What is common stock?

Common stock is the residual equity in a company in that all other financial claims against the firm have priority over this class of equity, it typically entitling its holders to voting rights and preemptive rights and to dividends and liquidation proceeds after satisfaction of the claims of all creditors and preferred stockholders.  Provisions concerning common stock are fundamental to the company law of most countries, with every stock company having to have at least one share of common stock issued and outstanding.  If a corporation has only one class of equity, it is common stock.

Common stock is an equity instrument and may take various form.  The specific rights and characteristics of each class of equity are specified in the issuing firm’s articles of incorporation or corporate or company law where a company is incorporated (registered).  In most countries, common stock entitles its holders to the following basic rights of ownership:

• Dividend rights – Pro rata share of the business’s distributable earnings through the receipt of dividends;
• Liquidation rights – Proportionate distribution of the business’s assets upon liquidation after the creditors’ claims have been settled;
• Voting rights – Control of the company by means of voting; and
• Preemptive rights – Privilege of existing shareholders to subscribe to shares in a new share issue to maintain proportionate ownership (often not granted to shareholders of US firms).

In some jurisdictions, companies can issue more than one class of common stock, with each class differing in terms of par value, right to dividends, voting rights, right to liquidation proceeds, and/or preemptive rights.   One class usually provides all the basic rights of ownership, while the other classes typically place limitations on ownership rights, such as restrictions on voting.

Dual-class common stock is the capital stock of a company that is comprised of more than one class of common stock, one of which has superior voting rights.  A company may have, for example, Class A common stock with one-share-one-vote and Class B common stock with five votes per share, whereby the Class A shares will carry a higher dividend than Class B.

The control group of dual-class companies is a group of members of a company who act together and in concert for a common purpose, usually determined by reference to the parties that effectively have control over others in the group, the relationships among group members based upon familial, business or social ties, or a common purpose or motive.  The control group comprises the founders and their descendants, directors and/or corporate officers acquiring control while owning less than 50% of total common equity.