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 much voting rights each share carries, the dividend eligibility, and other features like liquidation preferences. Class A shares are those that enjoy the maximum benefits and are deemed to be better opportunities for shareholders.
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 upon 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?
In such a case, the senior stakeholders will be given liquidation preference. That is to say that all the debt holders will be paid in full before any common or preferred stockholder is paid. Among the common or preferred stockholders, the holders of Class A shares will be given the first preference of share conversion. This will be followed by Class B and C.
- 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 change an upfront free or front-end load on the initial investment. These shares go on to charge lower marketing fee and can benefit in case of a long-term holding. In contract Class B share funds have lower upfront charges but deferred sales charges. It should be noted that any investment in Class A share funds, or any funds for that matter, should be done after thorough research and understanding including that of the expense ratio and exit load.
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, decisions of the business are more likely to be impacted by the voting of Class A shareholders rather than Class B shareholders.
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Since Class A shares are privileged, they tend to be greater beneficiaries of profits than Class B shares. In most of the matter other than voting rights, Class B shares have similar characteristic 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 to 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 are sold to the public and are mostly allotted to the management of the company. This is done to serve as incentive and counter agency problems
- Class A shares have very specific clauses attached to them. The conversion clause is applicable only in specific scenarios and can itself 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
Conclusion
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. Shares classification is intended to restrict diluting the company ownership. Thus, decision-making is restricted to top management and executives. At the very time of its formation of a company, shares are classified to fulfil 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. Preferred stockholders are paid before common stockholders during events of liquidation or sale, and dividend payout. Common stock shareholders do not have much to dissent with Class A share stockholders so long as the decision-making is aligned in the best interests of the business. This may serve as many disadvantages as advantages.
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