Non-voting shares

Non-voting shares are, as their name implies, equity that does not have a vote, even though it is entitled to a share of the profits. The term is not usually applied to preference shares: although prefs do not have votes, they receive a fixed dividend.

The most typical rights for non-voting share are identical to those of ordinary shares apart from the lack of a vote at company AGMs and EMGs.

The purpose of non-voting shares is to allow the holders of the ordinary shares to maintain control. The holders of the ordinary shares may be founders of a company, the existing shareholders of a company (often a family company) that wishes to list, a company that wants the benefits of an employee shares scheme without the existing shareholders losing control.

Non-voting shares are usually less valuable than voting shares despite being entitled to exactly the same stream of dividends. A simple dividend discount model would suggest that they are worth the same, but there are a number of reasons why the prices should be different:

  • The voting shares are more valuable in a takeover bid as most bidders aim at control, which owning non-voting shares does not help achieve.
  • The appointment of directors can bring an additional income stream. This is most relevant for small companies, especially family companies and those still controlled by their founders.
  • Control can bring the ability to make the company deal with connected parties. Visibly abusing this brings the risks of legal challenges from the minorities (which, in this context, includes other classes of shareholder).

This should make it clear why investors have become increasingly resistant to buying non-voting shares, which have becomes less widely used.

The shortcomings of a dividend discount models shown by the above explanations of the different prices of non-voting and ordinary shares are not evidence that discounted cash flow valuations are incorrect. It merely demonstrates that a simple dividend discount valuation may omit important cash flows — most importantly the potential cash flow from a takeover bid.