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

CFA® Level I · Equity Investments · 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.

A practice question

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

In a dual-class share structure, the class carrying superior voting rights typically lets its holders:

  1. control votes out of proportion to their economic stake — correct
  2. receive a larger dividend per share than the other classWhy not: Superior voting classes usually carry the same economic rights per share; the difference is in votes, not in cash flows.
  3. claim the company's assets ahead of its creditorsWhy not: No equity class ranks ahead of creditors. Shareholders of every class are paid only after creditors are satisfied.

Dual-class structures separate control from ownership: a founder holding high-vote shares can decide most resolutions while owning a minority of the economic interest.

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

A company with dual-class shares includes a sunset provision in its articles. This provision most likely:

  1. makes the low-vote shares non-voting after a set periodWhy not: This deepens the control imbalance, which is the opposite of what a sunset provision is designed to do.
  2. requires the founders to sell their shares by a set dateWhy not: A sunset clause changes the voting rights attached to the shares; it does not force the holders to sell them.
  3. converts high-vote shares to one vote after a set period — correct

A sunset provision limits how long unequal voting lasts. After a period, or an event such as the founder leaving, the superior-vote shares convert to ordinary one-vote shares. Whether such clauses are required, encouraged or unusual differs across exchanges and jurisdictions.

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