Definition of Share Classes
Shares classes are assigned by a corporation to classify the shares issued by it into different classes on the basis of differences in shares on account of voting rights, privileges, and restrictions. In order to give separate classifications these are assigned to categories of shares having similar characteristics such as Class A shares, Class B shares, and so on.
Explanation
A company may issue different classes of shares carrying different characteristics. These characteristics include voting rights, privileges, as well as restrictions. The two common types include Class A and Class B. All the shares that are issued in a particular class would have similar rights and privileges. A company issues shares of different classes if it wishes to restrict the control to a limited set of shareholders.
Example
A company issues two classes of common stocks namely Class A and Class B. The description of both is given below:
- Class A: Each unit of common stock carries one voting right
- Class B: No voting right is available to the stockholders
Here, the company has issued two of stocks based on the difference in voting rights. While Class A shares entitle the stockholders to one vote per share, Class B shares don’t confer any voting rights to the shareholders.
Types of Share Classes
There are mainly two types for common stock namely Class A and Class B.
- Class A Shares: Class shares have higher voting rights as compared to Class B shares. The charges relating to its purchase are high and the annual expenses are lesser than Class B shares. Class A shares have a preference over dividend in the event of dividend distribution.
- Class B Shares: The stockholders of Class B get lower voting rights in comparison to stockholders of Class A shares. The annual expenses are higher in these shares and the initial charges relating to purchase are less. Class B shares have less priority in dividend distributions. A company may decide to issue other classes of shares as well and define their features with respect to restrictions, voting rights, benefits, and so on.
Importance of Share Classes
These define the rights and restrictions attached to the stock units. Thus, it becomes very important for investors to understand the class of shares that are being issued by the company. The decision of investment will depend on the description of the class of shares being issued. Suppose a class of shares suggests that a priority will be given to the shareholders of other class of shares in the event of dividend distribution and if sufficient profits are not available no dividend will be paid to the class of shares being issued. Now an investor who relies on dividends for the regular income may not want to invest in such class of shares as the dividend payments are not assured to the shareholders of such class of shares. There are different criteria that an investor considers in the classes of shares before investing.
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Benefits
Some of the benefits are given below:
- The company is able to manage the control of the company by restricting it to a certain class of shares. It may decide to give controlling rights to one class of shares and less controlling rights to another class and hence, it can effectively manage the control.
- The company can further prioritize some shares for dividend distributions than other classes.
- Limitations and restrictions can be set for a certain class of shares for distribution of the company’s assets in the event of a liquidation.
- The concept is mostly beneficial for start-up companies as they can raise capital without diluting the control of the promoters so that there is no interference in the decision-making process.
Disadvantages
Some of the disadvantages are given below:
- The shareholders may feel disconnected from the company if a superior class of shares is being issued as it would reduce their rights and benefits.
- If it happens that a class of shares with preferential voting rights i.e. higher voting rights is issued then the original shareholders might get worried since control gets diluted in such cases and the voting rights of such initial shareholders get reduced.
Conclusion
It is very common for companies to issue shares with different classes. The most common share are Class A and B where the shareholders of Class A get higher voting rights and preference in dividends. However, it is important to check the description of the class to understand the rights and benefits available to the shareholders since similar classification might not be done by all companies.
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