Updated July 18, 2023
Definition of Class A Shares
Class A shares are a classification of common stock or preferred stock that come with greater benefits in terms of voting rights, dividends, asset sales, etc., as compared to the other classes, viz. Class B and Class C shares.
A company issues shares to its shareholders when it raises capital in the form of equity. The issued shares have certain classifications based on how many voting rights each share carries, the dividend eligibility, and other features like liquidation preferences.
Example of Class A Shares
- Let us assume a company that has several shares issued to its shareholders. It has categorized these shares based on voting rights per share. Thus, it made 3 categories of shares – Class A, Class B, and Class C. Class C shares have 1 voting right per share, Class B shares have 5 voting rights per share, whereas Class A shares have 10 voting rights per share. In a board meeting, the Class A shareholders will be prominent in decision-making as their voting value is higher, although the decision will be solely based on the number of shareholders of each category.
- Let us take another example of liquidation preference. If the same company in example 1 is taken over by another company, what should be the prospects of the shareholders of each class considering the clause of convertibility of 1:3 per Class A of common stock, 1:2 per Class B of common stock, and no conversion for Class C shares?
Among the common or preferred stockholders, the holders of Class A shares will be given the first preference of share conversion.
- Class A shares after conversion = 3x
- Class B shares after conversion = 2x
- Class C shares with conversion = 1x
Class A Share Funds
Class A share funds refer to share categorization within the mutual fund domain. Classes in a mutual fund are based on the type and fee charges, and hence the categorization is different from common or preferred stock classification in a business.
Mutual funds have several categories of shares. Class A share funds refer to those shares which charge an upfront fee or front-end load on the initial investment. These shares go on to charge lower marketing fees and can benefit in case of a long-term holding. In contrast, Class B share funds have lower upfront charges but deferred sales charges.
Difference Between Class A Shares and Class B shares
The major difference between Class A shares and Class B shares is the privilege of voting rights. Class A shares get greater voting rights per share than Class B shares. Thus, the decisions of the business are more likely to be impacted by the voting of Class A shareholders rather than Class B shareholders.
Since Class A shares are privileged, they tend to be greater beneficiaries of profits than Class B shares. In most matters other than voting rights, Class B shares have similar characteristics as other classes of shares; for example, the dividends paid by the company.
Class A shares are traded at a higher price than other shares. An example of this is Class A and Class B shares of Berkshire Hathaway that traded at $315,000 and $208, respectively, on March 5, 2020.
Advantages of Class A Shares
Some of the advantages are:
- Class A shares come with enhanced benefits, with voting rights being the most important benefit
- Class A shares have liquidation preference over other categories of shares
- Subjective to the company’s issuance and needs thereof, Class A shares are also eligible for conversion. One Class A share may be eligible for conversion to 5 shares of common stock
- Class A shares enjoy benefits related to dividends
- Class A shares provide a better defense against aggressive take-overs and are part of shark-repellent tactics
Disadvantages of Class A Shares
Some of the disadvantages are:
- Class A shares have very specific clauses attached to them. The conversion clause is applicable only in specific scenarios and can trigger several other clauses
- Class A shares are very less in number and often do not interest the general public
- Class A shares are not traded at the same price as other shares of the company. Class A shares can have a huge premium price attached
As Class A shares come with enhanced benefits, the need to issue such shares is to address the issues of agency problems. Class A shares have higher benefits than other categories of shares and thus act as an incentive to the management and the team. At the very time of its formation of a company, shares are classified to fulfill the above purpose.
For all purposes mentioned here, it should be noted that a Class B share is not a preferred stock. Preferred stock is a different category altogether and shares some characteristics with bonds. This may serve as many disadvantages as advantages.
This is a guide to Class A Shares. Here we also discuss the definition and example of class a share along with advantages and disadvantages. You may also have a look at the following articles to learn more –