CFA Level I · CFA Level I Exam · Investors and Other Stakeholders
A company has a dual-class share structure: Class A shares carry ten votes each and are held by the founding family, while Class B shares carry one vote each and are held by public investors. Which risk to minority shareholders is most likely heightened by this structure?
The main heightened risk is that the family can entrench management and extract private benefits while owning only a minority of the economic interest. Disproportionate voting power separates control from cash-flow rights, leaving public shareholders with little influence over board elections, takeovers or related-party transactions.
- AHigher likelihood that the firm pays dividends on all shares equally
- BGreater ability of the family to entrench management and extract private benefits despite holding a minority of economic interestCorrect
- CLower ability of the firm to raise equity capital from outside investors
Explanation
Dual-class structures separate voting control from economic ownership, so insiders can control decisions, resist takeovers and extract private benefits while bearing a smaller share of the cost. Equal dividends are not a risk, and such structures often help founders raise capital while keeping control.
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