Dual-class Share Structure

Until recently, corporate governance practices were not considered to have a major impact on a company’s financial performance; as a consequence, they drew little attention from investors. However, recent corporate scandals such have prompted investors to put a greater premium on transparency, accountability, and other sound governance practices. These scandals illustrate how the absence of effective corporate control can put a company and its investors at great risk – a matter of particular importance in Canada, where 46% of the population owns shares, whether directly or indirectly via mutual funds or superannuation funds. Today, higher standards of corporate governance are becoming obligatory for public companies wanting to maintain investor confidence and improve long-term performance.

Broadly, corporate governance systems comprise the framework of rules, relationships, systems and processes an organization has in place for overseeing its direction and management. An important aspect of best practices in corporate governance deals with shareholder rights. This article discusses shareholder rights, focusing on the issues raised by dual-class share structures.

Many company founders wish to avoid the dilution of control that normally accompanies the public issuance of shares. One mechanism at their disposal is to issue different classes of shares that confer different voting rights on the holder. These are known as dual-class share structures, or, alternatively, as restricted- or subordinate-voting share structures. Note that this is substantially different from the situation where one group of shareholders or a single shareholder holds a significantly large share position to control the company. In this latter case, control is proportionate to the financial risk conferred by share ownership. In contrast, dual-class share structures alter the normal 1:1 relationship between cash flow rights and voting rights.

A wide range of dual-class structures exist. In some cases, the superior class allows multiple votes per share; in others, the superior class carries only a single vote per share while the inferior shares are non-voting. Restricted-voting structures that confer special voting rights on the superior-class shareholder, such as the right to elect a certain number of board members or approve executive compensation plans, are also possible. So are various other types of dual-class structures. Essentially, the term covers any structure that confers a disproportionate amount of control on one group of shareholders in relation to their equity participation in the company.
(Source: Parliament of Canada)
(Photo Credit: Andrzej Pobiedzinski)