Non-voting shares are a type of equity in a company that, as the name suggests, do not provide the shareholder with voting rights in corporate decisions. These shares are different from common voting shares and play a unique role in the corporate structure. This guide will explain what non-voting shares are, their characteristics, advantages, and disadvantages, and provide examples to help learners understand their practical applications.
What Are Non-Voting Shares?
Non-voting shares are shares issued by a company that do not grant the shareholder the right to vote on corporate matters such as electing the board of directors or making major business decisions. These shares are typically issued to raise capital without diluting control over the company.
Key Characteristics of Non-Voting Shares
- No Voting Rights: The most defining characteristic of non-voting shares is that they do not allow shareholders to vote on important corporate matters. This means that holders of these shares do not have a say in decisions that affect the company’s management and operations.
- Dividends: Non-voting shares often come with the same rights to dividends as voting shares. In some cases, they may even offer a higher dividend yield to compensate for the lack of voting rights.
- Capital Appreciation: Like voting shares, non-voting shares can appreciate in value based on the company’s performance. Shareholders can still benefit from increases in the stock price and sell their shares for a profit.
- Priority in Liquidation: In some instances, non-voting shares may have a higher claim on the company’s assets in the event of liquidation compared to common voting shares.
How Non-Voting Shares Work
To better understand how non-voting shares work, let’s consider an example:
Example: ABC Corporation issues two types of shares: common voting shares and non-voting shares. Each common voting share grants one vote on corporate matters, while non-voting shares grant no voting rights. However, both types of shares receive the same dividend per share.
Advantages of Non-Voting Shares
- Retain Control: Non-voting shares allow a company’s founders or management to raise capital without giving up control. This can be crucial for maintaining the strategic direction and vision of the company.
- Attract Investors: Non-voting shares can attract investors who are more interested in the financial returns (dividends and capital gains) than in having a say in the company’s governance.
- Flexibility in Corporate Structure: Issuing non-voting shares provides flexibility in the company’s equity structure, allowing for various classes of shares to meet different investor needs and preferences.
Disadvantages of Non-Voting Shares
- Lack of Influence: Shareholders of non-voting shares do not have a voice in the company’s decisions, which can be a disadvantage for those who want to influence corporate policy and direction.
- Perceived Inferiority: Non-voting shares may be perceived as less valuable than voting shares, potentially leading to lower demand and lower prices in the market.
- Potential for Conflict: The existence of multiple classes of shares (voting and non-voting) can sometimes lead to conflicts between shareholders, especially if the company’s performance is not meeting expectations.
Example of Non-Voting Shares in Practice
Example: Google (now Alphabet Inc.) is a well-known company that has issued non-voting shares. Alphabet has three classes of shares: Class A shares with one vote per share, Class B shares with ten votes per share, and Class C shares with no voting rights. Class C shares (GOOG) were introduced to raise capital without diluting the control held by the company’s founders and key executives.
Conclusion
Non-voting shares are a type of equity that does not provide shareholders with voting rights in corporate decisions. These shares offer several advantages, such as allowing companies to raise capital without diluting control and attracting investors who are primarily interested in financial returns. However, they also come with disadvantages, including the lack of influence for shareholders and potential conflicts between different classes of shareholders.
Understanding non-voting shares is important for investors, corporate managers, and financial professionals as it provides insight into the various ways companies can structure their equity to meet strategic goals and investor needs. Whether considering investing in non-voting shares or issuing them as a company, it is essential to weigh the benefits and drawbacks carefully.