Posted in Finance, Accounting and Economics Terms, Total Reads: 279
Definition: Class of Shares
Class of shares are simply different types of shares of a publicly listed company which are distinguished from each other by the level of voting rights different kinds of shareholders get. For example, a publicly listed company may have divided its total shares into two different classes which may be designated as Class A and Class B. Class A having special voting rights while Class B including all common shareholders.
Owners of the companies which have been privately owned for a long time and decide to go public mostly generate class A and B share structures which have different voting rights so as to maintain authority and control. It may also be done to make the takeover of the company a more tedious, complex and difficult. It requires no guessing that, it's the original historical owners or the family in the family business who are allotted the preferential voting class of shares.
Many companies have only ordinary shares, but nowadays it can be seen that even very small private organizations have different classes of shares. This again may be done for several reasons, for example to control percentage of the dividends paid to different stockholders, company can also create a certain number of non-voting shares to keep the decision making power with the owners and obviously shares for employees or relations within the family, etc. A company is free to have whatever classes of shares it thinks is good for the future of the company and can recognize any class of stocks by whatever name it thinks would suit best.
Common types of shares apart from ordinary shares mostly come under one or the other categories mentioned below,
• Preference shares,
• Non-voting shares,
• A shares, B shares, etc. (called "alphabet shares"),
• Shares with extra voting rights (called "management shares")
The flexibility of the share class system is infinite. One point to note here is that different classes of shares, and the voting and other rights attached with them, should be clearly specified in the company's articles of association. Only then can the new classes be allotted among all the stockholders of the company. Moreover, even the existing shares can be converted to different classes if and when required by the board or management.