Decades ago, ownership of publicly traded companies used to be simple. You counted how many shares you own and how a big proportion of the total number of shares it is. The resulting percentage determined both share on capital (and dividends) and also voting power.
Nowadays, Alphabet (Google) and many other companies have very often different classes of shares that have different voting power. Because of that, defining who is the owner of the company became a little bit more complicated. In this article, we will look at the Alphabet’s (Google’s) ownership structure. Who owns it and who is in control.
So who owns Alphabet (Google)? Top shareholders are Vanguard with a 6.4% share on equity, followed by Google’s founders Larry Page (5.7%) and Sergey Brin (5.5%). However, thanks to “super-voting” stocks, Larry and Sergey have 51% of all votes. Therefore they have control over Alphabet Inc.
List of all Alphabet shareholders with more than 5% share on any stock class (December 2018)
|Shareholders||Share on Alphabet’s Equity||Share on All Votes|
As you can see from the table above, founders Larry and Sergey are clearly in control . They have a majority of votes without owning the majority of shares. Let’s look, in more detail, at how is this possible. We will look at different share classes of Alphabet Inc. and how they are distributed among the shareholders.
Who Owns Alphabet’s 💵 Equity vs. Who Has 🕹️ Voting Power
Let’s have a look again, in a more visual way, at the difference between who owns Alphabet’s (Google’s) equity vs. voting power. I included all stockholders with at least a 5% share on any of Alphabet’s three share classes.
The main takeaway from the infographic above is that although the share on Alphabet’s capital of Larry and Sergey is “only” 11%, they control 51% of votes. This fact makes the voting power of all other shareholders irrelevant.
If Larry and Sergey agree on something, it will happen, regardless of what are other shareholders’ opinions. There is one hypothetical situation when other shareholder’s voting rights might matter, and it is when Larry and Sergey do not agree on something and would vote a different way.
Different 📃 Share Classes are Behind Difference Between Google 💵 Owners and 🕹️ Voting Power Holders
I already mentioned that Alphabet Inc has three classes of shares. Differences between those are the very reason why Lary and Sergey have retained control over the company.
Alphabet Inc has currently three classes of shares outstanding: (use the table?!!!)
- Class A: “normal” shares with 1 vote per share. Publicly traded with ticker GOOGL
- Class B: “super-voting” shares with 10 votes per share, not traded publicly and owned mainly by founders
- Class C: “non-voting” shares with no vote, only share on equity. Publicly traded with ticker GOOG.
Now, let’s look at the breakdown of all outstanding shares as of December 2018 by share class where you can see how many of each class each shareholder had.
📃 Alphabet’s Significant shareholders by number of shares
|# in millions as of Dec 2018||Class A
|Class C Shares
|TOTAL||% of Total Shares|
|Eric E. Schmidt||0||4||4||8||1.2%|
Owning class B shares is the key to Larry and Sergey’s control of Alphabet (and Google). There are only 47 million of these shares, but since they have 10-time more votes, they allow founders to call the shots.
To make it even more apparent, the table below shows the same thing as share on total votes.
🗳️ Alphabet’s significant shareholders by number of votes
|# of votes in millions as of Dec 2018||Class A
|Class C Shares
|Total||As % of Alphabet Votes|
|Eric E. Schmidt||0||41||0||41||5.4%|
So now we have a clear picture of how it is possible that two people with an 11% share on capital control 51% of votes. To make a whole picture complete, let’s multiply the number of shares by prices at the end of 2018 to show you Alphabet’s market capitalization by top shareholders.
📈 Alphabet’s Market capitalization breakdown by significant shareholders
|in billions $ as of Dec 2018||Total Market Value||As % of Alphabet Market Value|
|Larry Page||$43 bn||5.9%|
|Sergey Brin||$42 bn||5.7%|
|Eric E. Schmidt||$9 bn||1.2%|
|Other shareholders||$520 bn||71.5%|
💸 Can Larry or Sergey Sell Their Alphabet’s Super-voting Shares to Somebody Else?
Yes they can and they are already slowly doing that, but we don’t need to worry about that. Class B shares have their super-voting power only if they are in hand of original holders. In case original holders sell them, stocks will automatically convert to ordinary Class A shares with one vote per share.
There is one exception from this rule a that is if original holders of Class B shares sell those shares to another original holder o B class share. In that case, Class B shares will keep its super-voting power. For example, Lary and Sergey can buy B shares from Erik.
So this means there will be no new Class B shares holders.
⚰️ What If Some of The Google’s Founders dies? Who will be in control of Alphabet?
Similar to the sale of the stock. When one of the founders dies, his stock will automatically convert to ordinary Class A shares. Class B shares cannot be inherited without losing their extra voting powers.
If founders make some provision, their voting rights can be transferred in case of their death on other class B shareholders. If they do it, conversion to ordinary shares will not happen immediately, but after nine months.
♾️ Will Larry and Sergey Stay in Control of Alphabet for Their Whole Lifetime?
Right now, two founders of Google hold 51% of voting rights. If we look a few years back, the trend is clear. As founders liquidate part of their holdings each year, their share is slowly decreasing. For example, at the end of 2014, they combine voting power was 55% compared to 51% now. The more money Larry and Sergey will need for their other project outside Alphabet, the more will their voting power decrease.
But, you might understandably ask, wait a minute, founders also own class C shares without voting rights. Why don’t they sell only those shares? This way, they can liquidate up to 50% of their shares (all class C shares) without decreasing their voting power.
Well, this is not allowed thanks to an agreement that Larry, Sergey, and Erik made during C shares introduction. They agreed that if they at any moment own more B shares than C shares, those B shares will automatically converted to A shares (with just one vote). This provision will make sure that if founders want to liquidate part of their holdings, they will have to decrease also their voting power.
However, even if their voting power falls below 50%, they still will have virtual control. Moreover, if Larry’s and Sergey’s combined share on votes falls below 34%, they are allowed to start selling only C shares only. This provision will enable them to keep their share at 34% level for very long time. Unless they find some new, ridiculously expensive hobby that will require liquidation of all Alphabet’s stocks.
Ownership of the rest of the shareholders is quite fragmented, and let’s not forget that their forme CEO Erik Schmidt also controls another 5% of votes., so having 34% would still mean robust control of the Alphabet. So we probably need to accept that Larry and Sergey will keep having control over Alphabet for their lifetime. Since Alphabet is funding also longevity research, this can be a really long lifetime.
💭 Do The Calls For The Equal Voting Rights Make Sense?
Some shareholders do no like the super-voting power Google founders have over Alphabet, and they very often call for introducing equal voting rights for all stock classes. Although somebody might see it as a “fair” proposal, to me, it sounds like an incredibly ridiculous demand that goes against fairness and common sense.
Why do I think so? Larry and Sergey negotiated the deal with the investors back then. They agreed that they would take investors’ money, but they want to keep control of the company. And those investors at the end agreed to this.
We might argue that it is unnatural and that there is data showing that companies with this strange super-voting share underperform their peers. But none of that matters today. Investors made a deal with founders and agreed to their super-voting status. So they need to accept it.
And even if somebody became investor later, he knew in advance that this is a deal and that if they buy the stocks, this is what they are getting. It simply does not make sense to come years later, crying that it is not fair. It was no secret and Alphabet is quite clear about that in their annual reports.
“Our certificate of incorporation provides for a tri-class capital stock structure. As a result of this structure, Larry, Sergey, and Eric have significant influence over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or our assets”
–Excerpt from Alphabet’s 2018 Annual Report (10-K)
There might be a reasonable demand for stripping Alphabet’s founder of ther super-voting rights, if the investors can prove that founders misuse their voting power. If they would make decisions that have value for them personally but not for the other investors.
And I am not talking about obvious illegal things like channeling money from Google to other companies under founders control. That is totally out of the line. The problem might also be if founders use Alphabet as a playground for their pet projects, which has no financial value for other shareholders.
Some of the Alphabet’s “Other Bets” might seem like these kinds of pet projects. However, founders might have an excellent counter-argument. Their very old “pet” project Google is earning billions of dollars every year, and nobody is complaining about that.
To sum up, we need to accept Alphabet Inc as it is. Be aware of founders’ super-voting powers and the fact that it is not going away anytime soon.
📚 Resources & Links
- Certificate of Incorporation for Alphabet Inc that contains all the detail about different stock classes and provisions related to them.
- SEC FORM 4 from Sergey through which Sergey disclosed his latest stock transaction of 2018 and so state also his holdings of different share classes at the end of 2018.
- SEC form 5 from Larry through which Larry disclosed his latest stock transaction in 2017. Form also includes status at the end of 2017. Larry did not do any stock transaction in 2018 so his holdings did not change.
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