A and B shares are a way for a company to issue various kinds of shares, which are associated with different rights and responsibilities for the shareholders. They are also known as ‘multiple share classes.’ This term refers to an arrangement where issued shares belong to one of two classes, but it’s worth keeping in the back of your mind the knowledge that there can be more than two different types of share. However, this arrangement is quite rare: most people settle for only two types.
The amount of control over and involvement in the company which different parties have is reflected in shareholders’ agreements in the number of shares which they hold. This is why it may be important for the person who runs the business to have at least 51 percent of shares, so that they hold a majority. This gives them majority voting rights on important decisions, as well as making sure that they get a fair amount of revenue. However, sometimes it might be necessary for a company to sell a large percentage of shares, without wanting to give up the amount of control (or funds) that that percentage implies; this situation provides a common example of business needs which can be solved through the use of multiple share classes.
Although shareholders will always require a degree of control and of revenue proportional to what they have invested, they may well be prepared to exchange one for the other. A and B shares facilitate this more subtle allocation of returns on investments. For instance, an investor may not care a great deal about controlling a company; he or she might have been motivated solely by a wish for a solid and increasing return on their investment. In this case, the business owner may ask if they would be willing to accept a type of share which guarantees high dividends but does not allow voting rights on company decisions, or allows disproportionately low voting rights – while the owner retains shares with a slightly lower dividend return but with complete or greater control of the business. If we think of the shares held in this case by the investor as ‘A’ shares, and of those held by the business owner as ‘B’ shares, we have a clear illustration of the operation of the multiple share class arrangement.
However, this is only one example of the many ways in which A and B shares can be used. On the other hand, a shareholder – perhaps someone who is emotionally invested in the business, as well as financially – may be prepared to make the trade-off of earning lower dividends while retaining greater control. The great thing about this share system is its flexibility, and the basic idea of shares differing according to the amount of money and of power which they give to their holders can be customised to fit many different needs.