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Look carefully, there are two classes of shares: those with and those without voting rights

Monday 30 November 2015

The capital of a corporation is usually divided in shares of one class. Each share has the same voting rights. The idea is the equal

treatment of all shareholders. 1 share = 1 vote at the general meeting. But there are a few exceptions. Shares with and without voting rights.

When these two classes of shares are traded on the stock market, this will sometimes create opportunities for careful investors.

The shares of Henkel AG and Roche Holding come in this context to mind.

Shares with one voting right (in Germany referred to as ordinary shares) usually cost more than listed company shares of the same firm which do not have voting rights. “preference shares”

In Germany the holder of preference shares usually receives a higher dividend to compensate for the lack of voting rights. The term "preference share" in this respect, is a deliberate deception. Holders of non-voting "preferred stock" have absolutely no say, when it comes to business matters or a merger. This is absurd. One cannot speak of preference here. In the past few decades the term preference share has therefore been phased out. On the other hand strategic investors or founding families secure control of the company with Voting Shares.


Here is the state of affairs of some of the few companies which are listed, with two classes of shares outstanding on the stock exchange. First, two "standard situations":

Google shares (the company is now named Alphabet Inc) the price of the non-voting shares (stock symbol GOOG) is about

USD 750.-.   Google shares Class A, with voting rights, ticker symbol GOOGL now cost about USD 770, -.

So there is a premium which investors are willing to pay for the voting rights. This will at times, where appropriate become interesting, when a hostile investor wants to exert his influence. Then voting shares will be more valuable.


The situation is similar with Lindt & Sprüngli AG in Kilchberg, Switzerland, the no. 1 premium chocolate manufacturer in the world.

The non-voting shares here are called participation certificates, or so-called PS (but are preference shares) and are quoted at CHF 6.125, -. Their shares with voting rights are registered shares and the most expensive shares listed on the Zurich stock exchange. They now cost CHF 73 375, - Since the share has 10 times the voting rights, you need to divide this price by 10 to get a comparative price. These are then CHF 7.337,50 per share, compared to CHF 6.125, - for the non-voting participation certificates. A significant premium

over the "castrated" PS. Is a patient competitor biding his time? If there will one day be changes in the shareholder structure, a possible scenario, then Lindt & Sprüngli due to its quality has a unique position in the stock market.


The interesting thing about the two cases is that the dividend argument is omitted. Google pays no dividends and Lindt & Sprüngli, has the same dividend for both classes of shares. We can also look at trading volumes. One often hears the argument: Yes, but there is hardly any volume in trading for the voting shares. This is the reason why most large investors and large funds buy the lower quality non-voting shares. But as far as Google and Lindt & Sprüngli are concerned this is not true.


With Google on a given trading day an average of 2.1 million shares for both classes changes hands. So, the same amount of shares for both classes, with strong trading volumes. At Lindt & Sprüngli it looks at first glance different. Here the trading day covers on average about 2,280 non-voting shares, compared with only 135 registered shares. However, since the registered share represents 10 times the value, the average daily trading volume amounts to 1,350 shares per day. So here there is also quite a balanced relationship.


And now for the two exceptions that currently stand out for me: Henkel shares and Roche.


The non-voting shares for Roche in Basel are referred to as "participation certificates" , but it is a share without voting rights. It is listed with the symbol ROG.VX and trades at CHF 275.60.

At the same time the voting shares of Roche, called bearer shares of Roche Holding AG are traded in Zurich at CHF 271.25 (ticker symbol: RO.SW).

The dividend for both shares is the same ( a dependable CHF 8, - per share).

The trading volume for the bearer shares of Roche averages 37,000 compared to 280,000 for the participation certificate. A big difference. The volume in the voting shares appears to be perfectly adequate for investors. Amazing: A stock with voting rights, with the same dividend, but cheaper than the nonvoting vehicle. Investors should take note. Will this always remain so? How would one explain it? 


Even more astonishing currently is the situation with Henkel shares. The successful Duesseldorf company in consumer goods and the adhesives industry is listed on the DAX with its preference share. Here an average of 570,000 shares are traded. The dividend amounts to EUR 1.31. The market price is EUR 108.50 per non-voting Preference share.

And what about the ordinary shares with voting rights? They are almost in secret listed at € 92.50 (!).

The dividend amounts to EUR 1.29 and the trading volume amounts to an average of 90,000 per day.

In my opinion, the dividends and trading volume hardly justify such a massively cheaper price. In my experience of over 40 years as an active investor I have rarely seen a situation like that. The argument that the Henkel family pool would not currently permit a take-over of the company, is not valid. Voting is voting and this privilege always has a value. A shareholder fight for Google and Lindt is not expected either.


So while observing the stock market, a closer look could be worthwhile. In this context, I recall the sale by the Wella heirs many years ago to Procter & Gamble.   This triggered the sale of the entire Wella Group. At that time voting shares were figuratively speaking worth their weight in gold, while the preferred shares were sold at a lower price.


If voting shares and non-voting preference shares trade at the same price, there will be no equality in extreme situations. So you should have no illusions.


This is the reason why in our Value Fund "ME Fund - Special Values" for the past 14 years we always buy shares with voting rights. And are also prepared to pay an extra premium for it. This has served our investors in the fund well. As my grandmother used to say, the most expensive is usually the cheapest. In this sense, I wish you a great day with a lot of "Value" for you, your Markus Elsässer