Shares of a company that entitle the shareholder to vote on key issues of the company
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Voting shares are shares of a company that entitle the shareholder to vote on key issues of the company. It is generally one vote per share. The shares represent an ownership interest in a corporation.
There is no limit to the classes of shares that can be set out in the company’s articles of incorporation, but the privileges and restrictions must be clearly stated within the articles. If there exist only one class of shares, then the shares include at a minimum:
- Voting rights
- Dividend rights
- Property rights if the corporation if dissolved
It is also possible for voting shareholders to receive the right to elect or fire directors, examine financial and corporate records, and appoint the auditor of a corporation. Voting shareholders generally possess limited liability in a corporation, and their risk exposure is limited to the amount they’ve paid for their shares and none of the corporation’s debts.
Below, we will look at the importance of voting shares and how and why they are distributed. If you are ever thinking about starting your own company, they must be a part of your corporate strategy.
Generally, companies create more than one type of share in order to concentrate voting power to a small group of individuals. Making voting shares exclusive to a small group of people can also thwart hostile takeover attempts by preventing shareholders that aren’t founders or company leadership to vote to allow another company to buy out their shares at a premium.
Many shareholders may not be interested in the long-term strategy of a company or be interested in holding shares for the long run, which is why a company may choose to issue voting shares to only a select group of individuals. After all, someone with only a short-term profit interest in mind may not vote for measures that protect the long-term position of the company over short-term share value.
Some companies will issue a class of shares that come with voting powers as a part of their common stock issuance. One such company is Warren Buffet’s Berkshire Hathaway. The company issues both Class A and Class B common stock.
Berkshire Hathaway’s s Class B common shares come with the rights of 1/1,500th of a share of Class A stocks and 1/10,000th the voting rights of Class A. It allows Class A shareholders to be heard in important matters, although both classes of shareholders are allowed to attend meetings.
If you are looking to start your own venture now, or in the near future, voting shares are an important concept to understand. It is prudent to consider how you will distribute shares among the founding team and early investors. Will you allow equal representation? Or would you like to hold onto the power of decision making personally? If you wish to hold on to voting power, it may be difficult to secure early-stage angel investors willing to invest in a high-risk company that they lack any influence over.
As such, you will likely need to structure investment options that give voting power to your early founding team and angel/venture capital investors. However, an important part of leadership is being able to execute unpopular decisions and guide the company based on your own best judgment. As such, it will not be unprecedented to build, at the very least, personal majority control of your company within the share structure (or distribute voting shares to those you consider allies).
Voting shares are a treasured asset in any company. Being able to influence the direction a corporation takes in key issues, such as determining whether to accept a takeover bid or determine who should lead, are important aspects that determine the longevity of a corporation, and it is a responsibility not to be taken lightly.
Related Readings
CFI offers the Capital Markets & Securities Analyst (CMSA®)certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:
