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Voting Shares

Updated on June 13, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

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

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Voting shares give the holder of it the power or authority to decide how the company’s management should look, especially regarding 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 acquisition or mergers or buyback.

How Does Voting Shares Work?

Stock or shares of a company generally means equity ownership of the company holding one or a million shares matters the same, i.e., and One is considered the owner of the company. Companies also use this distributed ownership model to raise capital for the company and use it for further operations or expansion. Thus, we primarily have two types of shares: 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 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 rights, which means that the shareholder can refuse or reject any newer shares 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 solvency.
  • The other aspect of difference is preferred shareholders get paid a dividend by the company while common shareholders or voting shareholders are paid less or are not guaranteed. If the company goes bankrupt, the preferred shares must be paid first by the company by selling off its assets. Then whatever remains after preferred shareholders are paid dividend by the company which common shareholders or voting shareholder are comparatively paid less or is not guaranteed.
  • Holders of this share will generally receive constant updates or communication from the company about matters where their vote is required to decide on affairs related to the company’s decision-making.
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Example

Let’s take an example of the type of shares issued by the internet giant Google. Google has three types of shares that 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 are 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 Shares are held only by the company’s founders and have ten times more voting authority than Class A shares. These shares are very limited in numbers, and the persons holding them are only a few. These are not traded among the public too.
  • Class C: They are more like preferred shares where it is commonly traded among the public and have no voting rights in the company affairs or policy-making scenarios.

Advantages

There are a few advantages and disadvantages of the concept. Let us look at the advantages first.

  • The returns generated from this are proven to be rewarding regarding capital gains and dividends received.
  • The holders of such shares can participate in the company’s decision-making 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 should be on the board of directors.
  • The number of shares one owns is equal to the number of votes; thus, their opinion becomes even stronger when they own a massive chunk of the shares.
  • Though dividend is not guaranteed, there may be issues with some dividends if the company feels like it.
  • When they are issued, the power gets distributed evenly. It is not held by a few people or the company owners and their families. 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.

Disadvantages

Some disadvantages of the concept are given below.

  • They are the last ones to receive compensation in 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 associate’s investment because if the company fails to perform or goes bankrupt, the shareholders have to part off their investments straightaway.
  • Voting shares are limited and not issued in huge numbers like the preferred shares, so the common public accessing such shares is complicated.
  • If the company issues such shares in large numbers, this will dilute the ownership percentage of the existing shareholders. This will lead to less control and the share value will also go down.
  • The company may face risk of takeovers. If the management does not work in favour of the interest of the business, and above that if the ownership and control of voting shareholders are very diluted, then competitors may easy gain control of the management of takeover the business.
  • Sometimes, there may be a conflict of interest among voting shares if the management gives more priority to their own personal interests and does not look at growth and expansion of the business overall.

Voting shares have both upsides and downsides. 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 a 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 access such shares unless one has a stronghold with the company’s management. They play a bigger role in terms of the count of shares because the more shares one holds, the more votes one is allotted because one share is typically counted here as one vote.

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