What are Class A Shares?

Class A shares are a particular category of shares that usually comes with unique benefits in the form of additional voting rights compared to ordinary shareholders. They come under the classification of common stock or preferred stock.

  • The ownership of these shares is usually given only to company management. It means ownership reserved for executives at the C-level, founders, senior management individuals, and the board of directors. It is done to ensure that the additional voting power continues to lie with the company’s management.In a dynamic stock market, these shares offer a higher number of votes per share to the management professionals of a company.Class A shares can also have conversion rights. For example, each A Share may convert into 3 ordinary sharesOrdinary SharesOrdinary Shares are the shares that are issued by the company for the purpose of raising the funds from the public and the private sources for its working. Such shares carry voting rights and are shown under owner’s equity in the liability side of the balance sheet of the company.read more upon a trigger event.In case of a hostile takeoverHostile TakeoverA hostile takeover is a process where a company acquires another company against the will of its management.read more, this maintains significant control of the company in the hands of management.

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Class A Shares Examples

Let us say, a listed Company ABC on the stock exchange has two classes of shares issued – Class A shares and Class B sharesClass B SharesB Shares are a mutual fund share type which work with the “back-end load” structure, i.e., shareholders can pay the commission at the end of the investment period. Moreover, they might contain more or less voting rights as compared to the Class A shares. read more. On the one hand, a shareholder who owns one A share of Company ABC may have ten voting rights per share. On the other hand, a shareholder who owns one Class B share of Company ABC will have only one voting right per share. It means that investors in Class A shares have more votes for each share they hold than investors in Class B shares.

Numerical Example

Let us assume that Company ABC is a publicly listed company. Another public company decides to buy Company ABC. It means all the debtors who lent money and shareholders who invested in the shares of Company ABC will have to be paid. The first in line would be the debtors who lent money to Company ABC. The second line will be the investors who invested in A-shares of Company ABC. Let us say that one class A share of Company ABC is convertible to 4 shares of common stock. At the time of buying Company ABC, its shares were sold at $5 per share. If the founder of Company ABC owns 100 A shares, these will convert to 400 shares of common stock to be valued at $2000.

This unique benefit of having more votes per share and more value than other classes of shares comes in handy when there is a situation of a hostile takeover. Or, like in the above case, during the sale of a company, if the majority of votes per share lie with the company management, then it holds the maximum decision-making power.

Advantages

  • It provides additional benefits to investors who invest in them. Investors who own this kind of share get more voting rights per share than investors who own other classes of sharesClasses Of SharesShare class is the company’s bifurcation of its shares into different classes on the basis of their voting rights, privileges, ownership restrictions. For example dividing the common stock into class A shares having the most privileged voting rights and class B shares which have less voting rights.read more. It gives them the privilege of controlling the business as they hold more voting rights than any other investor.Investors who own A share are prioritized over everyone else when the company distributes dividends to its shareholders. A company’s dividend is distributed to investors depending on which category they come under. Investors in such shares are given first preference, and dividends are paid to the first. Investing in these shares provides the investor with a dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more priority.There could be a possibility of bankruptcy or business failure. When such a situation arises, the investors who had initially invested in the company need to be paid back. In this scenario, first the debtorsThe DebtorsA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion.
  • read more who lent money to the company will get paid. It is followed by payment to the investors who own this kind of share. It allows A-share investors to easily recover the investment that had been made in the company. Therefore, the second advantage of investing in this kind of share is that you get liquidity protection in the event of a bankruptcy.As seen above, it provides more votes per share as compared to other classes of shares. It can also mean that A share will hold more value than a share from another class. Let us say that class A share of Company ABC has four times the voting rights per share than a class B share. This situation would mean that the value of an A share is also four times that of a class B share. Hence, the shares of a company have better conversions than other classes of shares.

Disadvantages

  • These shares are only reserved and offered to the company’s management; they are scarce.These shares are not available to the public. It means an average investor cannot invest in them. The company only offers these shares to individuals in the senior management, C-level executives, founders, board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals.
  • read more, and owners.These cannot be traded in the open market. It means that shareholders of such shares cannot sell them to another investor in the secondary stock market.Secondary Stock Market.A secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more

Conclusion

Class A Shares are a superior category of shares. This concept of shares was introduced in the first place so that only the company’s management could control significant business decisions. With more votes per share, the primary voting rights lie with the company’s top management. This concentration of decision-making power in top executives’ hands allows the company’s management to focus on long-term growth and build a better business in the future.

This article has been a guide to what are Class A Shares and how they are entitled to unique benefits. Here we will discuss Class A Shares examples along with advantages and disadvantages. You can learn more about accounting from the following articles –

  • Ordinary Shares CapitalPar Value of ShareWhat is Shares Issued?Equity Shares vs Preference Shares