When investors purchase shares of stock in a company, they are risking their investment if the company does not perform well. Investors are willing to do this in exchange for a share if the company is profitable. Shareholders who invest in a company also historically have voting rights they can use if shareholders feel that the management is not living up to their expectations. From an investor's point of view, this makes sense as the control of the company is left to its ownership.

However, in a relatively small number of companies, especially Internet-based and media businesses, a dual-class of shares are offered to investors. One class is for common stock without voting rights and the other class has super voting rights for a limited number of investors who then have total control of the operation. The New York Times, the Washington Post and Google are some businesses that have the dual-class stock system.

When voting rights are withheld from general investors, then shareholders are left with no voice if the company performs poorly. From the dual-class companies' perspective, this is exactly their intent. They hope that a small number of leaders can focus on long-term goals, without shareholders complaining about quarterly profits.

However, those concerned with shareholders' rights say that dual-class shares give management too much power, fail to hold them accountable and allow abuse. They worry that dual-class shares put a shareholder's investment at risk in the long run.

Although dual-class shares are typically less expensive than single-class shares, California investors may want to consider their options when investing in a company that employs the dual-class share system. California businesses that are in the formation stages should consider whether a dual-class share system will be good for their long-term economic goals and for long-term returns on investments.

Source: SmartMoney, "Are Dual-Class Shares Bad For Investors?," Sarah Morgan, 1 Aug 2011