Learning Module 2 of Equities 11–14% of the exam

Equity Jurisdictions, Classes, and Voting

3 lessons. About 17 minutes in cram mode, 72 minutes in full.

Start with lesson 1 Learn with Sensei Read the module summary Practice this module

Lessons

1
Share classes and voting rights: dual class structures and differential voting shares
describe 5 min cram, 22 min full
2
Investing across jurisdictions: dual listings and depositary receipts
describe 6 min cram, 24 min full
3
How shareholders vote: proposals, proxies, proxy advisors and asset managers
describe 6 min cram, 26 min full

What the exam expects you to do

Describe differences in economic and voting rights and other characteristics among different jurisdictions and equity classes.Share classes and voting rights: dual class structures and differential voting shares
Describe the voting process and roles of the issuer’s management, board, proxy advisors, asset managers, and asset owners in the process.How shareholders vote: proposals, proxies, proxy advisors and asset managers

Module summary

The whole module on one sheet, organised by lesson: what to memorize, how the ideas fit together, the formulas and the key terms. No paragraphs, just what you need to revise.

Hide what I know

How deeply to learn each part

Know the idea: Understand it in general. It frames other topics, but you will not calculate with it.
Use it: Understand it well enough to solve a question with it. Recognize when it applies.
Memorize: Learn it by heart. The exam will not give it to you.

Share classes and voting rights: dual class structures and differential voting shares

Known

MemorizeShare classes in one table

Structure	Votes	Economics	Traded?
One share, one vote	in proportion	in proportion	yes
Superior voting class	several per share	equal	no, held by insiders
Non-voting public class	none	equal	yes
DVR shares	a fraction	higher dividend, issued at a discount	yes

Memory hook Dual class = different rights. Dual listing = different places. Same word, different question.

Know it cold Vote share = votes held ÷ total votes (not total shares).

Key terms

economic rights Memorize
voting rights Memorize
one share one vote Know the idea
dual class share structure Memorize
superior voting share class Use it
non-voting share class Use it
differential voting rights (DVR) shares Use it
voting control vs economic ownership Use it
dual listing vs dual class Memorize

How companies split votes and economics across classes

Equity classesrights in proportion by default

One share, one vote Know the idea votes and dividends in proportion
Superior voting class Memorize insiders' untraded class, several votes per share
Non-voting class Memorize public class, equal economics, no vote
DVR shares Use it fewer votes, higher dividend, issued at a discount

Formulas

Share of votes Use it

\text{Vote share} = \dfrac{\sum (\text{shares held} \times \text{votes per share})}{\sum (\text{shares outstanding} \times \text{votes per share})}

Quick example

500 million one-vote shares and 80 million ten-vote shares, with insiders holding all of the ten-vote class. Their votes are 80 × 10 = 800 million out of 500 + 800 = 1,300 million: 61.54% of the votes for 80 ÷ 580 = 13.79% of the shares.

On your calculator

80×10=STO1
+500=STO2
RCL1÷RCL2= 0.6154

STO store · RCL recall a stored number

80ENTER10×ENTERENTER500+÷ 0.6154

ENTER enter (on the HP, puts the number on the stack)

Investing across jurisdictions: dual listings and depositary receipts

Known

MemorizeSponsored vs unsponsored

	Sponsored	Unsponsored
Who sets it up	foreign company with a bank	the bank alone
Votes	holders	the depository bank
Reporting	greater (in the US, SEC registration)	less

Memory hook Sponsored = the company is on board, so you vote. Unsponsored = the bank keeps the vote.

Know it cold Only a sponsored DR carries the voting rights to the holder.

MemorizeWhere DRs trade

Receipt	Shares of	Trades in
ADR	non-US companies	US markets, USD
EDR	non-European companies	euro markets, usually EUR
GDR	any company, issued outside its home country and the US	London and Luxembourg first, also Dubai and Singapore; mostly USD; not on a US exchange

Memory hook A, E, G: America, Europe, Global (anywhere but home and the US).

Know it cold A GDR can be placed privately with US institutions but cannot list on a US exchange.

MemorizeDR ratio and price

Ratio	Q (shares per DR)	One DR is worth
1 share : 1 DR	1	the share price, converted
1 share : 5 DRs	0.2	one-fifth of a share, converted
4 shares : 1 DR	4	four shares, converted

Memory hook More DRs per share, cheaper each DR.

Know it cold $P_{DR} = Q \times P_{local} \div X$ ; a DR still moves with the exchange rate.

Key terms

home asset bias Know the idea
direct investing Use it
dual listing Memorize
indirect investing Know the idea
depositary receipt Memorize
depository bank Use it
DR ratio Use it
implied exchange rate Use it
American depositary receipt Memorize
European depositary receipt Memorize
global depositary receipt (GDR) Memorize
Indian and Chinese depositary receipts (IDR, CDR) Know the idea
sponsored depositary receipt Memorize
unsponsored depositary receipt Memorize
domestic, foreign and global equity markets Know the idea

Ways to own a company listed in another country

Owning foreign sharesoffsets home asset bias

Direct investing Use it buy on the foreign market, in its currency
Dual listing Memorize the company lists the same shares in two or more markets
Depositary receipt (DR) Memorize a bank holds the shares; the receipt trades like a local share
- American depositary receipt (ADR) Memorize non-US shares, traded in the US in USD
- European depositary receipt (EDR) Memorize non-European shares, traded in euro markets
- Global depositary receipt (GDR) Memorize issued outside the home country and the US; mostly USD
- Other domestic schemes Know the idea for example Indian and Chinese depositary receipts

Where a company can issue shares

Issuer's choiceweigh costs against investors reached

Domestic equity market Know the idea home currency, home regulator
Foreign equity market Know the idea may matter more for sales or investors
Global equity market Know the idea several listings using DRs, without draining liquidity from the main venue

Formulas

Depositary receipt price Use it

P_{DR} = \dfrac{Q \times P_{local}}{X}

Quick example

One share to four depositary receipts (Q = 0.25), shares at Japanese yen (JPY) 6,240, JPY 160.00 per US dollar (USD): 0.25 × 6,240 ÷ 160 = USD 9.75.

On your calculator

0.25×6240÷160= 9.75

0.25ENTER6240×160÷ 9.75

ENTER enter (on the HP, puts the number on the stack)

Implied exchange rate Use it

X_{implied} = \dfrac{Q \times P_{local}}{P_{DR}}

Quick example

One share to three American depositary receipts (ADRs), so Q = 1/3. Shares at euro (EUR) 54.00, ADR at US dollars (USD) 19.80. The formula gives EUR per USD; for the usual USD per EUR quote, flip it, $P_{DR} \div (Q \times P_{local})$ : 3 × 19.80 ÷ 54.00 = USD 1.10 per EUR.

On your calculator

3×19.8÷54= 1.1

3ENTER19.8×54÷ 1.1

ENTER enter (on the HP, puts the number on the stack)

How shareholders vote: proposals, proxies, proxy advisors and asset managers

Known

MemorizeVoting: dates, roles, rules

Item	Rule
Record date	often 30+ days before the meeting; fixes who votes
Sold after record date	still votes
Bought after record date	no vote
Proxy deadline	earlier than in-person voting
US shareholder proposals	at least 120 days before materials are released
Proxy advisor	research, recommendations, governance benchmarks, records
Voting service / tabulator	carries instructions / counts votes
Shareholder proposals	non-binding; wide support usually gets a response

Memory hook Down the chain go the papers, up the chain go the votes; the record date takes the register's photo.

Know it cold Vote for an encroaching shareholder proposal only if it would materially add value or cut risk.

Key terms

annual general meeting (AGM) Know the idea
special shareholder meeting Know the idea
management proposal Memorize
shareholder proposal Memorize
proxy statement Memorize
vote by proxy Use it
securities depository Use it
custodian Use it
beneficial owner Use it
registered holder Use it
shareholders of record Use it
record date Memorize
voting deadline Use it
shareholder voting service Memorize
tabulator or registrar Memorize
proxy advisor Memorize
non-binding shareholder proposal Memorize
European Union Shareholder Rights Directive (SRD) Know the idea
asset manager Use it
asset owner Use it
stewardship Use it
voting policy Use it

Who is involved in a shareholder vote

Shareholder votematerials go down, votes come back

Issuer Memorize board and management
- Management proposes, explains each recommendation
- Board recommends for or against every item
Intermediaries Use it move the papers and the votes
- Securities depository ownership records
- Custodian holds shares in its name for the owner
- Shareholder voting service carries vote instructions
- Tabulator or registrar counts votes, reports results
Investors Use it cast the votes
- Beneficial owner the true owner; votes if it owned on the record date
- Asset manager votes delegated by clients
- Asset owner delegates or votes under its policy
Proxy advisor Memorize researches, recommends, keeps records

The voting calendar

From proposals to resultsthe main milestones

Proposals in Know the idea US: at least 120 days before materials
Proxy statement out Memorize proposals, board recommendations
Record date Memorize often 30+ days before the meeting; fixes who votes
Proxy deadline Memorize earlier than in-person voting
Meeting and count Use it AGM or special meeting; tabulator counts