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Equity Instruments
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Common Stock
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Preferred Stock
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Tracking Stock
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Spin-off
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Partial Spin-off
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Stock Rights
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Stock Classes
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Real Estate Investment Trust
(REIT)
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Stock Classes
Ford Motor Company is the classic example of a
company with multiple classes of voting shares. Mr. Henry Ford founded the
company and wanted to ensure that his descendants controlled the company.
The Ford family and friends control 40% of the voting power of the company,
but own only about 4% of the company’s stock.
Typically, different classes of stock evolve when a
company needs to raise capital, while controlling shareholders want to
maintain control over the cash flow of an organization. Normally, each share
of common stock is entitled to one vote. Stock classes can have a
disproportionate number of votes and different shareholder rights, stock
prices and dividend rates. Preferred stock is the most cited example.
Different classes are normally labeled as A, B, C, and so forth.
Hewlett-Packard was not set up with different classes
of stock to protect the founders’ legacy. When the founders moved on and
professional managers took over, the descendants lost control of the
business. As a result, in 2002 management merged the highly profitable HP
brand with the much less profitable commodity PC maker Compaq Computer. The
merger, against the will of the descendants, diversified the organization,
but also created a lot of uncertainty and price volatility for its shareholders.
Multiple classes of voting
shares, with large publicly traded companies, normally do not undermine the
value of the regular shares.
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