FINANCIAL RESTRUCTURING OF

CLAIMS

SUBMITTED BYUPASNA HANDA

DUAL-CLASS
RECAPITALISATION

Dual-Class Stock
What is a 'Dual Class Stock?
A dual class stock is the issuing of various types of shares by
a single company.
A dual class stock structure can consist of stocks such as
Class A and Class B shares, and where the different
classes have distinct voting rights and dividend
payments.

(ReferenceTakeover,
Governance
Author- Weston)

Restructuring

and

Corporate

Dual-Class Stock
Two share classes are typically issued:
One share class is offered to the general public, and the other
is offered to company founders, executives and family.
The class offered to the general public has limited voting
rights, while the class available to founders and executives
has more voting power and often provides a majority
control
of
the
company.

(Reference- Takeover, Restructuring and Corporate Governance

Author- Weston)

Recapitalization
What is 'Recapitalization?
Recapitalization is restructuring a company's debt and
equity mixture, often with the aim of making a
company's capital structure more stable or optimal.
Essentially, the process involves the exchange of one
form of financing for another, such as removing
preferred shares from the company's capital structure
and replacing them with bonds.

(Reference- Investopedia)

Dual-Class
Recapitalization

Dual-class recapitalization
Dual-Class Recapitalizations entail the creation of a second
class of common stock that has limited voting rights but
typically a preferential claim on the company's cash flows, in the
form of a higher dividend.
The issue of a second class of common stock, generally with
reduced voting power, in exchange for already outstanding
shares of common stock.
Shareholder approval is required.
This type of recapitalization typically results in the
entrenchment of management that enjoys increased control
over corporate affairs.
Entrenchment-to place (someone or something) in a very
strong position that cannot easily be changed.
(Reference- Takeover, Restructuring and Corporate Governance
Author- Weston)

Dual-class recapitalization
(DCR) mechanism
Dual-class recapitalization (DCR) mechanism
Second class of common stock has limited voting rights
and a preferential claim to cash flows
Class A shares/Superior Voting Stock one vote
per share but higher dividend rate than other class
Class B shares/Inferior Voting Stock cast
multiple votes such as 3, 5, or 10 per share but
dividend rate is lower than other class.

(Reference- Takeover,
Governance
Author- Weston)

Restructuring

and

Corporate

Reasons for dual-class

recapitalizations
Reasons for dual-class recapitalizations
Management can solidify control to carry out long-run
programs
Avoid pressure for good short-term results
Operations are relatively complex and difficult to evaluate
managerial performance
Managers are compensated when plans come to fruition
Negative managers can entrench their position against
takeover or being replaced

(Reference- Takeover, Restructuring and Corporate Governance

Author- Weston)

Pros and Cons of DualClass Recapitalisation

PROS
A dual-class share structure allows founders control over
significant decisions of the company
Allowing them to access the equity markets for additional
financing
Interest in maintaining a good reputation, emotional
incentive, therefore enhanced performance
Secure liquidity without sacrificing control

Dual-class shares and takeover bids When a firm is taken over, holder of superior voting
right shares received differentially higher payment
Fewer firms with dual-class stock experienced
takeover bids
Superior shares sell at a premium mainly because
they receive more in takeover

Pros and Cons of DualClass Recapitalisation

Dual class recapitalizations can be very effective takeover
devices.
By concentrating voting power in the hands of incumbent
managers, the device prevents bidders from obtaining control
by tendering for the outside shares. Even if a bidder were
successful in acquiring all of the outside equity, it would not
have sufficient votes to replace the incumbent managers or
merge with the target.
CONS
Limits investors of their voting rights and their ability to
participate in shareholders' meetings
Unfair system that allows a small group of shareholders to
retain control while other shareholders provide a majority of
the capital.

How it works (Example):

For example, let's assume Company XYZ has Class A
shares and Class B shares.
Company XYZ issues the Class A shares to the
company founders and top executives.
It issues the Class B shares to the public in an initial
public offering. If the Class A shares carry ten votes
each, but the Class B shares carry only one vote each,
then each Class A shareholders carries ten times more
power than the Class B shareholders (assuming the
same number of shares are owned).
Usually this disparity is intentional. In this case, the
Company XYZ managers and founders may want to
retain majority control of the company and also take
advantage of the capital provided by an IPO.

Examples
Ford's dual-class stock structure, for instance, allows the Ford
family to control 40% of shareholder voting power with only
about 4% of the total equity in the company.
Berkshire Hathaway Inc., which has Warren Buffett as a
majority shareholder, offers a B share with 1/30th the interest of
its A-class shares, but 1/200th of the voting power.
Echostar Communications demonstrates the extreme power
that can be had through dual-class shares: founder and CEO
Charlie Ergen has about 5% of the company's stock, but his
super-voting class-A shares give him a whopping 90% of the
vote.
Well-known companies that have or had dual-class stock include
Ford, Tyson, Cablevision, Hewlett Packard, Berkshire
Hathaway, Viacom, and Hollinger International.

Googles Dual-Class
Recapitalisation

When Google went public, a lot of investors were upset

that it issued a second class of shares to ensure that the
firm's founders and top executives maintained control.
Class B shares reserved for Google insiders would carry
10 votes, while ordinary Class A shares sold to the
public
would
get
1
vote.
Designed to give specific shareholders voting control,
unequal voting shares are primarily created to satisfy
owners who don't want to give up control, but do want the
public equity market to provide financing.

In most cases, these super-voting shares are not

publicly traded and company founders and their families
are most commonly the controlling groups in dual-class
companies.

Fords Dual-Class
Recapitalisation
"If liquidated, each share of Common Stock will be entitled
to the first $0.50 available for distributions to holders of
Common Stock and Class B Stock, each share of Class B
Stock will be entitled to the next $1.00 so available, each
share of Common Stock will be entitled to the next $0.50
so available and each share of Common and Class B Stock
will be entitled to an equal amount thereafter.

In 2009-10 Ford had 2,802,397,653 shares of regular common

stock and 70,852,076 shares of Class B stock.
Regular shares were entitled to elect 60% of the Board of Directors
with the Class B shares entitled to elect 40%.
Based upon the paragraph quoted above, they were also entitled
to different amounts if the company went into bankruptcy and
there was anything remaining after the debts have been paid.
The Ford family owns all 70+ million shares of the Class B stock. It
is a way for them to ensure they kept control of the company no
matter how much stock they have to issue to avoid bankruptcy.