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Dual-class shares are a corporate structure in which companies issue two or more classes of stock. This grants preferential voting rights and advantages to a specific group of investors.
The standard shares are offered to the general public. The reserved shares are kept for company executives, including founders, family members, and top executives.
This article covers dual-class shares, their advantages, and limitations.
Key Takeaways
- Dual-class structures allow founders to retain strategic control over a company without holding a numerical majority of equity shares.
- Insider shares often carry multiple votes per share (e.g., 10:1 ratio), whereas public shares carry standard or reduced voting rights.
- Indian companies can issue Differential Voting Rights (DVR) shares up to a maximum cap of 74% of total post-issue paid-up equity capital.
- While this structure protects long-term vision from short-term market pressure, public shareholders face lower board oversight and potential governance risks.
What are Dual-Class Shares?
Dual-class shares allow company founders to maintain long-term control of the business even after a public offering. Different categories of stock have varying dividend payouts and other features.
Suppose a company issues dual-class shares of two categories: Category X and Category Y.
The reserved category Y will be provided to top executives and founders, while the ordinary category X will be offered to general investors. The first category of stocks will differ from the second in two ways:
- Voting rights: Category Y shares will have more voting rights compared to Category X shares. This is known as Preferential Voting Rights (PVRs).
- Dividend payouts: Reserved categories may sometimes have higher or more customized dividend structures than ordinary shares.
The practice of providing dual-class stocks began in the US when the automobile firm Dodge Brothers’ Initial Public Offering (IPO) included non-voting stock for the general public. The mechanism was subsequently adopted by many family-owned businesses and media companies.
| Share Class | Primary Holders | Publicly Traded | Typical Voting & Economic Rights | Strategic Purpose |
| Class A / Ordinary | General Public & Institutional Investors | Yes | Standard voting (e.g., 1 vote/share); often paired with fixed or higher dividends. | Raises public capital. |
| Class B / Founders | Founders, Executives, & Insiders | No (Usually converts if sold) | Super-voting power (e.g., 10+ votes/share). | Maintains firm control. |
Also Read About: What is Share?
Examples of Dual-Class Shares
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An example of the dual-class stock mechanism is Google. In 2004, the company announced its IPO with three different classes of shares. General investors got Class A shares with one vote per equity. Class B shares were granted to top executives of the company, with 10 votes per share. These cannot be traded publicly. Lastly, Class C shares had no voting rights.
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Another example of the dual-class stock mechanism can be seen in Warren Buffett's conglomerate, Berkshire Hathaway, which offers dual-class stock based on share price and voting rights.
Dual-Class Shares in India: What is the Rule
Similar to dual-class stocks, companies can offer shares with Differential Voting Rights (DVRs).
- Regulatory Criteria: Pursuant to Rule 4(1)(c) of the Companies (Share Capital and Debentures) Rules, 2014, the voting power in respect of equity shares with differential rights shall not exceed 74% of the total voting power of the company.
- Tata Motors Case Study: In 2008, Tata Motors became the first Indian firm to issue DVR shares, offering lower voting rights (1 vote for every 10 shares) paired with a 5% higher dividend than ordinary shares. In 2024, Tata Motors successfully converted its DVRs into ordinary shares, thereby winding down the instrument. Other firms like Jain Irrigation have also explored DVR structures.
Difference Between Ordinary Shares and DVR Shares
| Features | DVR Shares | Ordinary Shares |
| Voting rights | Can be few or higher | One vote per equity |
| Dividend | Can be high or low compared to ordinary stocks offered by firm | As declared by the Board of Directors |
| Issuance | Offered at a discount | Issued at fair market value |
| Suitability | Suitable for small investors or promoters | Suitable for large investors |
Also Read About: Outstanding Shares
Why do Companies Use Dual Shares?
Protection from takeovers: Superior voting blocks prevent hostile takeovers and activist investor pressure. Insiders can easily block unwanted buyout attempts.
Long-term strategic focus: Founders can execute long-term, high-risk innovation strategies without worrying about short-term quarterly earnings pressure from public markets.
Founder vision retention: Tech giants like Alphabet (Google), Meta, and Berkshire Hathaway use this structure to ensure original creators retain control over the corporate mission.
Control of key decisions: The extra voting power of dual-class shares can allow the company’s founders and top executives to make key policy decisions without debate or obstruction from general shareholders.
Reduced risk of hostile takeover: The voting rights of dual-class shares allow founders to retain control of the company, reducing the risk of a hostile takeover.
Raise funds without giving up control: Stocks can help technology startups by allowing founders to raise capital through a public offering without diluting control.
Also Read About: Difference Between Shares and Stocks
Disadvantages of Dual-Class Shares
Unequal risk distribution: The dual-class stock mechanism provides superior voting rights to an exclusive few. Majority shareholders, despite providing the bulk of capital, have lesser voting rights. This results in a lopsided risk distribution, favoring the founders and top executives.
Misuse of control: It can result in founders and top executives using preferential voting rights to do things their own way. As public shareholders have limited influence, they cannot oversee the company's board and management.
Regulatory scrutiny: The stocks may attract extra scrutiny from regulatory bodies regarding governance issues and conflicts of interest.
Conclusion
Dual-class shares have their pros and cons. They can allow companies to retain control even after getting funds via an IPO. However, they also suffer from issues of control, regulatory scrutiny, and unequal risk distribution. In India, the concept of shares with differential voting rights is limited and offered only by a few companies.
