What are dual class shares?

Hello everyone! Something that’s been somewhat of a recent notable failure in the financial markets recently has been the Deliveroo IPO, which saw the share price initially fall by nearly 30% on the launch into the public markets. In the market commentary and concerns raised by professional investors, one of the given reasons for the failure was the fact that Deliveroo had insisted on dual class shares.

It’s not a topic many people outside of the markets have explored, so I’d explain what these were and why it can potentially have an impact on our investments.

What is an IPO?

A quick recap before we start on what an IPO is. It stands for Initial Public Offering, and relates to the period where a private company floats on the stock market for the first time.

What this means in reality is that they’re effectively allowing the public to buy a stake in the company in the knowledge this will allow new funds to flow into the business.

As lots of growth companies aren’t necessarily at the profitable stage at the point of IPO, it’s an exciting moment for an entrepreneur – the cash injection can mean they’re finally seeing the fruits of their labour become cold, hard cash!

The trade off is that now those public investors have some degree of control over your company where it comes to voting on the future direction of the company. You also need to make a significantly higher degree of public disclosure to the investor community than if you were a private company.

What is a dual class share?

So in most people’s mind they tend to think of a share bought in the markets as simply being an ordinary share and they’re much-of-a-muchness – something that gives voting rights, dividend rights if there is any and basically ranks alongside all other shares.

Often that’s the case, but it’s becoming increasingly common to have different classes of shares that have variable rights associated with them. A dual class share is a reference to when the original owners of the company have a different set of rights to that of an ordinary shareholder, and it tends to relate to voting rights and ability to control.

Dominoes representing dual class

Did Dual Class shares hurt the Deliveroo IPO?

In the case of Deliveroo the founder wanted to maintain the best of both worlds – to maximise the money coming in to the company through public sales, whilst not giving up his personal control of the company.

As a result the shares being offered publicly through the Deliveroo IPO had significantly different nature to those held by the founder. For every 1 vote on company matters you held with a single Deliveroo share bought in the IPO, the founder had 20 votes!

Let’s be clear, there were multiple concerns about Deliveroo and not all of them related to the Dual Class shares – but it is likely to have been a contributing factor.

Why Dual Class shares matter

These types of shares have been coming more and more common in tech IPO’s in particular.

Now as smart investors we know that there’s always some kind of trade off involved with investments – when anything is given up, we want to be compensated for it.

The thinking to date on these dual-class shares was that actually, investors didn’t care that much (they just wanted to invest in the company and wouldn’t worry too much about structure) and so the effect on the share price would be very minimal. What the actual results show is that investors do care.

Voting rights isn’t something shareholders have traditionally used that much but it’s something becoming increasingly important, as not only does it allow input on important corporate decisions, but it can also have influence companies into making better decisions where it comes to the ESG agenda.

This has stronger implications to a company like Deliveroo than others, where there are questions on if the company’s approach to “zero hours contracts” has wider social implications.

Learning from Dual Class Shares

It’s simply a case of appreciating the devil is in the detail when looking at an investment. It’s worth doing your due diligence and appreciating if there’s any specific clauses to the shares you’re investing in that may cause you some concern as to if this is a good investment.

This is particularly true when it comes to anything being bought during an IPO – if something has been publicly tradeable for a while, you would expect the market would have already “priced in” any additional concerns – something that may not have occurred yet with an newly issued share.

Any questions?

If you have any questions about dual class shares or other types of shares then just drop us a note in the comments bar!

And that’s it!

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