Dual-Class Share Structure

A Dual-Class Share Structure (also known as a dual-class stock structure) is a system where a single company issues two or more different types of shares, each with unequal voting rights. Typically, one class of shares, often called Class A, is sold to the public and comes with the standard one-vote-per-share privilege. A second class, often Class B, is held by a select group of insiders—like the company's founders, executives, and their families—and carries “super-voting” power, granting them multiple votes per share (sometimes 10, 20, or even more). This setup allows the insider group to maintain decision-making control over the company, even if they own a small minority of the total equity. It's a way for founders to have their cake and eat it too: they can raise capital from the public market without surrendering control of their “baby.” Famous companies like Google (Alphabet), Meta Platforms, and Ford Motor Company have long used this structure.

Imagine a company as a large ship. The public shareholders buy tickets (Class A shares) to be on board, share in the journey's profits, and get a say in choosing the snack bar's menu. The founders, however, hold special tickets (Class B shares) that give them exclusive, permanent control of the ship's bridge. They get to steer the ship, set the course, and hire the crew, regardless of what the other passengers think. Let's put some numbers to it:

• FounderCo has two types of shares:
  1. 9 million Class A shares, held by the public, each with 1 vote. Total public votes: 9 million.
  2. 1 million Class B shares, held by the founder, each with 10 votes. Total founder votes: 10 million.

In this scenario, the founder owns just 10% of the company's total shares (1 million out of 10 million). However, she controls over 52% of the total voting power (10 million out of 19 million votes). This gives her majority control to elect the board of directors, approve mergers, and set company strategy, leaving public shareholders with little more than a suggestion box.

Dual-class structures are one of the most hotly debated topics in corporate governance. The arguments for and against are deeply rooted in different views of what a public company should be.

Proponents argue that this structure is essential for fostering innovation and long-term thinking.

• Insulation from Short-Termism: It shields visionary leaders from the constant pressure of quarterly earnings reports and the demands of activist investors. This freedom allows them to invest in ambitious, long-range projects that might not pay off for years.
• Stability: With control firmly in the hands of a stable group, the company can maintain a consistent culture and strategy, which can be a powerful competitive advantage.
• Defense: It makes a hostile takeover nearly impossible, protecting the company from being bought and dismantled by a corporate raider.

For many investors, especially those with a value-oriented mindset, the cons are glaring and often insurmountable.

• Entrenched Management: This is the biggest risk. If the leadership team underperforms, makes poor capital allocation decisions, or becomes complacent, public shareholders have no effective way to vote them out. You are stuck with them, for better or worse.
• Diverging Interests: The interests of the controlling insiders can drift away from those of public shareholders. The controlling group could, for example, approve excessive pay packages for themselves or engage in transactions with other companies they own, enriching themselves at the expense of the minority owners.
• Violation of Fairness: The principle of “one share, one vote” is a cornerstone of shareholder democracy. Dual-class structures violate this, creating a corporate aristocracy where some owners are more equal than others.

So, should a value investor ever buy a dual-class stock? The legendary Warren Buffett has done so, and his own company, Berkshire Hathaway, has a dual-class structure. However, this is a case of “do as I say, not as I do,” unless you can replicate his deep due diligence. The core question for an investor is one of trust. A dual-class structure is a massive red flag. It transfers significant risk from the insiders to the public shareholders. To justify buying in, you must have immense, evidence-based faith in the integrity, skill, and shareholder-friendliness of the controlling group. Before even considering such an investment, ask yourself:

1. Is the leader a true genius? Does the controlling party have a long, proven track record of creating exceptional value for all shareholders, not just themselves?
2. Are incentives aligned? Does the controlling group have a significant portion of their own wealth tied up in the economic performance of the stock, not just in their voting power?
3. Is there a sunset clause? Good governance advocates push for sunset clauses, which automatically collapse the dual-class structure after a set period or when the founder leaves. This prevents the “super-votes” from being passed down to less-capable heirs or new managers who haven't earned that level of trust.

The Capipedia Takeaway: For the vast majority of investors, the risks of poor accountability inherent in dual-class structures are simply too high. While a visionary founder might use their unchecked power for good, a mediocre or self-serving one can use it to entrench themselves while destroying shareholder value. Unless you have deep, personal insight into the character of management, it’s often wiser to invest where your vote—and your voice as an owner—truly counts.