Classified Shares – Definition

Cite this article as:"Classified Shares – Definition," in The Business Professor, updated September 23, 2019, last accessed June 5, 2020, https://thebusinessprofessor.com/lesson/classified-shares-definition/.

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Classified Shares Definition

Classified shares refer to shares of a publicly-traded company that has different share classes categorized as, Class A shares and Class B shares respectively. An in-depth description of the two classes’ features is always governed by charter as well as the company’s bylaws.

A Little More on What are Classified Shares

Companies that have complex capital structures sometimes have a combination of various common stock classes. In these classes, each share class carries different dividend rates as well as voting rights.

Most companies create different classes so that they can assign various voting privileges, dividends rights, and or liquidation. For instance, the bylaws and charter often give class B shares (common stock shareholders) voting advantage over class A shares (preferred stock shareholders). In other words, common stock shareholders have more voting power compared to preferred stock shareholders who don’t hold such rights. The company’s charter clearly states the preferred shares’ terms.

To prevent a possible hostile takeover, the company’s top management and directors issue themselves with Class A shares. The reason is that class A shares have higher votes per share. So, to ensure that they protect the company from a possible hostile takeover, class A shares have to remain within the company.

Class A shares vs. Class B Shares

Basically, a company can create various classes of shares of common stock. The categories of these classes include Class A and Class B, respectively. Determining factor of Class B shares and Class A shares’ difference in a company’s stock is the number of voting rights. These voting rights rest with the shareholders.

Class A Shares

Another term for Class A shares is common stock. Commons stock shares represent the majority of shares a company issues and also offer more benefits to shareholders. For this reason, retail shareholders should not worry about the various classes of stock, especially if the company is well-managed.

Shareholders of common stock are always issued with one vote per share for every share they hold. The common stock shares give them a right to vote and the right to dividends.

Class B shares

Class B shareholders have fewer voting rights. For instance, they only have one voting right per share. The number is far less when you compare it with class B  shareholders, who have up to 10 voting rights per share they hold.

Generally, when we put aside voting rights issues, common stock’s classes have similar equity interests in a company. So, shareholders across all classes have the same rights when it comes to sharing company profit.

Class B Shares vs. Preferred Stock

Well, you should not confuse Class B shares with preferred stock shares, because the two are quite different. Their differences are as follows:

  • Shareholders of preferred stock have a right to receive the dividend. For this reason, their dividends should be paid out first before common stock shareholders.
  • If a company undergoes liquidation or experiences bankruptcy, the preferred stock shareholders are usually given repayment priority over shareholders of common stock.
  • When it comes to the ranking of the company capital structure, preferred shares always rank above the common stock.

Real-World Example of Classified Shares

Founders of multi-class share structure at Google, Sergey Brin, and Larry Page noticed that they owned fewer shares than the company’s stock majority ownership. Given their wish to control over major business decisions, they created three classes of shares of the company’s stock. The three classes of shares were as follows:

  • Class A shares
  • Class B shares
  • Class C shares

Currently, regular investors hold a class A shares with one vote right per share. Brin and Page, on the other hand, hold Class- B shares worth 10 vote rights per share. Lastly, employees hold Class C shares without any voting rights. The new structure gives the founders voting rights enabling them to have control of the business. However, similar setups are not popular with average shareholders, especially in the past.

Reference for “Classified Shares”

https://www.investopedia.com/terms/c/classifiedshares.asp

https://financial-dictionary.thefreedictionary.com/classified+stock

https://www.accountingtools.com/articles/2017/5/14/classified-stock

https://www.nasdaq.com/investing/glossary/c/classified-stock

www.businessdictionary.com/definition/classified-common-stock.html

www.investorwords.com/871/classified_stock.html

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