3 ms·

So what exactly is the value of the Class A stocks beyond speculation? In the olden days it was dividends, but it seems most stocks now don’t issue dividends. T

by hahajk 5y ago

So what exactly is the value of the Class A stocks beyond speculation? In the olden days it was dividends, but it seems most stocks now don’t issue dividends. Then I thought well, it’s the value of selling to a hostile takeover or, when the company is on the defensive, stock buybacks. But with these non-voting shares even that value is taken away.

JumpCrisscross 5y ago
> In the olden days it was dividends, but it seems most stocks now don’t issue dividends The present value of the asset's free cash flow. Classically, this was distributed via dividends. In modern finance, for all but the largest companies, it's distributed through M&A.
- Ericson2314 5y ago
  But why do you need to acquire the non-voting shares to acquire the company?
  - jcliff 5y ago
    because nonvoting shares still represent economic ownership of the company. for example, they get pro rata dividends if dividends are ever declared.
  - JumpCrisscross 5y ago
    > why do you need to acquire the non-voting shares to acquire the company? Control doesn't alleviate the duties, fiduciary and of loyalty, the controlling person has to its shareholders. An acquirer who only bought the votes would still need to act in all shareholders' interests (or face litigation). To have a free hand, and full access to those cash flows, an acquirer thus must purchase the whole company.
    - Ericson2314 5y ago
      I feel like sooner or later a PE firm is going to try not buying those shares, and argue the new policy is indeed in the shareholder's interests.
- hahajk 5y ago
  Thanks, I forgot about that. But I found this from Investopedia about stock price and mergers/acquisitions: In most cases, the target company's stock rises because the acquiring company pays a premium for the acquisition, in order to provide an incentive for the target company's shareholders to approve the takeover. Simply put, there's no motive for shareholders to greenlight such action if the takeover bid equates to a lower stock price than the current price of the target company. [1] If the buying firm doesn’t need approval from the Class A shareholders, what would be their incentive to buy those Class A stocks at a premium? [1] https://www.investopedia.com/ask/answers/203.asp https://www.investopedia.com/ask/answers/203.asp
  - JumpCrisscross 5y ago
    > If the buying firm doesn’t need approval from the Class A shareholders, what would be their incentive to buy those Class A stocks at a premium? Supervoting stock usually converts into regular stock on transfer. For example, Rent the Runway says "future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes" [0]. Delaware law is also developed in protecting minority investors' rights [1]. (The situation varies from state to state [2].) [0] https://www.sec.gov/Archives/edgar/data/1468327/000119312521291103/d194411ds1.htm https://www.sec.gov/Archives/edgar/data/1468327/000119312521... S-1, page 59 [1] https://corpgov.law.harvard.edu/2018/04/26/controlling-shareholder-transactions/ https://corpgov.law.harvard.edu/2018/04/26/controlling-share... [2] https://www.stimmel-law.com/en/articles/corporate-struggles-who-has-what-power-when-push-comes-shove https://www.stimmel-law.com/en/articles/corporate-struggles-...
- paxys 5y ago
  Don't forget share buybacks. In fact these days large investors hate dividends since they are immediately taxable. Much better to keep inflating the share price and get a line of credit against it.
  - rsj_hn 5y ago
    It is not just "these days" and the point is not to get lines of credit and spend, as that is unnecessary risk (going short a bond and long a stock is very risky). You, as an investor, want to save money for longer than one quarter. You want to save money for 20 years. So you'd like to avoid 80 taxable events in those twenty years, especially as you are just going to be reinvesting those dividends anyway. You want the law of compound interest working in your favor and then you pay taxes when you actually sell. E.g. at a 20% tax rate say a stock pays a 4% dividend once per period and has no capital gain. Suppose you invest $1 and want to hold that for 2 periods, reinvesting the dividend and then selling. Then after the first period you get 3.2 cents (after taxes) and you now own $1 and 3.2 cents. After period 2 you get $1.065024. Then you sell for a profit of 6.5024 cents (there are no capital gains) But if the stock pays no dividend and has a 4% capital gain, and you hold for two periods, sell, and then pay the 20%, you will make 6.528 cents.
    - paxys 5y ago
      Sure, but this perspective is only for those who are looking to hold an investment for 20 years. A lot of people with large stock holdings also want to buy nice things today. You can do that by (1) getting quarterly dividends and spending them (have to pay taxes), (2) regularly selling some shares (have to pay taxes and reduce ownership) or (3) borrowing on margin. 3 has the biggest tax advantages of the lot.
      - cstejerean 5y ago
        I’ve always wondered, how do you pay off the loan then? Or do these loans not require making regular payments?
        5y ago

by hahajk 5y ago

JumpCrisscross 5y ago

> In the olden days it was dividends, but it seems most stocks now don’t issue dividends The present value of the asset's free cash flow. Classically, this was distributed via dividends. In modern finance, for all but the largest companies, it's distributed through M&A.

Ericson2314 5y ago
But why do you need to acquire the non-voting shares to acquire the company?
- jcliff 5y ago
  because nonvoting shares still represent economic ownership of the company. for example, they get pro rata dividends if dividends are ever declared.
- JumpCrisscross 5y ago
  > why do you need to acquire the non-voting shares to acquire the company? Control doesn't alleviate the duties, fiduciary and of loyalty, the controlling person has to its shareholders. An acquirer who only bought the votes would still need to act in all shareholders' interests (or face litigation). To have a free hand, and full access to those cash flows, an acquirer thus must purchase the whole company.
  - Ericson2314 5y ago
    I feel like sooner or later a PE firm is going to try not buying those shares, and argue the new policy is indeed in the shareholder's interests.
hahajk 5y ago
Thanks, I forgot about that. But I found this from Investopedia about stock price and mergers/acquisitions: In most cases, the target company's stock rises because the acquiring company pays a premium for the acquisition, in order to provide an incentive for the target company's shareholders to approve the takeover. Simply put, there's no motive for shareholders to greenlight such action if the takeover bid equates to a lower stock price than the current price of the target company. [1] If the buying firm doesn’t need approval from the Class A shareholders, what would be their incentive to buy those Class A stocks at a premium? [1] https://www.investopedia.com/ask/answers/203.asp https://www.investopedia.com/ask/answers/203.asp
- JumpCrisscross 5y ago
  > If the buying firm doesn’t need approval from the Class A shareholders, what would be their incentive to buy those Class A stocks at a premium? Supervoting stock usually converts into regular stock on transfer. For example, Rent the Runway says "future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes" [0]. Delaware law is also developed in protecting minority investors' rights [1]. (The situation varies from state to state [2].) [0] https://www.sec.gov/Archives/edgar/data/1468327/000119312521291103/d194411ds1.htm https://www.sec.gov/Archives/edgar/data/1468327/000119312521... S-1, page 59 [1] https://corpgov.law.harvard.edu/2018/04/26/controlling-shareholder-transactions/ https://corpgov.law.harvard.edu/2018/04/26/controlling-share... [2] https://www.stimmel-law.com/en/articles/corporate-struggles-who-has-what-power-when-push-comes-shove https://www.stimmel-law.com/en/articles/corporate-struggles-...
paxys 5y ago
Don't forget share buybacks. In fact these days large investors hate dividends since they are immediately taxable. Much better to keep inflating the share price and get a line of credit against it.
- rsj_hn 5y ago
  It is not just "these days" and the point is not to get lines of credit and spend, as that is unnecessary risk (going short a bond and long a stock is very risky). You, as an investor, want to save money for longer than one quarter. You want to save money for 20 years. So you'd like to avoid 80 taxable events in those twenty years, especially as you are just going to be reinvesting those dividends anyway. You want the law of compound interest working in your favor and then you pay taxes when you actually sell. E.g. at a 20% tax rate say a stock pays a 4% dividend once per period and has no capital gain. Suppose you invest $1 and want to hold that for 2 periods, reinvesting the dividend and then selling. Then after the first period you get 3.2 cents (after taxes) and you now own $1 and 3.2 cents. After period 2 you get $1.065024. Then you sell for a profit of 6.5024 cents (there are no capital gains) But if the stock pays no dividend and has a 4% capital gain, and you hold for two periods, sell, and then pay the 20%, you will make 6.528 cents.
  - paxys 5y ago
    Sure, but this perspective is only for those who are looking to hold an investment for 20 years. A lot of people with large stock holdings also want to buy nice things today. You can do that by (1) getting quarterly dividends and spending them (have to pay taxes), (2) regularly selling some shares (have to pay taxes and reduce ownership) or (3) borrowing on margin. 3 has the biggest tax advantages of the lot.
    - cstejerean 5y ago
      I’ve always wondered, how do you pay off the loan then? Or do these loans not require making regular payments?
      - 5y ago