Multiple Capital Structure

Multiple capital structure is the classification of a company's stock and bond offerings into different classes. Each class has distinct characteristics in order to meet the needs of a range of investors. For example, bonds offer steadier, fixed-income investments, while stocks present more potential for capital gains. A multiple capital structure creates more possibilities than issuing just one class of stock. Individual components have varying required rates of return that affect the weighted average cost of capital (WACC).

For example, Berkshire Hathaway's common stock is divided into class A and class B shares. Class A shares (BRK.A) have more voting rights and can be converted to class B shares. Class B shares (BRK.B) have fewer voting rights and cannot be converted to class A shares. Class B shareholders have one two-hundredth of the per-share voting rights that class A shareholders have.

Another major difference between BRK-A and BRK-B is the share price. As of June 27, 2018, at market close, Berkshire Hathaway class A stock traded at $281,600.00 per share, compared with $184.91 for class B shares.

In his 1996 annual letter to shareholders, Berkshire Hathaway Chairman Warren Buffett said: "As I have told you before, we made this sale [of a new class of shares] in response to the threatened creation of unit trusts that would have marketed themselves as Berkshire look-alikes. In the process, they would have used our past, and definitely non-repeatable, record to entice naive small investors and would have charged these innocents high fees and commissions." If the stock was left in the hands of unit trusts, "Berkshire would have been burdened with both hundreds of thousands of unhappy, indirect owners [trustholders] and a stained reputation."

Buffet introduced class B shares to allow investors the ability to purchase the stock directly instead of having to go through unit trusts, or mutual funds that mirror Berkshire Hathaway's holdings.

A second example is Google. Two tickers represent class A (GOOGL) and class C (GOOG) shares. Company insiders own Google’s B shares, which don't trade on the public markets. As of market close on June 27, 2018, GOOGL closed at $1,112.39, while GOOG closed at $1,102.09.

Multi-class structures have been out of favor in recent years, largely due to the trend toward multi-class high-vote/low-vote and, sometimes, no-vote equity structures. For example, in 2017, both Snap and Blue Apron offered shares to the public for the first time that had little or no voting rights. In 2016, a coalition of investors and pension funds lobbied against multi-class structures. Following this, in 2017, the Council for Institutional Investors (CII) also announced its belief that a single vote per share is important to good corporate governance. The S&P Dow Jones and MSCI recently banned Snap and other companies with multiple share-class structures from inclusion in several of its indices.