Dual-Class Shares

Dual-Class Shares (also known as a 'dual-class stock structure') is a corporate setup where a company issues two or more classes of common stock with unequal voting rights. Typically, the company offers one class of shares, say Class A, to the general public, granting one vote per share. Meanwhile, a second class, say Class B, is held by founders, family members, and top executives. These Class B shares carry super-voting rights, often granting 10, 20, or even more votes per share. This structure allows the insider group to retain majority voting control over the company—and its board of directors—even if they own a small minority of the total equity. In essence, it separates economic ownership from voting power, allowing founders to raise capital from the public markets without surrendering the driver's seat. It's a controversial practice that pits the promise of visionary leadership against the fundamental principles of shareholder democracy.

At first glance, creating a corporate “ruling class” seems unfair. So why do so many innovative companies, from Google (Alphabet) to Meta Platforms (Mark Zuckerberg), choose this path? The primary reasons are vision and defense.

• Protecting the Long-Term Vision: Founders often argue that the stock market is obsessed with short-term quarterly results. This pressure can force a company to abandon bold, long-term projects in favor of easy, immediate wins. By retaining voting control, visionary leaders can steer the company according to their grand plan, making decade-long bets without fear of being ousted by impatient shareholders. They can focus on building a durable, innovative enterprise rather than just managing the stock price.
• A Fortress Against Activism: A dual-class structure is a powerful shield against hostile takeovers and activist investors. With voting power concentrated in friendly hands, it's nearly impossible for an outsider to gain control and force major changes, such as selling off divisions or taking on excessive debt. This stability allows management to execute its strategy without constant distraction or threat.

For a value investor, dual-class shares present a fascinating and often frustrating puzzle. The structure forces a choice between backing a potentially brilliant leader and upholding sound principles of corporate governance.

The core argument against dual-class shares is simple: it breaks the alignment between ownership and control. As a shareholder, you are a part-owner of the business, and your vote is your voice. When that voice is diluted to near-irrelevance, serious risks emerge.

• Management Entrenchment: This is the single biggest danger. Insiders with superior voting rights are insulated from accountability. If they perform poorly, make disastrous acquisitions, or award themselves excessive pay, public shareholders have little recourse. They can't be voted out. This can lead to a complacent management team that serves its own interests rather than those of all shareholders.
• Lack of Accountability: Warren Buffett, who ironically presides over Berkshire Hathaway's dual-class structure, has often cautioned investors about companies where they have no say. He argues that when you invest, you are placing trust in both the business's economics and its management. If management is completely unaccountable, you are taking a significant leap of faith that they will always act in your best interest—a risky bet over the long term.

The counterargument is equally compelling: sometimes, you're not investing in a democracy; you're investing in a genius.

• The Visionary Factor: In some cases, a company's most valuable asset is its founder. A dual-class structure allows investors to explicitly bet on that individual's continued leadership and vision. Early investors in companies led by uniquely talented founders have been rewarded handsomely precisely because those founders had the freedom to execute their unconventional plans.
• Commitment to the Long Haul: Unshackled from quarterly earnings pressure, these companies can invest in research and development (R&D) and capital-intensive projects that may not pay off for years. This long-term orientation is often a key ingredient in creating truly disruptive and enduring businesses.

So, should you run for the hills when you see a dual-class structure? Not necessarily, but you should proceed with extreme caution. For us, a dual-class structure is a significant governance red flag by default. It violates the sacred principle of “one share, one vote.” However, an automatic rejection might mean passing up the next great innovator. Instead, your investment case must heavily depend on your assessment of the controlling “jockey.”

1. Analyze the Leadership: Is the controlling founder a proven capital allocator with a track record of integrity and brilliance? Or are they simply using the structure to entrench their power and enjoy the perks of a public company without any of the accountability? Your research into management's history and character is paramount.
2. Demand a Discount: Because you are taking on extra governance risk and giving up your right to a meaningful vote, you should demand a higher margin of safety. The stock's price must be sufficiently cheap to compensate you for this lack of power. If you're paying full price for a business where you have no say, the risk/reward profile is likely tilted against you.
3. Look for Sunset Provisions: A growing number of companies are including “sunset clauses” in their dual-class structures. These provisions automatically collapse the two-tier system into a single class of stock (with one vote per share) after a set period, or when the founder sells their shares, retires, or passes away. The presence of a sunset clause is a very positive sign, as it shows that the founders are thinking about the long-term health of the company beyond their own tenure.