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Classified stock is common stock that is issued in two types or categories. Each type of common stock will carry certain terms and conditions, including privileges extended to the holder of the stock. The use of a classified stock investment structure for a company can be a very attractive option that helps the corporation attract more than one type of investor. Sometimes considered a complex capital structure, classified stock is really a relatively easy strategy to implement and manage.
The first type or category in a classified stock structure is the Class A stock. Generally, investors who hold Class A stock in a company enjoy a full range of rights and privileges associated with the shares. Often, these privileges will include voting privileges at various levels that are defined in the articles of incorporation for the company, as well as dividend opportunities that are superior to those associated with other types of classified stock.
Class B stock is the other most common element of a classified stock arrangement. Class B stock will be configured to allow the investor to realize an attractive return, but will not extend as broad a range of privileges as those associated with Class A stock. Investors holding Class B stock do not usually enjoy voting privileges and are not likely to have the same level of return as those holding Class A shares. However, it is important to note that along with the reduced privileges, there is also a reduced rate of risk.
Companies sometimes use a classified stock structure to form the basis for a retirement program for employees. This is especially common in corporations that choose to function with an employee stock ownership plan. Executives and other high profile investors are eligible for Class A stock, while mid level managers and general employees may accrue shares of Class B stock. Depending on the performance of the company, and the general condition of the market, this type of multiple capital structure can result in excellent nest eggs for all parties concerned.
How would you compare the risk level of class a vs. class b stock? Why is class b less risky? How would the rate of return compare for them?