Dual-Class Ownership
Dual-Class Ownership: a short-lived 1980s buddy sitcom about an upper class snob and working class shlub who end up co-owners in a water taxi service in the Florida Keys.
Also, the term refers to the ownership structure of some companies.
Owning stock comes with two basic benefits. One is economic. You are entitled to the financial benefits the company produces (assuming there are any).
The other benefit is managerial. You get to be in charge. The owners (meaning the stockholders) ultimately decide things like who gets to be CEO or whether or not the company will sell itself to the mega-conglomerate buying up all the competition.
Under the dual-class system, the company will issue two types of shares, called classes. Typically, they get identified as Class A and Class B (though, it would be amazing if a company got a little more creative and went with something like Class Zipper and Class Buttonfly).
The two classes will have different mixes of economic and voting powers.
You start a frozen custard stand with your cousin. However, you're afraid your cousin will stage a coup someday and wrestle control of Custard Heaven from you. To prevent this, you create two classes of stock: Class A and Class B. Class A has all the economic benefits. These shares, you and your cousin split 50/50. Class B shares have all the voting/decision-making power. You take 75% of the Class B shares and leave him with 25%.
All the financial rewards from Custard Heaven are split 50/50, in accordance with the split of Class A shares. When the stand has $100,000 in cash for dividends, you get $50,000 and your cousin gets $50,000.
However, when it comes to decide whether to open a second location or whether you're going to sell out to Devil Custard down the street, you get 3/4 of the decision power, because that's how much Class B stock you own.
The takeover offer comes in from Devil Custard. Your cousin says "yes." You say "no." The result isn't a tie...you win, because you hold 75% of the voting Class B shares. He only has 25%.
Related or Semi-related Video
Finance: What is Cumulative Voting?6 Views
Finance, a la shmoop. What is cumulative voting? All right people there are two
flavors of voting in the land of common stock, there's cumulative and statutory. [Two ice cream cones held next to each other]
Cumulative voting just somehow sounds cooler, doesn't it? It allows teams to [Guy points at the ice cream cone and drops it]
join forces and pool their votes cumulatively
for target candidates to get elected that is it allows for the disaggregation,
$5 word there, of board members when voting. That is if a shareholder has one [5 dollar price tag appears]
percent of the common shares outstanding of a company and cumulative voting is [Pie chart showing the small 1% holding]
allowed and there are five candidates being elected, well that shareholder can
vote effectively five percent of their total shares voteable for just one
candidate. Said graphically with blood and guts it looks like this. Cumulative [Table showing shares equalling number of votes per candidate]
voting helps the little guy to have a big presence, with only 1% of the shares [Kid sat at a shareholder meeting]
the little guy can be felt as a 5% holder which makes you know him or her a [Kid jumping to hit a Mario coin box]
relatively major player. It also encourages boards to rotate seats [People swapping seats in the boardroom]
gradually, that is if there were seven seats coming up for election while that
1% could feel like 7% which starts to get dangerous in a contentious board and [The people in the boardroom start fighting]
company situation. You can imagine someone who only owns a small part of
the shares outstanding could elect a whole lot of board. Yeah that'd be a [Wooden boards replace the people in suits]
little scary. Well, score one for the little guy... [Kid laughing will an evil face]
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