Question

Why would firms have two (or more) classes of common stock?

Answer 1

Common stock:

Common stocks are the shares subscribed by the shareholders to have voting rights in the organisation and to have voice in the organisation policies.

Classes of common stock:

Common stocks are classified to allow for the assignment of greater voting rights (known as “super-voting” rights) for one class over another.

For example, a company may create one class of stock (Class A), to be owned by the company promoters/founders and senior executives only, that assigns a greater per-share voting “multiple” than another class of common stock (Class B). In some cases, that multiple may be as high as 10 times that of the company’s Class B common stock, meaning that each share of Class A stock comes with 10 votes, compared to one vote for each Class B share.

The purpose of doing this is to ensure that the founders and executives maintain control over the company’s board of directors and major corporate decisions. In this particular example, Class A shares would not be publically traded, their availability limited instead to company founders and senior executives.

Here’s another example of how a company may structure different classes of common stock:

Class A - Class A shares are similar to the shares issued by a company with only one common stock class. That is, Class A shares are available to individual investors and publicly traded. Each share comes with one vote.

Class B - Class B shares are similar to those described in the first example as Class A shares. That is, they are not available for trade to individual investors and are limited to ownership by company founders and top executives. Per-share voting power may be a multiple of those of Class A shares.

Class C - Class C shares are similar to Class A shares in all aspects, except that the Class C shares lack voting rights.

The above classification changes from organisation to organisation. Because it depends on the organisation how they define each class according to their control of voting rights over one another.