Lesson 3 of 7 · 13 min
Controlling versus minority shareholders, and shareholders versus creditors
Shareholders are not one happy group: a controlling holder, often helped by dual-class shares, can override minority owners, and shareholders as a whole like leverage and payouts that creditors fear.
In short
- Dispersed ownership: many shareholders, none able to control the company. Concentrated ownership: a controlling shareholder (family, company or government) can.
- Controlling and minority holders can want different things: a family with its wealth in the stock may want diversification; diversified minority holders may prefer focus, or quick gains.
- A dual-class structure gives insiders a share class with several votes per share, so they can control the company with a minority of the shares and avoid voting dilution.
- CFA Institute opposes dual-class structures; where legal, they should be clearly disclosed. They are hard to dismantle once adopted.
- Creditors (fixed claim) prefer more equity, lower leverage and limited distributions; shareholders prefer leverage and payouts over dilutive equity.
- The conflict is larger for long-term debt, so long-term lenders more often impose contractual limits.
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