Recently, Facebook announced that it would withdraw its plan to issue Class C no-vote stock. Facebook had proposed issuing a new class of Facebook stock that would have had the same economic rights as the existing Class A and Class B shares but would have no voting power. Facebook, however, already uses a multi-class stock structure, with Class A shares (which trade under the ticker “FB” on Nasdaq) having one vote per share and Class B shares (which are owned by Facebook insiders, such as Mark Zuckerberg) having 10 votes per share. While Facebook is a public company with many shareholders, family-owned businesses may also benefit from having different classes of stock.
A class is one group, or type, of stock that has identical rights; every share within a class is the same as every other share in that class. It makes sense, then, that issuing different classes of stock allows a company to give different rights to different groups of shareholders. Most notably, a company can concentrate voting power in one class of shares, which allows the holders of that class to retain control, while giving the economic benefits of stock ownership to all shareholders.
In a family-owned business, multiple classes of stock can enable certain members of the family to maintain voting control over the company. By issuing to themselves a class of voting stock (with either one vote or multiple votes per share), the first generation family owners can preserve their power to elect the board of directors and therefore control the company. A different class of stock with reduced or no voting power can then be issued to second- and third-generation family members without worrying about how they will vote in director elections. Therefore, while the founders may be economically diluted over time with the issuance of a different class of stock to children and grandchildren, their voting power remains concentrated. This multi-class stock structure can assist families in transitioning the business to younger generations.
One cautionary note: If your family-owned business is taxed as an S-corporation, consult with an attorney and an accountant before issuing a different class of stock. While voting and non-voting stock are permitted in an S-corporation, both classes of stock must have the same economic rights. If the classes of stock have different economic rights, the company’s S-election may be terminated.