Share Classes

Share class refers to the company’s bifurcation of its shares into different classes on the basis of their voting rights, privileges, ownership restrictions such as dividing the common stock into A shares having the most privileged voting rights and B shares who have fewer voting rights and so on.

As the company offers different classes of shares with different features, it attracts the investors more as they get an opportunity to choose their kind of class for investments. Plus, such structure when adopted by firms offer myriad of benefits to them, including retention of major decision-making rights and control over the company.

• Share class refers to the company's shares division into several categories per voting rights, privileges, and ownership limits.
• It reduces or denies certain owners' claim to receive a return of the firm's entire capital in the event of a winding-up while allowing some shareholders to determine how much of each class' dividend they would get.
• One class of shareholders may benefit before another from a capital return and a predetermined dividend percentage. While raising equity share capital is typically necessary for start-up firms, the original member's capacity to act quickly and freely under a profit-sharing structure must be preserved.

Share classes, as the name suggests, are categories in which the shares or stocks of a company are divided. They are classified into different categories, thereby being offered to different shareholders. Based on the class of shares the shareholders own, their rights over the company are determined.

In simple terms, dividing the shares into different “classes” confer different rights to different types of shareholders. These rights could be from voting rights, entitlement to profits, rights to dividends and capital, a different purpose and features depending on the shareholders’ requirements, etc.

Let us take for example, Mr. A, CEO of company X, who has approximately 54% voting rights in the company. He holds 28% of class B shares – which provides ten votes per share – to its shareholders. It indicates that A has a high voting power within the company.

There are multiple reasons that make it essential for firms to introduce these share classes. By offering a specific set of share class, the companies get an opportunity to keep control over itself and continue to be authorized to make strategic decision in favor of the company.

Investors aiming to have distinct privileges get attracted to companies offering different classes of shares.  In addition, the companies get exposed to different distribution patterns for the income generated. With the share classes with most significant voting rights being conferred to the strongest shareholders, the firms restrict voting rights and indirectly retains its decision-making power.

The share classes, when effectively used by the shareholders and the companies, can help against hostile takeovers and also let companies retain their employees by offering them an opportunity to hold shares and gain the rights and privileges in the company itself.

When it comes to share classes for mutual funds, multiple alternatives are offered to investors. The class that investors invests in comprises same portfolio of assets or securities and it serves the same purposes and follow or adopt same policies. However, these are offered to investors at different prices with different initial investment requirements, which directly or indirectly impact the performance of those class of shares.

Here is the list of Most Common Classes of Shares –

1 - A Shares

It is a Classification of common shares or preferred class shares. These Class A shares shares might be convertible to another class at a favorable rate. These have lesser benefits in terms of dividends, asset sales, and voting rights when compared to the other class of shares.

In the case of Mutual Funds, this class has a front-end load attached for the investors, which is approximately 6% of the amount invested.

2 - B Shares

It is a Classification of common or preferred shares. These have different voting rights than A-shares. In the case of Mutual Funds, this class does not usually charge a front load; instead, they charge a contingent deferred sales charge (CDSC) or simply the "back end load."

Also, B shares can be converted to A-share after a certain duration of holding, mostly seven to eight years.

3 - C Shares

It is a type of Mutual fund share. It is characterized by the level load, which includes the annual charges of the fund as a fixed percentage to its investors. The charges include expenses around marketing, distributions, and servicing. Charges or load is just about 1% of the fund.

The investor pays for these throughout the year, unlike A or B. In A, the investor pays charges when the fund/ shares are bought. In B, charges are paid when the fund/ shares are sold. Also, class C shares mostly have lower expense ratios than B shares but are higher than the A-shares.

C shares are non-convertible to any other class of shares.

4 - D Shares

It is a type of Mutual fund share characterized as a no-load fund. Therefore, fees in terms of the commission are attached to transactions done. These fees are directly paid to the broker. These are usually available through discount brokers.

5 - I Shares

These are the Institutional shares that are available for institutional shareholders and investors. Institutional mutual fund share classes have the lowest expense ratios among the other mutual fund share classes.

The class of fund or shares has a low-cost structure and no load. Fund companies usually use this class of shares as an investment option for the institution. These institutions have a minimum investment of $ 25,000.

6 - R Shares

R class of shares is designated for work-based retirement accounts. This class of mutual fund shares is available through the retirement plan, mostly employer-sponsored, such as the 401(k).

These shares are unavailable in the open market and do not carry sales charges. However, like others, R shares carry the annual expenses towards a mutual fund.

7 - Z Shares

This class of shares is made available to the employees of the fund house that is managing the fund. These shares might be available to the employees in two options. Either by way of purchase or as part of their compensation.

Let us consider the following instances to understand the share classes definition better:

Example 1 - Multiple Share Class: Google and its Parent Company Alphabet Inc

The share classes for the company are divided into two classes after the company got split in stocks having Alphabet Inc named as the parent company. The symbol GOOG represents class C, while the GOOGL stock represents the A shares. C shares do not have voting rights, whereas A shares, which are the GOOGL shares, have one vote each for the shares.

There are B shares and Google, but the employees and early investors own them. Each of them has the right to ten such shares, which, therefore, also makes them have super-voting powers. These shares are, however, not available in the open market.

It came into the picture when Google decided on a stock split due to the formation of Alphabet Inc as a parent company. Therefore, shareholders of Google stock were entitled to one share of the voting stock of GOOGL and one share of the non-voting GOOG stock for each share held.

Example 2

Dimensional Fund Advisors, a private investment firm in Texas, requested for permission from the US Securities and Exchange Commission (SEC) to offer Vanguard-style Exchange Traded Fund (ETF) share classes on its US mutual funds in July 2023. The submission of application was done following the expiry of Vanguard’s patent to offer this structure in May.

Vanguard, to date, has the sole authority to offer ETFs as a share class structure. However, if Dimensional Fund Advisors gets this permission, it would emerge as a milestone achievement for the firm in the US funds industry. The chances of approval seem high given the growth the investment firm has exhibited in the span of less than three years of its inception in the ETF market.

Share classes are introduced as a result of the benefits that they provide not only to the firm offering them, but also those who own them. Let us have a look at the advantages of such structure below:

• It helps the promoters of any company to retain its management control and give limited control to the shareholders.
• It provides control to some shareholders for the dividend due to each class of shareholders.
• In case of winding up of the company, limiting or denying certain shareholders the right to return of the company’s total capital;
• One set of shareholders would receive a return of capital and a fixed dividend percentage before the other classes of shareholders.
• Raise equity share capital, mostly for startup companies, without diluting the control of the founder members so that the decision-making remains easy without others participating in a profit-sharing plan.

This article has been a guide to what are Share Classes. Here, we explain different share classes, its types, examples, and the benefits of having this structure. You can learn more about finance from the following articles –

• Shares Issued Definition
• Diluted Shares
• Preferred Shares Meaning
• Shareholder Structure