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

What are the two kinds of rights in a share?

Every share carries two bundles of rights. Economic rights are a proportional claim on any dividends or other distributions, and on the company’s net assets if it is liquidated. Voting rights let the holder vote on matters such as board elections, executive pay, dividends and the choice of auditor. The previous module introduced both; the voting lesson in this module shows how the votes are cast.

The default is one share one vote : both bundles are spread in proportion to the shares held. One share has one vote and one equal slice of the dividends. But several jurisdictions let a company spread the rights unevenly across share classes, and that is where control and ownership come apart.

What is a dual class share structure?

A dual class share structure gives different share classes different economic and/or voting rights. The usual form has two classes. The first is widely held, publicly traded and carries one vote per share. The second is not traded: only founders, family members or other insiders hold it, and each share carries several votes. This is the superior voting share class .

Why do companies do this? Insiders can keep control through their votes while owning only a minority of the company’s economic value. A founder can take the company public and raise capital from outside investors without giving up the say over strategy. The cost falls on the public holders: the controllers set the company’s course, and their priorities may differ from what most outside shareholders want.

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

How much control does a small stake give?

Control follows the votes, not the shares. The voting control vs economic ownership gap is the arithmetic of a dual class structure: a holder’s economic stake is a share of all shares, while the vote share is a share of all votes.

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

Issuing more of the low-vote class dilutes control. If Halvorsen later sells 50 million new Class A shares, the founder’s votes stay at 382 million but the total rises to 790 million: 382 ÷ 790 = 48.35%, below a majority. The economic stake falls to 40 ÷ 340 = 11.76%.

Exam tip Divide by total votes, not total shares. A holder’s share of the shares and share of the votes are different numbers in a dual class company.

What are the three ways to split the rights?

Beyond one share one vote, a company can use three patterns.

Pattern	Votes	Economic rights	Who holds the control class	What the public gives up
Superior voting class	insider class has several votes per share; public class one each	equal	founders or insiders; class not traded	influence over the company’s direction
Non-voting public class	public class has no vote; insider class one vote each	equal dividends and equal claim in liquidation	founders or family	any vote at all
Differential voting rights (DVR) shares	DVR class has a fraction of the ordinary vote	DVR class gets a higher dividend, if one is declared, and is usually sold at a discount	ordinary shares, often controlled by a family	votes, in exchange for the extra dividend and the lower price

Non-voting classes

In a non-voting share class structure, the public holds shares with no vote while the founders keep the voting class. The economic rights are equal; only the voting rights differ. Carrick Media (fictional) has two listed classes. Both get the same dividend per share and the same amount per share in liquidation, but only Class V votes, and the founding family holds most of Class V.

Differential voting rights shares

Differential voting rights (DVR) shares change both bundles at once. A DVR share carries a fraction of the ordinary vote and a higher dividend whenever a dividend is declared, and it is usually sold at a discount to the ordinary share. The company raises equity without handing over much control. Investors who do not care about voting get a cheaper share with a higher payout.

The catch is that the extra dividend only exists when a dividend is declared. If the company stops paying, the higher dividend is worth nothing, DVR shares can turn illiquid, and they can trade at a much wider discount.

Go deeper Retiring a DVR class by exchange

A company may later want a single class, because simplifying can help the liquidity of the ordinary shares. Suppose Marigold’s DVR shares have slipped to INR 280 while the ordinary shares are at INR 400 (a 30% discount, 280 ÷ 400 = 0.70). The company offers 3 ordinary shares for every 4 DVR shares.

• Value offered: 3 × 400 = INR 1,200.
• Market value of 4 DVR shares: 4 × 280 = INR 1,120.
• Premium: 1,200 ÷ 1,120 − 1 = 7.14%.

Premium on your calculator

TI BA II Plus HP 12C

1. 3×400÷(4×280)=−1= 0.0714

1. 3ENTER400×4ENTER280×÷1− 0.0714

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

Why do some investors avoid dual class companies?

An investor who wants its votes to count may refuse to buy a company whose traded class has little voting power, because the untraded superior class decides. Some large asset owners publish voting policies that do not support unequal voting rights across share classes. The same logic makes such an investor prefer sponsored depositary receipts (next lesson), which carry the vote.

Founders see it the other way. A dual class share structure lets them go public through an initial public offering (IPO), raise capital and keep control. The governance lessons show why that control can matter to other stakeholders.

Is it dual class, dual listing or a depositary receipt?

These three terms are often mixed up, and exam questions use that. Only a dual class share structure changes who has the votes.

Term	What it means	Changes votes?
Dual class share structure	two or more classes with different voting and/or economic rights	yes
Dual listing	the same shares listed and traded on two or more markets at once	no
Depositary receipt (DR)	a receipt for foreign shares, traded in another market	not by itself (depends on sponsored or unsponsored)

The dual listing vs dual class question comes down to one line: a founder who wants to go public and keep control uses a dual class structure, not a dual listing. The next lesson covers dual listings and depositary receipts.