Today, I sat out on the balcony of my primary residence, overlooking the river in the forest behind my house reading through annual reports. A lot of time was spent on precious metals companies as part of the ongoing series I've been rolling out here at Investing for Beginners. Several hours, however, was spent delving into the details of car companies; specifically Ford. I was impressed by the move to repurchase their own debt at 35 cents on the dollar in the open market so I thought it would be worth a closer examination.
As I was reading page 115 of the annual report, I came across a statement that is routine when studying companies with dual class structures but I realized that many of you may not know how it works. Here's the paragraph: "If liquidated, each share of Common Stock will be entitled to the first $0.50 available for distributions to holders of Common Stock and Class B Stock, each share of Class B Stock will be entitled to the next $1.00 so available, each share of Common Stock will be entitled to the next $0.50 so available and each share of Common and Class B Stock will be entitled to an equal amount thereafter."
Looking at the most recent quarterly filing with the SEC, you discover that Ford has 2,802,397,653 shares of regular common stock and 70,852,076 shares of Class B stock. As you research further, you discover that the regular shares are entitled to elect 60% of the Board of Directors with the Class B shares entitled to elect 40%. Based upon the paragraph quoted above, they are also entitled to different amounts if the company goes into bankruptcy and there is anything remaining after the debts have been paid.
Why does this exist? The Ford family owns all 70+ million shares of the Class B stock. It is a way for them to ensure they keep control of the company no matter how much stock they have to issue to avoid bankruptcy. Some argue that dual class structures are inherently unfair because you are decoupling ownership from voting power. I'm not sure I agree simply because everyone accepted those terms when the shares were first issued so you knew what you were getting into at the outset. The liquidation provisions, if I'm reading the details correctly, help to ensure that the Ford family walks away with more than the regular stockholders who bought their shares on the open market through a brokerage account in the event of a catastrophic liquidation.
