What are Voting Shares?
A publicly-traded company lists its shares on stock exchanges or in an over-the-counter market to freely trade its organised ownership via shares. As per a company’s articles of incorporation, a set of formal documents that establish the existence of the company in the United States and Canada, there is no limit to the classes of shares that a company can list, provided all privileges and restrictions are clearly stated within the article. If a company chooses to list only one class of shares, it is a minimum requirement that the shares include:
- Voting rights
- Dividend rights
- Property rights, in any event, the company is dissolved.
What are voting shares?
Voting shares, as the name suggests, are shares that entitle the holder with the right to vote on matters governing corporate policy. Mostly, common shares issued by a company are referred to as voting shares, which carry a value of one vote per share. Common shares or voting shares enable the holder to have an ownership interest in the company.
Amongst voting rights, shareholders have the right to elect or remove company directors, examine corporate and financial records, and also appoint auditors to carry out company audits. The rights also entitle the holder to have a say in framing the corporate policy, while also holding the power to accept or reject decisions of acquisitions, mergers, and buyback.
Voting shareholders receive regular updates and communications from the company on matters where their vote is required to make a decision on the affairs impacting the company. Shareholders of voting shares possess limited liability with their risk exposure limited to the amount expensed to acquire the shares and no part of the company’s debt.
The Importance of Voting Shares
Companies design their share class ensuring more than one type of share, in a way that voting rights are only concentrated within a small percentage of shareholders. Limiting shares with voting rights exclusively to small groups prevents attempts of a hostile takeover by shareholders who are not company founders or form part of company leadership, also ensuring no other company buys out their shares at a premium.
A limited exclusivity to voting shares allows companies to only issue voting rights to shareholders who are invested in the long-term growth of the organisation. Many shareholders do not hold the right industry or service domain expertise to have the right to sway company decisions. They may also not be interested in long-term strategy or being associated with the company over the long term. Limiting voting rights helps companies concentrate decision-making power only among stakeholders who look beyond short-term profit interests while protecting the company’s interests.
How do Voting shares work?
Individuals holding shares or stocks of a listed company imply stakeholders have equity ownership in the company. This is also a common method for companies to raise capital for further investment in expansion, growth, and operations. Two common types of shares are: voting shares, also referred to as common shares and preferred shares.
Common shares also entitle the shareholder with preemptive rights, which further allow shareholders to retain their ownership stake by permitting them to purchase proportional interests in future issuance of common stock. This also implies that stakeholders can buy additional shares of the company’s stock before they are made available to new investors or made open to the public.
Voting shares largely differentiate from preferred shares in events of bankruptcy or solvency. In such scenarios, holders of preferred shares are entitled to be paid first, when company assets are sold. Common shareholders do not hold rights to claim any settlements in events of solvency or bankruptcy. Another aspect of difference is in terms of dividend payout, where common shareholders are either paid less in comparison to preferred shareholders or not guaranteed a dividend payout.
Types of Voting shares
Shareholders have various levels of associated voting power, depending on the types of shares issued by the company.
Companies tend to reserve a class of shares for founders and upper management, as well as employees granting them several votes per share held. A voting share with the value of one vote per share is also issued. Companies also issue shares with no voting rights as well.
Different classes of shares ensure an arrangement for different voting shares to have a different market value, particularly when new shares are offered through a stock split. A stock split occurs when a company boosts its share volume in an event to increase liquidity.
Examples of Voting shares
Notable companies like Google and Berkshire Hathaway are companies that offer shares in the form of voting and non-voting shares.
Google lists multiple classes of shares under their trading ticker symbol GOOGL. These are Class A shares that have associated voting rights. Class B shares are non-traded shares that are held by company employees and have associated supervoting privileges, entitling the shareholder for every share to count as 10 votes. Class C Google shares trade under the symbol GOOG that are shared without any voting rights.
Similarly, Berkshire Hathaway lists its shares of voting shares of Class A under the ticker symbol BRK.A. Investors also have an alternative option to purchasing shares at a comparatively lower cost without any voting rights.
Advantages and Disadvantages of Voting Shares
One of the many advantages of voting shares is that the returns generated are rewarding to investors in both capital gains and dividend payouts. Voting shares ensure even distribution of power bringing in the diversification of ownership and transparency. They ensure democratic decision-making in a corporate landscape.
The legal liabilities for the shareholders are limited and restricted while also allowing for easy trading by being very liquid and easily traceable. On the downside, voting shareholders have lower priority in comparison to preferred shareholders and may or may not receive compensation in events of bankruptcy. They also can be a high-risk investment option in scenarios where the company is unsuccessful and investors stand to lose on their complete investment.