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 unique 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. It means ownership reserved for executives at the C-level, founders, individuals in the senior management and on the board of directors. It 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 convert into 3 ordinary sharesOrdinary SharesOrdinary Shares are the shares that are issued by the company for the purpose of raising the funds from the public and the private sources for its working. Such shares carry voting rights and are shown under owner’s equity in the liability side of the balance sheet of the company.read more upon a trigger event.
- In case of a hostile takeoverHostile TakeoverA hostile takeover is a type of acquisition of a target company by an acquiring company in which the target company's management is not in favour of the acquisition but the bidder still uses other channels to acquire the company, such as acquiring the company through tender offer by directly making an offer to the public to buy the shares of the target company at a pre-specified price that is higher than the prevailing market prices.read more, this maintains significant control of the company in the hands of management.
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Source: Class A Shares (wallstreetmojo.com)
Class A Shares Examples
Let us say, a listed Company ABC on the stock exchange has two classes of shares issued – Class A shares and Class B sharesClass B SharesB Shares are a mutual fund share type which work with the “back-end load” structure, i.e., shareholders can pay the commission at the end of the investment period. Moreover, they might contain more or less voting rights as compared to the Class A shares. read more. On the 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. It means that investors in Class A shares have 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. It 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.
This unique 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, like in the above case, during the sale of a company, if the majority of votes per share lie with the company management, then it holds the maximum decision-making power.
Advantages
- It provides 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 sharesClasses Of SharesShare class is the company’s bifurcation of its shares into different classes on the basis of their voting rights, privileges, ownership restrictions. For example dividing the common stock into class A shares having the most privileged voting rights and class B shares which have less voting rights.read more. It 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 provides the investor with a dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more 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 debtorsThe DebtorsA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion. read more who lent money to the company will get paid. It is followed by payment to the investors who own this kind of shares. It 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. It 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 situation 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. It 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 directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more, and owners.
- These cannot be traded in the open market. It means that shareholders of such shares cannot sell it to another investor in the secondary stock market.Secondary Stock Market.A secondary market is where securities are offered to the general public after being offered in the primary market. Such securities are usually listed on the stock exchange. A significant portion of trading happens in such a market and are of two types – equities and debt markets.read more
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 can control significant 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.
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