Class A Shares (Definition, Example) | Top Advantages and Disadvantages

What are Class A Shares?

Class A shares are the type of shares of the company which is considered to be most privileged in terms of its voting rights, conversion rights, ownership rights, dividend rights, and liquidation priorities and these shares are generally allotted to the top-level management to provide the proper control of the company.

Class A shares are a particular category of shares that usually comes with special benefits in the form of additional voting rights as compared to ordinary shareholders. They come under the classification of common stock or preferred stock.

The ownership of these shares is usually given only to company management. This means ownership is reserved for executives at the C-level, founders, individuals in the senior management and on the board of directors. This is done to ensure that the additional voting power continues to lie with the management of the company.
In a dynamic stock market, these shares offer a higher number of votes per share to the management professionals of a company.
Class A shares can also have conversion rights. For example, each A Share may be converted into 3 ordinary shares upon a trigger event.
In case of a hostile takeover, this maintains major control of the company in the hands of the company management.

Class A Shares Examples

Let us say, Company ABC is listed on the stock exchange and it has two classes of shares issued – Class A shares and Class B shares. On one hand, a shareholder who owns one A share of Company ABC may have ten voting rights per share. On the other hand, a shareholder who owns one Class B share of Company ABC will have only one voting right per share. This means that investors in Class A shares are given more votes for each share they hold than investors in Class B shares.

Numerical Example

Let us assume that Company ABC is a publicly listed company. Another public company decides to buy Company ABC. This means all the debtors who lent money and shareholders who invested in the shares of Company ABC will have to be paid. The first in line would be the debtors who lent money to Company ABC. The second line will be the investors who invested in A-shares of Company ABC. Let us say that one class A share of Company ABC is convertible to 4 shares of common stock. At the time of buying Company ABC, its shares are being sold at $5 per share. If the founder of Company ABC owns 100 A shares, these will convert to 400 shares of common stock to be valued at $2000.

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This special benefit of having more votes per share and more value than other class of shares comes in handy when there is a situation of a hostile takeover or in the above case, during the sale of a company. When the majority of votes per share lie with the company management, as in the case of these shares, the management of the company holds the maximum decision making power in their hands.

Advantages

It provides an additional benefits to investors who invest in them. Investors who own this kind of shares get more voting rights per share that investors who own other classes of shares. This gives them the privilege of controlling the business as they hold more voting rights than any other investor.
Investors who own A share get priority over everyone else when the company distributes dividends to its shareholders. Dividends of a company are distributed to investors depending on which category they come under. Investors in such shares are given first preference and dividends are paid to the first. Investing in these shares gives the investor a dividend priority.
There could be a possibility of bankruptcy or business failure. When such a situation arises, the investors who had initially invested in the company need to be paid back. In this scenario, first, the debtors who lent money to the company will get paid. This is followed by payment to the investors who own this kind of shares. This allows A-share investors to easily recover the investment that had been made in the company. Therefore, the second advantage of investing in this kind of shares is that you get liquidity protection in the event of a bankruptcy.
As seen above, it provides more votes per share as compared to other classes of shares. This can also mean that A share will hold more value than a share from another class. Let us say that class A share of Company ABC has four times the voting rights per share than a class B share. This would mean that the value of A share is also four times that of a class B share. Hence, the shares of a company have better conversions than other classes of shares.

Disadvantages

These shares are only reserved and offered to the management of the company, they are scarce in nature.
These shares are not available to the public. This means an average investor cannot invest in them. The company only offers these shares to individuals in the senior management, C-level executives, founders, board of directors, and owners.
This cannot be traded in the open market. This means that shareholders of such shares cannot sell it to another investor in the secondary stock market.

Conclusion

Class A Shares are a superior category of shares. This concept of shares was introduced in the first place so that only the management of the company is able to control the major business decisions. With more number of votes per share, the primary voting rights lie with the top management of the company. This concentration of decision making power in the hands of top executives, allows the management of the company to focus on long-term growth and build a better business in the future.