 times the voting rights, or decision-making power, of B shares. By controlling enough A shares these key individuals effectively have the ability to make decisions without having to persuade those owning less powerful B shares to go along.

So who owns these more powerful share classes? Typically they are granted to company founders, key executives and major investors when the company goes public. Putting greater voting power in the hands of these key individuals may be seen as a way to ensure that control of the company stays in the hands of those who know it best. In many cases the more powerful share class is not traded publicly, but company insiders who hold such shares may convert them to the less powerful share class in order to sell them on the open market and thus cash out part of their equity in the firm.

The practice of issuing two different classes of company stock -- one more powerful than the other -- is somewhat controversial, however. Critics say it allows company insiders to reap the financial benefits of taking a company public without ceding control to outsiders. Others argue that more democracy in corporate governance isn't necessarily a good thing, and that those who know the company best should be the ones with ultimate control.

A few high-profile examples

Many tech companies use a so-called dual share class structure, including   Google  GOOG and   Facebook  FB. When the former went public in 2004, it issued its co-founders Class B shares that carried 10 times the voting rights of its Class A shares as a way for the co-founders to maintain majority control of the company. Recently the company announced plans to issue C shares that will carry no voting rights at all.

Facebook uses a similar structure, with Class A shares that are traded publicly and Class B shares held by insiders and others and carrying 10 times the voting power. Recently Facebook founder and CEO Mark Zuckerberg sold 41.35 million Class A shares of company stock to help cover taxes related to his exercising options to buy 60 million Class B shares. As of last June, Zuckerberg controlled about two thirds of the company's voting rights.

One high-profile company with dual share classes that are both traded on the open market is   Berkshire Hathaway  BRK.A  BRK.B, the firm run by Warren Buffett. The company's A shares provide the best voting and ownership rights, but if you want to own them you'll have to dig deep--real deep. As of Aug. 26 24, the price was more than US$204,000 per share -- not exactly walking-around money for most individual investors. The company's B shares, on the other hand, were trading at a much more affordable (for those of us not named Warren Buffett, anyway) US$136 per share. (Previously B shares had traded in the thousands-of-dollars range, but a 50-for-1 stock split in 2010, implemented to allow a stock swap as part of the company's purchase of the Burlington Northern Santa Fe railroad, brought this price down considerably.) In Berkshire's ownership structure, the lower-priced B shares provide just 1/1,500th the economic rights (essentially 1/1,500th the ownership stake) of the company's Class A shares and 1/10,000th the voting rights.

Other companies using a multiple share class structure include   Bombardier  BBD.B,   AGF Management  AGF.B,   Rogers Communications  RCI.B,   MasterCard  MA and   Nike  NKE.

Some people mistakenly think of preferred shares as being a class of common stock. But preferred shares are really a different animal, one that is more bond-like than stock-like. Unlike common stock, preferred stock typically entitles the shareholder to a fixed payment that comes before common stock in the pecking order when a company pays out dividends. Preferred shares also may be callable, meaning that the company can buy them back at will, and provide no advantage to the shareholder if the company grows, unlike the case with common stock. For more on preferred shares, see this Ask the Expert article.

Pay attention to ownership structure

In practical terms, individual investors usually have access to just one share class of a company's common stock -- others simply aren't traded publicly -- so there's really no decision to be made with regard to which share class to own. That said, anyone investing in a particular stock would be well-advised to pay close attention to how the company's share structure works, and who ultimately makes decisions regarding the firm's direction. If you're investing in a company that uses a dual share class structure, looking closely at the firm's stewardship record can be a good way to identify red flags before new problems arise.

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About Author

Adam Zoll

Adam Zoll  Adam Zoll is an assistant site editor with Morningstar.com