StartupTalky

Tag: Shareholders

  • Dual Class Shares – What is it, Advantages, Disadvantages, Examples and More

    What is one common thing among the founders of famous companies like Google, Ford and Facebook that allows them to have complete control over the decision-making of their companies? The answer to this question is dual-class shares.

    I know you are very confused about what dual-class shares are and what advantages and disadvantages they offer to the founders. Don’t worry I will explain to you about dual-class voting shares in great detail without technical jargon. We will also talk about companies with dual-class stock structures.

    What are Dual-Class Voting Shares?
    Why Dual-Class Voting Shares are Used?
    Famous Examples of Companies That Use Dual Class Structure
    Advantages of Dual Class Shares
    Disadvantages of Dual Class Shares

    What are Dual-Class Voting Shares?

    In dual-class shares, the founders own a small portion of the company’s total stock but they have the maximum voting power. For example, a company may issue class A and class B shares. Both these shares may have different voting power and dividend payments.

    In this scenario, class A shares which have limited or no voting rights are offered to the general public while class B shares which have the maximum voting power are offered to the founders, executives, and family.

    Why Dual-Class Voting Shares are Used?

    Founders who want to enter the public equity markets for financing but want to gain full control over their company opt for dual-class stocks. Using this strategy founders can focus on their long-term vision. They don’t have to worry about their investors who just want profits.

    Famous Examples of Companies That Use Dual Class Structure

    Google

    Alphabet subsidiary Google issued two classes of shares in 2004. Here, class A was offered to the general public which carried one vote per share. Although Class B which was offered to the founders carried 10 votes. Later, the company issued class C shares that had zero voting rights.

    Ford

    The Ford family has also issued two classes of shares: Class A and Class B. The family owns the class B shares which gives them 40% of voting power with just 5.0% of the total equity in the company.

    Facebook

    Facebook also follows a dual-class common stock structure. Mark Zuckerberg and his close executives possess class B shares which carry 10 votes. Zuckerberg owns 75% of class B shares which allows him to control 58% of Facebook’s votes.

    Advantages of Dual Class Shares

    • The biggest advantage of dual-class voting shares is that the founders have complete control over the decision-making and functioning of the company.
    • The company can still get public financing without worrying about giving too much voting power to its investors.
    • Founders can focus on long-term growth. It protects the company from investors who only want to gain profits.

    Disadvantages of Dual Class Shares

    • Dual-class voting shares give unfair voting rights to their investors.
    • Super voting rights in the hands of the founders and executives weaken the structure of the company.
    • The structure of the company cannot be easily transformed into a single class.
    • A study from the National Bureau of Economic Research provided strong evidence that the company which follow a dual-class structure face more debt than single-class shares.
    • Shareholders can make bad decisions with few consequences.

    Conclusion

    As you can see dual-class voting shares allow the founders and insiders of the company to have complete control over the company with limited shares.

    Almost every other founder wants to focus on the company’s long-term goals and doesn’t want to allow investors to control the decision-making of the company. That’s why well-known founders are implementing a dual-class structure in their respective companies.

    Although dual-class voting shares do have their own cons. The founders and investors should understand the benefits and consequences of dual-class voting shares.

    FAQs

    What is a dual-class share?

    In a dual-class stock structure, a company issues two classes of shares: Class A and Class B where one of the shares have more voting rights than the other one. For example, class A shares which are offered to the general public have one vote per share. While class B shares which are offered to the founders and insiders of the company can have 10 voting rights.

    What are the benefits of Dual-class shares?

    Since the founders have higher voting rights with a limited amount of stock they can have complete control over the decision-making of the company. They can focus on long-term goals. This protects the company investors who only aim to make profits.

    Is it unfair or unethical for corporations to create classes of stock with unequal voting rights?

    No, it is not unfair to issue stock with unequal voting right since the company before issuing its shares tells the general public and investors that they will be following the dual-class structure. Investors know all the terms and conditions and are under no obligation to buy the shares.

  • What Happens When a Public Company Goes Private?

    What happens when a public company goes private? Why would a publicly-traded company make that decision? What are its options once it does? It’s difficult to know how to answer these questions if you have no background information on the subject. To help you get some insight into what happens due to these transactions, we’ve collected seven pointers about going private and provide some insight into what happens due to these transactions. Hopefully, this guide answers your questions and helps you understand what happens if a publicly-traded company decides to pursue another route.

    When a Public Company Goes Private:

    The company is removed from the stock exchange

    No. of Companies listed on Stock Exchange in India
    No. of Companies listed on Stock Exchange in India

    Once a company goes private, it’s removed from the stock exchange. Investors will no longer be able to purchase or sell shares in the company through a major stock exchange.

    The company’s management team may still hold on to some of their shares, which they may sell in the future for a profit. But for most investors, this is the end of their involvement with the company.

    The company’s shares are withdrawn from the stock market

    When a publicly-traded company goes private, its shares are withdrawn from the stock market. This is a major shift for investors, who are used to seeing their investments on display on the stock exchange.

    Management often decides to go private, but investors can also initiate it. In some cases, an investor may buy out other shareholders and control the company. In other cases, multiple investors pool their resources and buy out existing shareholders.

    Existing Shareholders get paid

    When companies go private, their shareholders can receive various payout options. These include:

    • Cash payments to each shareholder are based on the number of shares they own. The payout can either be in one lump sum or spread over time.
    • Stock in a new company is formed when the parent company goes private. This stock could pay dividends or be sold for cash later.
    • New shares in the parent company that’s going private. Once those shares become publicly traded again, it’s possible for investors who hold them to make money off their original purchase price or by selling them at some point down the line.

    List of All the Upcoming IPOs in India 2022
    2021 was the year full of new startup IPOs from Zomato to Nykaa. 2022 also has many new listings, take a look at companies going public in 2022.
    StartupTalkyBhoraniya Huda Hifzur Rehman

    The company no longer releases financial statements to the public

    Once a company goes private, it no longer releases financial information to the public. This means that investors who had previously owned shares of the company in question will no longer have access to any information about its finances or performance. However, this does not mean that the company goes completely dark: companies can still be purchased and sold by other companies using private transactions, which means that their financials are still available to their owners.

    The only major difference is that these transactions are not recorded on any stock exchange. Instead, they must be reported to regulatory bodies such as the Securities and Exchange Board (SEBI), allowing them to track how many outstanding shares exist within the private sector.

    Fewer regulatory requirements and obligations

    By going private, a publicly-traded company no longer has to deal with the many regulatory requirements of being a publicly-traded company. These include:

    • Annual reports: are required for publicly-traded companies and must be submitted to the SEBI.
    • Audited financial statements: audited financial statements must be submitted to the SEBI for publicly-traded companies. This requirement helps ensure that investors access accurate information about their investments.
    • Required disclosures: publicly-traded companies must disclose information about their operations and management team to the public via annual reports and other filings with the SEBI.
    • Corporate governance: corporate governance refers to how businesses are run internally—for example, whether shareholders have voting rights over key decisions made by management, or who sits on boards of directors at large companies.

    Less capital available

    The reason for this is simple: a public company must disclose its financial statements, which means anyone can access them. This is great for investors who want to get in on the action and make money from their investments. Still, it’s not so great for companies that want to be able to keep their financials secret to protect proprietary information or avoid scrutiny from government regulators.

    By going private, companies can keep their financials under wraps and more of their profits for themselves!

    A public company that goes private no longer has to contend with quarterly pressures.

    Public companies are accountable to their shareholders, who demand that the company generate quarterly revenue and profit. These demands make it difficult for companies to focus on long-term goals, often leading to short-term planning and poor decision-making.

    Private companies have more freedom: they can focus on their long-term goals without worrying about those pesky quarterly reports!

    More flexibility

    When a public company goes private, it gains more flexibility in its operations. This means that the company can make decisions that may be unpopular with investors but which are better for the business’s long-term health.

    For example, a public company might cut costs to boost profits and increase shareholder value. This could involve layoffs or outsourcing certain aspects of operations. However, when a public company goes private, they no longer have to worry about shareholder concerns and can focus on what is best for the business as a whole.

    List of All the Upcoming IPOs in India 2022
    2021 was the year full of new startup IPOs from Zomato to Nykaa. 2022 also has many new listings, take a look at companies going public in 2022.
    StartupTalkyBhoraniya Huda Hifzur Rehman

    Conclusion

    There is a lot at stake when a public company goes private.

    So there you have it, folks. That’s what happens to a company when it goes private. Of course, this article is only meant to be a general overview of the process. It may be worth learning more about private equity firms and the going-private phenomenon in general; then, you should do further research on those topics.

    This post’s subject can be applied to almost any situation involving a significant change in company ownership and structure. While there are many options that can be pursued when taking your company public or private, keep in mind the information above: timing and valuation matter. If you’re ready to make the leap, talk to an investment banker or investment broker/advisor, they can help!

    FAQs

    What is privatization in public sector?

    Privatisation of public sector means the transfer of ownership, management, and control of the public sector enterprises to the private sector.

    Which sectors are privatised in India?

    The sectors privatised in India are:

    • Atomic Energy
    • Space and Defence
    • Transport
    • Telecommunications
    • Power
    • Petroleum
    • Coal and other minerals
    • Banking, insurance, and financial services

    What happens if public company goes private?

    When a Public Company Goes Private:

    • The company is removed from the stock exchange
    • The company’s shares are withdrawn from the stock market
    • Existing Shareholders get paid
    • The company no longer releases financial statements to the public

    Which are the public companies that went private?

    Some of the popular public companies that went private are:

    • Twitter
    • Dell
    • Burger King
    • Hilton Worldwide Holdings
    • Reader’s Digest