Class A and Class B stock shares are both types of common stock shares. Common stockholders receive privileges such as voting rights in exchange for lower priority for other benefits that preferred stockholders get, such as dividends. According to Wake Forest University, there is no law that specifies the difference between Class A and Class B shares. It is up to the public corporation that issues these shares to assign different rights, such as voting privileges, to each category of shareholder. A company can also authorise even more types of shares, such as Class C stock.
When a public corporation only has one class of stock, each shareholder gets one vote in a corporate meeting. In a corporate meeting, the shareholders can elect members of the board of directors and can also vote on mergers and acquisitions, and approve changes to the bylaws that govern the corporation. If a corporation has Class A and Class B shares, Class B shareholders may receive additional votes, such as five votes per share compared to a Class A shareholder's one vote per share.
Class B shares do not always receive more votes than Class A shares, this is just the most common arrangement, according to Wake Forest University. There is also no regulation that specifies the amount of extra votes that a Class B shareholder receives, so the shareholder may receive five, 10 or 100 votes, depending on the corporation's charter.
When a company has two classes of common stock, investors can select whether they want the right to receive more of the corporation's earnings, or the right to control the actions of the corporation. The investor must pay a premium to gain additional voting rights by purchasing the Class B stock, and an investor who is not concerned with managing the company can gain more income by purchasing more of the cheaper Class A shares that provide fewer votes, according to the University of Georgia.
Offering different classes of stock allows a minority shareholder to keep control of a business. A family business that becomes a public corporation risks losing control of the business if it sells a large number of common shares. The family business can sell Class A shares to investors, while keeping the Class B shares that provide greater voting rights within the family.
The main advantage of a dual-class share structure is that it allows the owners of the company to focus on long term decisions. Investors who are interested in making a quick profit can buy and sell the Class A shares, while longer term investors can hold the Class B shares and govern the company. According to Boston University, corporate managers often state that having two classes of common stock allows them to place less emphasis on the quarterly financial reports and more emphasis on future profits.