Nonvoting stock refers to corporate securities that do not grant the shareholder the right to vote on corporate resolutions or the election of directors. These stocks can be a strategic tool in corporate financial maneuvers, particularly during takeover attempts.
Types of Nonvoting Stock
Preferred Stock
Preferred stock is normally nonvoting stock. Although preferred shareholders have a higher claim on assets and earnings than common shareholders, such as receiving dividends before common stockholders, they typically do not have voting rights.
Nonvoting Common Stock
Some companies may issue a class of common stock that does not carry voting rights. This can be done for various strategic reasons, including maintaining control within a certain group of shareholders.
Why Issue Nonvoting Stock?
Takeover Defense
During takeover attempts, a company may issue nonvoting shares to dilute the target firm’s equity. This process is intended to discourage the merger attempt by reducing the potential control acquirers would have.
Ownership Control
Firms may issue nonvoting stock to raise capital without diluting the control of existing voting shareholders. This can also allow the founders or management to maintain control of the company while still receiving investment from new shareholders.
Historical Context
The practice of issuing nonvoting shares dates back to the early 20th century, although it gained significant attention during the corporate takeover boom of the 1980s. Companies sought mechanisms to prevent hostile takeovers and protect managerial control.
Examples
A notable example is Google, which in 2014 restructured its share classes to include nonvoting shares. This allowed the company’s founders, Larry Page and Sergey Brin, to retain control over corporate decisions despite diluting their economic ownership.
Applicability
Nonvoting stock is most applicable in corporate finance, investment analysis, and strategic management. It is a tool for balancing capital raising needs with control considerations.
Comparisons
Nonvoting Stock vs. Voting Stock
- Nonvoting Stock: No rights to vote on corporate issues or directors.
- Voting Stock: Grants shareholders the power to vote on major corporate matters, including electing board members and approving mergers.
Nonvoting Stock vs. Convertible Preferred Stock
- Nonvoting Stock: Generally does not convert to voting stock.
- Convertible Preferred Stock: May include a feature that allows conversion to common stock with voting rights under specific conditions.
Special Considerations
Investors should carefully consider the lack of voting rights when purchasing nonvoting stock as it limits their influence over corporate governance and strategic decisions.
Related Terms
- Common Stock: Shares that typically grant voting rights and represent ownership in a corporation.
- Takeover: An attempt by one company to acquire control of another.
- Equity Dilution: Reduction in existing shareholders’ ownership percentage due to the issuance of additional shares.
FAQs
Can nonvoting stockholders attend annual meetings?
Do nonvoting shareholders receive dividends?
Can nonvoting stock be converted to voting stock?
References
- Google Investor Relations. “An Update on Our New Stock Structure.”
- Investopedia. “Non-Voting Share Definition.”
Summary
Nonvoting stock serves as a crucial component in corporate finance, offering companies a way to raise capital while maintaining control over corporate governance. Through careful issuance and strategic application, nonvoting stock can protect against hostile takeovers and balance the interests of investors with the management’s long-term vision. Investors, however, must weigh the benefits of such stocks against the inherent lack of voting privileges.
