A Shopify Inc. SHOP-T proposal to give chief executive officer Tobias Lutke special voting rights has drawn more opposition, as Egan-Jones Ratings Co. joined other shareholder advisory firms in recommending against a plan to entrench Mr. Lutke’s voting power at the company.
Investors will vote on June 7 to determine whether a newly formed “founder share,” which locks in 40 per cent of the total voting power at Shopify, should be granted to Mr. Lutke, his family and his affiliates. If the vote goes through as planned, Mr. Lutke would still keep his special share even if his equity stake is diluted to as low as 1.1 per cent. According to the terms of the proposal, Mr. Lutke would only have to give up his share if he is no longer an executive, director or consultant at the e-commerce company.
But over the past two weeks, three leading proxy advisory firms have told their clients to vote against Shopify’s motion. Institutional Shareholder Services Inc. called the proposal “inappropriate” in a memo on May 24, recommending clients against it. Just days before that, on May 21, Glass, Lewis & Co. said it is “not persuaded that the proposed arrangement is the correct solution.”
On Wednesday, Egan-Jones issued a similar report, stating Shopify’s proposal “is not in the best interests of the company and its shareholders, with of course the exception of the founder.” The advisory firm believes the arrangement would “violate” the one-share-one-vote principle that is standard in corporate law and corporate governance.
“We believe this proposal would give essentially practical control of the company at the expense of other non-family shareholders even if the legal definitions of such control are not met,” Egan-Jones told clients.
Egan-Jones also took the additional step of telling clients to withhold their votes on an another motion scheduled for June 7 – which, separately, would potentially make Mr. Lutke the combined CEO and chairman of the board at Shopify. “There is an inherent potential conflict in having the CEO or former CEO serve as the chairman of the board,” the advisory firm said in its report.
Earlier this year, a special committee of independent directors recommended shareholders vote in favour of the founder-share proposal. The committee was created by Shopify in February to consider changes to its share capital and governance structure.
In a statement to The Globe and Mail, Shopify said the founder share “will provide significant benefits to Shopify’s shareholders by modernizing the company’s governance structure and strengthening the foundation for long-term stewardship by Tobi Lutke by tying his voting power to his employment and economic interest” in the company.
“These changes will align Shopify’s governance structure more closely with the company’s long-term market opportunities, positioning Shopify to remain mission-driven and merchant-obsessed while sustaining an innovative culture,” the company stated.
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