Class B Shares
The term class B shares refers to common and preferred stock that may offer their holders fewer benefits, or charge higher fees in the case of mutual funds. Class B shares are normally subordinate to class A shares in terms of liquidation preference.
Companies have the option of issuing different classes of common and preferred shares. While not universally true, class B shares typically bestow fewer rights on the holder. For example, class B shareholders might not be entitled to a dividend payment during fiscally challenging times for the company. They may also have fewer voting rights than holders of class A securities. Finally, holders of class B shares may be subordinate to other security holders during liquidation, meaning they may be paid after other shareholders have been paid or not paid at all if funds are depleted.
There are a number of reasons a company may issue different classes of stock, including offering insiders and company managers additional voting rights to defend against hostile takeovers. These shares may be issued to these individuals as part of the company’s incentive program.
Mutual funds also offer different classes of shares. For example, class B shares typically have no upfront load, but may carry a back-end load instead. On the other hand, class A shares carry a front load that ranges from 2.50% to 5.75% of the original investment. In exchange for paying no upfront fee, class B shares in a mutual fund may impose higher ongoing fees.