Leading shareholder advisory firms are opposing a Shopify Inc. SHOP-T proposal that would give chief executive officer Tobias Lutke a “founder share” and lock in his voting power as long as he is at the company.
At a meeting scheduled on June 7, shareholders at Shopify will be asked to approve a new arrangement that would allow Mr. Lutke, his family and his affiliates to hold 40 per cent of the total voting power at the company, subject to certain restrictions concerning his stock ownership. A special committee of the Ottawa-based e-commerce firm has recommended shareholders vote in favour of the proposal.
But proxy advisory firm Institutional Shareholder Services Inc. said late Tuesday it is recommending against the proposal. Separately, Glass, Lewis & Co. told clients last week it is “not persuaded that the proposed arrangement is the correct solution.”
In its report sent to clients, ISS associates Shehrbano Khan and Nicholas Stiege said they recommend Shopify shareholders “vote against the creation of the founder share as it does not meet the exceptional set of circumstances under which such a multiclass share structure might be considered appropriate in the Canadian market.”
“Canadian market best practices generally call for a following of a one-share, one-vote principle, with a view to alignment between economic interest and voting power at a given company,” Ms. Khan and Mr. Stiege said.
Under the proposed agreement, ISS noted, Mr. Lutke would still keep his votes even if his equity stake is diluted to as low as 1.1 per cent, thus effectively allowing him to control the company’s board.
A Shopify spokesperson said a founder share for Mr. Lutke will provide benefits to shareholders by modernizing the platform’s governance structure and aligning it with “long-term market opportunities.” The spokesperson would not comment directly on what the advisory firms said.
If the vote goes through as planned, Mr. Lutke would only have to give up his share if he is no longer with the company as a Shopify executive, director or consultant. Mr. Lutke would not be allowed to transfer the vote to anyone else.
There does not “appear to be sufficient rationale that suggests the proposed multiclass share structure should potentially be perpetuated in the form presented,” Ms. Khan and Mr. Stiege wrote in the ISS report. Giving Mr. Lutke power over the board “risks creating an issue of board entrenchment,” they said.
“In addition, the arrangement provides for a scenario where material drawbacks exist,” Ms. Khan and Mr. Stiege said, stating that the proposed arrangement could allow disparity between voting power and equity interest to grow to a larger degree than as currently constructed.
Glass, Lewis & Co. said Shopify’s board and its special committee “adopted an overly concessionary approach toward Mr. Lutke in agreeing to this arrangement at the expense of dispersed minority shareholders,” in a report to clients on May 21. The advisory firm believes Shopify would carry “inadequate protection” and limit the rights of minority shareholders if the proposal goes ahead.
Earlier this month, Shopify posted its slowest quarterly growth in seven years, as revenue and profit fell short of analysts’ expectations.
The price of Shopify’s stock has sunk more than 80 per cent since its late 2021 peak of $2,228.73. On Wednesday, shares of the company closed at $426.78 on the Toronto Stock Exchange.
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