Class B Shares
Reviewed by Aug 27, 2020| Updated on
Introduction to Class B Shares
Commonly, Class B shares are held by promoters or senior management of a company and carry significantly higher voting rights than Class A shares. It effectively allows firms to raise capital (by selling Class A shares) while retaining control of voting (and retaining Class B shares).
Class B Shares Explained
When considering investing in a business with more than one class, an investor will study details of a company's share classes. For instance, a private company that decides to go public typically issues a large number of common shares, but can provide a different class of common stock with multiple votes for each share to its founders, executives or other large stakeholders.
Through voting shares offer greater control over voting rights, the company's board of directors (BOD) and corporate behaviour to key business insiders. Since key insiders can retain majority voting rights without owning more than half the outstanding shares, the insiders can protect the company against hostile takeovers. As long as big stakeholders owning greater voting shares are successfully running the business, individual investors need not be concerned.
Class B shares are standard stock classifications which may be accompanied by more or less voting rights than Class A shares. Although it is often thought that Class A shares carry more voting rights than Class B shares, this is not always the case.
Sometimes companies will try to disguise the disadvantages of owning shares with lesser voting rights by categorising those shares as "Class A" and those with more voting rights as "Class B."
Commonly, Class B shares have a lesser priority on dividend than Class A shares. But, different share classes do not usually affect the share of profits or benefits from the overall success of the enterprise by an average investor. For different purposes, some companies are selling more than two types of shares (for example, Class C and D).
A company will sometimes offer a second class of shares with a lower share price to attract individual investors as against the institutional shareholders.
Comparison of Class B Shares with Class A
Committed mutual fund brokers typically recommend Class A shares to individual investors in terms of the mutual fund designations. The shares have a charge, or commission that investors must pay when purchasing the shares of the fund. Investors who buy large numbers of shares, or who hold shares in other funds provided by the same mutual fund company, may obtain discounts on the charge.
Class A shares can incur a lower 12B-1 or marketing and distribution charge than other classes of shares. Class B mutual fund shares, by comparison, have no paying fees. Investors buying Class B shares are charged a fee when their shares are sold. The fee for holding the shares can be deferred five years or longer. Additionally, if held long-term, Class B shares may convert to Class A shares.