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Explain how voting and economic rights vary between share classes and between jurisdictions

CFA® Level I · Equities · Equity Jurisdictions, Classes, and the Voting Process · EQ.8.a

The idea

Owning a share gives two kinds of right: economic rights, a claim on dividends and on whatever is left in a liquidation, and control rights, chiefly the vote. The two need not travel together. In a dual-class structure one class may carry ten votes per share and another one or none, so founders can hold control with a minority of the economic interest. Preference shares usually trade votes for priority: a fixed dividend paid before ordinary dividends and an earlier claim in liquidation. How far these structures are allowed varies by jurisdiction and exchange, as do rules such as one share, one vote, cumulative voting and sunset clauses, so the same label can carry different rights in different markets.

Formulas

Economic share and voting share

e = s ÷ S and v = V ÷ T

e
the economic share
s
the shares held
S
the shares in issue
v
the voting share
V
the votes held
T
the total votes

With classes that carry different votes per share, the two shares can be far apart.

A practice question

From the question bank, with the reason each wrong option is wrong.

Compared with ordinary (common) shares, preference shares most typically offer:

  1. full voting rights but a lower claim in liquidationWhy not: This reverses both features: preference shares rank ahead of ordinary shares in liquidation and usually carry restricted votes.
  2. dividend priority but limited or no voting rights - correct
  3. a share of profits that rises with earnings growthWhy not: That describes ordinary shares. A preference dividend is normally fixed and does not rise when profits grow.

Preference holders give up most of their say in running the company in exchange for a fixed dividend paid before ordinary dividends and an earlier claim on assets in a liquidation.

A harder one

Company A has 100 million shares: founders own 20 million Class B shares with 10 votes each, and the public owns 80 million Class A shares with one vote each. What share of the votes do the founders control?

  1. 20.0%Why not: That is the founders' economic stake, 20 of 100 million shares. It ignores the ten votes attached to each Class B share.
  2. 28.6%Why not: That is the public's share of the votes, 80 million of 280 million, attributed to the wrong group.
  3. 71.4% - correct

Founders' votes = 20m x 10 = 200m. Public votes = 80m x 1 = 80m. Founders' share = 200 / 280 = 71.4%, from a 20% economic stake.

The hardest tier

Company B has two share classes with identical dividend and liquidation rights. Class X carries one vote per share and Class Y ten, and Class Y trades at a small premium to Class X. The premium most likely reflects:

  1. the value investors place on greater voting control - correct
  2. a higher expected dividend on the Class Y sharesWhy not: The stem states the dividend rights are identical, so the cash flows to each class are the same.
  3. greater trading liquidity in the Class Y sharesWhy not: High-vote classes are usually held more closely and trade less, which would tend to produce a discount, not a premium.

With economic rights equal, the only difference between the classes is control. A premium on the high-vote class is the price the market puts on that extra say, which tends to be larger when control is contested.

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