Class A Shares - What Are They, Vs Class B Shares, Advantages (2024)

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.

Usually, class A shares are not issued to the public. As mentioned earlier, it is issued to the top management of the company. Moreover, they cannot be traded publicly. However, class A shares mutual funds offer an option to the public to invest in such shares where the expense ratio is also usually lesser than that of class B shares.

1. Class A shares are the sort of company shares typically granted to senior management to ensure adequate firm control. These shares are considered the most privileged regarding their voting, conversion, ownership, dividend, and liquidation rights.
2. Class A shares are a specific type that typically offers special advantages in the form of more voting rights than common shareholders. They fall into one of two categories: ordinary stock or preferred stock.
3. When the corporation pays dividends to its shareholders, holders of A shares receive preference over all other shareholders. Investors receive different portions of a company's dividend depending on whatever group they fall into.

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

Class A shares are a particular category of shares that usually comes with unique benefits in the form of additional voting rights 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, senior management individuals, and the board of directors. It is done to ensure that the additional voting power continues to lie with the company's management.
• 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 shares upon a trigger event.
• In case of a hostile takeover, this maintains significant control of the company in the hands of management.

Examples

Let us understand the concept in detail with the help of a couple of examples as discussed below.

Example #1

Delta Solutions is listed on the stock exchange has two classes of shares issued - Class A shares and Class B shares. 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.

Example #2

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 were 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 classes 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

Let us understand the advantages of holding class A shares and how investors can take advantage of its benefits through class A mutual funds through the explanation below.

• It provides additional benefits to investors who invest in them. Investors who own this kind of share get more voting rights per share than investors who own other classes of shares. It gives them the privilege of controlling the business as they hold more voting rights than any other investor.
• Investors who own A share are prioritized over everyone else when the company distributes dividends to its shareholders. A company's dividend is 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 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. It is followed by payment to the investors who own this kind of share. 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 share 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 an 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

Let us understand the disadvantages of this class of shares through the discussion below.

• These shares are only reserved and offered to the company's management; they are scarce.
• 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 directors, and owners.
• These cannot be traded in the open market. It means that shareholders of such shares cannot sell them to another investor in the secondary stock market..

Class A and B shares are sub-categories of shares of a company. Their benefits, rights, and decision-making authority are different from one another. However, there is common confusion regarding their nature and intricate details. Let us understand them through the comparison below.

• Class A shares carry a greater voting power than any of the other categories. For example, the shareholder voting power of 10 votes per share.
• They can be considerably expensive in comparison to class B or C shares.
• Sometime, it is not made available to the public altogether. Instead, it is only allotted to the top management to ensure solid decision-making.
• However, holders of class A shares are not allowed to trade these shares, they can only convert them, provided it is allowed under their agreement.
• In case of a buy-out or bankruptcy-like situation, these shareholders would be given preference over other shareholders. Similarly, even dividends would be first paid out to these shareholders.

• Class B shares have lower voting rights than class A holders. Usually, each share holds the power of one vote.
• Since it is open for the public to purchase, they are publicly traded for the market price on a daily basis.
• There are no restrictions in terms of trading them. They can be freely traded on the open market.
• Preference is usually not given to them for providing dividends or sharing profits.

Frequently Asked Questions (FAQs)

Recommended Articles

This article has been a guide to what are Class A Shares. Here we explain how they are entitled to special benefits, examples, advantages, and disadvantages. You can learn more about accounting from the following articles –

• Ordinary Shares Capital
• Par Value of Share
• What isShares Issued?
• Equity Shares vs Preference Shares