Recently, John tried to add a US stock to his portfolio. But he
noticed a peculiarity in its name; the letters "A" and "C" were
tacked on to the end of the official stock name.
He wanted to buy shares in popular online search firm Google but there was a "Google A" and "Google C". But wait, what does that mean? Aren’t the two stocks the same company?
In fact, yes they are. The varying names allude to the several types of stock for the same company in US stocks. I’ll explain a little more using Google above as an example.
Three types of Alphabet
Alphabet Inc is the holding company of Google. Beyond this though,
there are three types of stocks for Alphabet – ranging from class
A to class C.
There are actually two classes that are listed; Class A (NASDAQ: GOOGL) and Class C (NASDAQ: GOOG) that can be purchased by anyone who wishes to buy on the US stock market. Then there is Class B. This is not listed and cannot be bought by the public.
But what exactly is the difference between the three? Basically these share classes refer to the difference in voting rights at general meetings of shareholders. More broadly, these voting rights have a significant say on the company, its management and overall business strategy.
For Google’s example, Class A shares have one voting right per stock while class C shares come without voting rights. And Class B shares, which are not listed, have 10 voting rights per share and are owned by the founders.
However, Google’s structure isn’t a hard-and-fast rule in that certain A, B, C share classes for one company can mean something different for another. For example in March 2017, Snap Inc. (NYSE: SNAP) the operator of photo and video-sharing platform Snapchat, listed only shares without voting rights. But these non-voting right shares were A class.
To buy a stock of a company means that you own the company as much as the next person. Usually, the only difference is how many shares you own. As for the rights of shareholders, they are allowed to participate in management decisions that need approval via voting at the general meeting of shareholders.
However, if you own Class C shares you do not have voting rights. You are entitled to receive dividends, but you have no say in how the business is run.
Sheltering from the activist storm
In Japan, people may remember the days when Murakami Fund (M&A
Consulting) and “activist shareholders" hogged the business
headlines. It is a style of shareholding that exerts demands on
management when an “activist” firm accrues a sizeable stake in a
company in an attempt to materially alter the business strategy.
They are investors who actively exercise their rights as shareholders. Famous activist investors in the US include well-known figures such as Mr Carl Icahn, Mr David Einhorn and Mr Daniel Loeb.
On the other hand, companies are increasingly keeping themselves an arm’s length away from activists (who tend to pursue short-term benefits) as the companies themselves want to operate from a long-term perspective. This is backed up by the strong leadership of founders and is especially evident in technology companies.
Google, and its charismatic founders Mr Larry Page and Mr Sergei Brin, is a prime example. As is Mr Mark Zuckerberg, who is in charge of Facebook – a company that issues Class A (voting right) shares that carry one vote per share and Class B (also voting right) shares. The only difference is that Class B shares have 10 votes per share and are mostly owned by Mr Zuckerberg himself – effectively giving him control over the company.
US stocks with dual-class share structures
Purchasing such non-voting rights shares means that we, as common
shareholders, do not have any say in how the company is run. As a
result, you will have to put all your faith in the management team
(and CEO) to properly oversee the business.
Even if management makes decisions against the interests of shareholders, it means that there is no way to stop them. Within this constraint there may be a certain risk which is not immediately obvious.
Yet in fact, listing non-voting rights shares is controversial from the perspective of investor protection and corporate governance. And compiled indices such as the S&P 500 Index or the MSCI Singapore Index may exclude such stocks, with the former index having already done this.
So overall, as an individual investor make sure you are aware of the differences in voting rights among share classes and verify the exact rights of each, as these can differ. So get to grips with your ABCs before you start investing.
by Michihiro Soma, Japanese Editor @ FIGS
7 Sept 2018
(Please note that all views expressed in this article are solely my own and do not represent the opinions of FIGS or its related companies)
The information contained in the FIGS Blog is for your general information only and is not meant to constitute professional and/or financial advice. Please note that the use of the FIGS Blog is subject to the Disclaimers.