What are Voting Shares?
Voting shares give the preference to the holder to vote in matters of the company decision making and policies which allow the person to vote specifically for the selection of the board of directors and other governing affairs of the company.
Voting shares give the holder of it the power or authority to decide about how the management of the company should look like, especially in terms of the selection of the board of directors. It gives the investor the authority to decide how the corporate policy of a particular company should be framed and has the power to accept or reject certain critical decisions like acquisitionAcquisitionAn acquisition is defined as the act of taking over or gaining control of all or most of another entity's stocks by purchasing at least fifty percent of the target company's stock and other corporate assets. or mergersMergersA merger is a voluntary fusion of two existing entities equal in size, operations, and customers deciding to amalgamate to form a new entity, expand its reach into new territories, lower operational costs, increase revenues, and earn greater control over market share. or buyback. Holders of this share will generally receive constant updates or communication from the company about matters where their vote is required to decide about affairs related to the decision making of the company.
How Does it Work?
Stock or shares of a company generally means equity ownership of the company was holding 1 share or a million shares matters the same, i.e., One is considered to be the owner of the company. Companies also go by this model of distributed ownership to raise capital for the company and use it for further operations or expansion. Thus, we have primarily two types of shares, which are classified as voting or common shares and preferred shares. Here we are going to talk about how does it work.
- Voting or common shares give the shareholders the right or authority to vote in any kind of matters specific to the company and its state of affairs. It is primarily used to frame policies for the company. It is used in cases of making a crucial decision. Like whether the company should acquire another company or go for a merger. Whether a company should go for a share buy-back, who should be a part of the board of members, who should head the board and other crucial decisions;
- They appear with preemptive rightsPreemptive RightsPreemptive rights refer to a shareholder's right to maintain his or her ownership stake by allowing them to purchase a proportional interest in any future issuance of common stock. These are rights provided to some equity shareholders that allow them to purchase additional shares of a company's stock before it is made available to new investors., which further means that the shareholder can refuse or reject any kind of newer shares which the company attempts to issue in the market. An essential aspect where common or voting shares are different from preferred shares is at times of bankruptcy or solvencySolvencySolvency of a company means its ability to meet the long term financial commitments, continue its operation in the foreseeable future and achieve long term growth. It indicates that the entity will conduct its business with ease..
- If the company goes bankrupt, it is the preferred shares that have to be paid first by the company by selling off its assets. Then whatever is remaining after preferred shareholders are paid, the common shareholders get paid with which in reality is barely anything and very minimum. The other aspect of difference is preferred shareholders get paid dividend by the companyDividend By The CompanyDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company. which common shareholders or voting shareholder are comparatively paid less or is not guaranteed.
Example of Voting Shares
Let’s take an example of the type of shares issuedShares IssuedShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner's equity on the Company's balance sheet. by the internet giant Google. Google has three types of shares which it issues, and they are as follows: Class A, Class B, and Class C. The three shares are distinctive in their ways.
- Class A: These are common shares that Google issues and held by investors who are given the voting rights and thus the power to vote in the company’s policy-making scenarios and also frame the board of directors.
- Class B: B SharesB 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. are held only by the founders of the company and have ten times more voting authority as compared to Class A sharesClass A SharesClass A shares represent the common stocks category, which provides the shareholders with superior rights to voting, conversion, ownership, dividend, and liquidation. These shares cannot be publicly traded in the open market and are generally allotted to the company's top management.. These shares are very limited in numbers, and also, the persons holding them are only a few. These are not traded among the public too.
- Class C: They are more of like preferred shares where it is commonly traded among the public and has no voting rights in the company affairs or policy-making scenarios.
- The returns generated from this are proven to be rewarding in terms of capital gains and dividends received.
- The holders of such share can take part in the decision making of the company and its policies.
- They can issue a kind of internal corporate governing methodology through the practice of their voting rights.
- They have a certain degree of freedom to dictate how the company should be run and who all should be on the board of directors.
- The number of shares one owns is equal to the number of votes, and thus their opinion becomes even stronger when they own a massive chunk of the shares.
- Though dividend is not guaranteed, they may be issues with some dividend if the company feels like.
- When they are issued, the power gets distributed evenly. It is just not held by a few people or the owners of the company and his family. It brings about the distribution of ownership and transparency.
- The decision making becomes much more democratic in case of the issue of voting shares, and a lot of people get involved.
- The legal liabilities pertaining to the shareholders are limited and restricted.
- The shares are very liquid and can be easily traced.
- They are the last ones to receive compensation at times of bankruptcy since preferred shareholders need to get paid first.
- The dividend they receive is not guaranteed as preferred shareholders need to get paid on a guaranteed basis.
- It is a high-risk associates investment because if the company fails to perform or goes bankrupt because the shareholders have to straightaway part off with their investments.
- Voting shares are limited in numbers and are not issued in huge numbers like the preferred shares, so the common public to get access to such shares is complicated.
Voting shares have both upsides and downsides it. On the one hand, where the holder enjoys the power to vote and get involved in the crucial decision-making scenarios of the company, on the other hand, there is also high risk involved because once the company gets bankrupt, his/her investment can go for a toss. Also, the shares issued in these criteria are limited in numbers, so it is very tough to get access to such shares unless one has a stronghold with the management of the company. They play a bigger role in terms of the count of shares because the more the number of shares one holds the number of votes one is allotted with because one share it typically counted here one vote.
Thi article s has been a guide to what are voting shares and their meaning. Here we discuss an example of voting shares with advantages, disadvantages, and working. You may learn more about financing from the following articles –