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Differential voting rights (DVR) shares grant holders less voting rights compared to regular shareholders in a company vote on significant decisions
DVR shares are just another part of the complicated structure most big corporations have. Since most key decisions within a company have to either be made by a board or the shareholders themselves, equity investors must stay aware of the power they have when they buy shares.
In this article, we’re going to explore a new category of shares in a company, find out how they differ from regular shares, and how the voting rights differ too.
What are DVR shares?
DVR shares are a class of equity ownership that grants shareholders reduced voting rights compared to ordinary shareholders in a company. While they represent ownership in the company and entitle holders to dividends, their voting power on crucial corporate decisions is limited.
Imagine a company where some shareholders have a strong say in its future direction (through voting rights), while others prioritise a potentially higher return on investment (through dividends) and are content with a lesser voice in decision-making. DVR shares cater to the latter category.
Investors who seek to maximise their short term return on capital could explore DVR shares as a means of getting superior returns while investing in the same company; that is, taking on the same amount of risk.
Voting rights on key decisions are important to a company’s long-term goal, and they usually do not want to risk the influence of a hostile party in their internal affairs. Voting rights, hence, are more important to investors who have significant skin in the game, relative to short-term investors who are just looking for returns.
Why do companies issue DVR shares?
Corporations have several reasons to issue equity shares that have less voting rights compared to regular equity shares:
- Bring on strategic partners – To expand, companies sometimes need to partner with other companies, institutions, and businesses and raise capital by issuing equity. By issuing regular shares, they take the risk of a hostile party gaining enough seats to influence their decisions. However, if they issue DVR shares, they get their desired capital infusion without having to give up the integrity of the company’s decision-making.
- As a defence strategy against hostile takeovers – DVR shares can act as a defence mechanism against hostile takeovers. By diluting the voting power of a potential acquirer who might buy a large number of shares, DVR shares make it more challenging for them to gain control of the company.
Pros and cons of investing in DVR shares
DVR shares, just like any other financial instrument, have their own pros and cons. Here are some of them:
Advantages of DVR shares
DVR investors usually benefit from higher dividends compared to regular shareholders. This is because DVR investors have the right to be compensated for giving up their voting rights. The higher dividend payout is usually a win-win for both parties, as companies get to reduce voting dilution, and investors get a higher rate of return.
Another way investors can be compensated for a lack of voting rights is by issuing DVR shares at a discount.
Equity dilution is also something corporations have to care about. When issuing new equity to get more money flowing into the company, they dilute the ownership of the investors that bought equity before the latest round. DVR shares prevent this, at least in terms of voting rights.
For instance, suppose a company has 100 total shares outstanding. If an investor buys 25 shares, they are a 25% owner of the company. However, if the company decides to issue 100 more shares to raise another round of capital, the previous investor’s 25 shares are now worth only 12.5% ownership after this fundraise.
Disadvantages of investing in DVR shares
The most obvious one is the reduction in voting rights. If you’re an activist investor or have significant stakes in the company’s future, you might want to invest in regular shares to have a say in major strategic decisions.
Secondly, DVR shares have lower liquidity than regular shares – lower volume too. This means it’s difficult to buy them and even more difficult to sell at a certain price.
DVR shareholders are also given less access to information about the company, especially relative to regular equity inventors. This can create an information parity and affect trading decisions in the long term.
Differences at a glance
| Feature | DVR Shares | Ordinary Shares |
| Voting Rights | Lower | Higher |
| Dividends | Potentially Higher | Regular Dividends |
| Investment Cost | Potentially Lower (discounted) | Market Price |
| Liquidity | Lower | Higher |
| Risk of Dilution | Lower | Higher |
| Information Access | Potentially Lower | Higher |
Frequently Asked Questions
The exchange itself might not significantly impact the share price. However, different exchanges might have varying commission structures and trading requirements. We encourage you to find the one that suits your requirements the best.
Conversion rights are rare, but some companies might offer them under specific circumstances. It depends on the company’s structure and the terms of the specific DVR share class. You can check these details in the share offer document.
Capital gains from the sale of DVR shares are subject to capital gains tax. The applicable tax rate depends on the holding period of the shares. Additionally, dividends received on DVR shares are typically taxable as income at the marginal tax rate.
The terms of the acquisition will determine how DVR shares are treated. In some cases, they might be converted to ordinary shares with full voting rights, while others might offer a fixed buyout price. Typically, this information should also be found in the share offer document.
Definitely! Explore other options like high-dividend yield stocks with strong track records, dividend-paying ETFs (Exchange Traded Funds), or even bonds. Each has its own risk-reward profile, so we encourage you to research them carefully.