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Comment by woopwoop | Hacker News Reader

I have a probably naive question. I just learned about the concept of non-voting stock today. Is there typically some contractual obligation for companies that, if they do a stock buyback, some fraction of the shares bought must be non-voting shares?

If not, what is the value of a non-voting share? Particularly for a company that doesn't pay dividends and doesn't have substantial material assets to sell in the event of liquidation (my impression is that this describes many or even most modern publicly traded companies)?

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> If not, what is the value of a non-voting share? Particularly for a company that doesn't pay dividends and doesn't have substantial material assets to sell in the event of liquidation (my impression is that this describes many or even most modern publicly traded companies)?

Why would a voting share in a firm without dividends or with no assets be worth anything? Voting just gives you input into a future course which will hopefully give the firm assets (from which it may or may not issue dividends), but the voting shareholders will presumably pursue that anyway, and if you don't have better ideas than they do on how to do that, your vote isn't actually netting you any additional value.

All stock is based on the (possibly expected future) value of a share of the net assets of the company. There is nothing else that could provide it value. Voting rights are just a way to have input on how the company will try to realize value and how and when it will distribute it to those entitled to it.

My impression is that modern firms "pay dividends" by doing share buybacks, which are equivalent to dividends but taxed less (I'm nowhere near an expert here, if that isn't clear). If you don't have a voting share or some kind of contractual guarantee, though, what's to stop the voting shareholders from deciding to just buy only voting stock in the event of a buyback?

Note that the dividend effect is dependent on the share price, and may only be valid if you sell shares within a short time of the buy back.

Outside of taxation, a buy back is essentially equivalent to a dividend that you're forced to reinvest. At the end of the day, all of your shares are worth a smidge more of the company. Certainly, the price could go down after a buyback, same as if you reinvested the dividend.

The benefit for shareholders is that the shareholder can decide when to recognize that as a capital gain; the negative for shareholders is that they can't recognize only the portion of their capital gains related to the buy back.

The voting shares give control over the company. If another company wants to buy a company in order to control its direction, they non-voting dividend-paying shares are worthless to them. They need voting shares.

And indeed, non-voting shares in a company that doesn't pay dividends seem worthless to me. And who decides whether the company pays dividends? Not the non-voting shares.

Non-voting shares could be fine, but they could also turn out to be a scam, depending on the wishes of the people who control the company.

The value of a company like Alphabet if it's sold isn't the value of the material assets, it's the value of the actual business, i.e. for Google the ability to essentially print money via AdWords.

Right, but a voting stock is a contract that provides some fraction of those Adwords to you. If they accumulate a lot of those AdWords dollars, shareholders will eventually demand that money back to spend for themselves. In the past, this was done via paying dividends, but my impression is that nowadays it is done via stock buybacks. But if stock buybacks don't have to include non-voting shareholders, what's to stop voting shareholders from just excluding them from the buyback completely and keeping the payout for themselves?

The market value of the non-voting shares should theoretically be the value of the voting shares minus what the market believes the value of voting to be. If a stock buyback only buys voting shares and the price of shares in that class rises, such that the difference in prices of the share classes is greater than the value of voting rights, then an arbitrage opportunity exists. Thus the market will bring the price of the non-voting shares up, and the shareholders of that class will benefit too.

> If a stock buyback only buys voting shares and the price of shares in that class rises, such that the difference in prices of the share classes is greater than the value of voting rights, then an arbitrage opportunity exists.

I'd say the opposite is true. It's more likely non-voting share prices will crash because it's now clear to the market that voting rights are worth quite a lot given that they can be used to steal money from non-voting shares.

I think this assumes that the value of the voting rights is constant. In OP's example, the stock buyback only happens for voting shares, which should cause the market to update its estimate of the value of voting rights.

Good point! I don't really have enough (or any) economics knowledge to know how to model the value of voting shares in this case, but I think that there would also be downward pressure, for example as the voting power of company founders increases due to the reduction in number of voting shares.

The CEO still has some vague duty to the non-voting shareholders, even though they don't vote. If the CEO did something egregiously unfair they could probably sue successfully.

> they could probably sue successfully

Probably? That's very reassuring.

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