Shopify CEO Tobias Lutke participates in the company's Annual General Meeting of Shareholders in Ottawa on Wednesday, May 29, 2019.Justin Tang/The Canadian Press
Shareholders at Shopify Inc. SHOP-T have voted in favour of giving chief executive officer Tobias Lutke a special “founder share” that entrenches his control of the Ottawa-based e-commerce company.
At an annual meeting held Tuesday, shareholders voted to give Mr. Lutke, his family and his affiliates 40 per cent of the total voting power at Shopify. As long as he remains at the company as an executive, director or consultant, Mr. Lutke will retain his non-transferable founder share – even if his equity stake is diluted to as low as 1.1 per cent. He held about 6 per cent of the company as of the end of 2021.
Mr. Lutke was also voted in as the combined CEO and chairman of the board at Shopify for at least the next year, providing him with further control of the company.
Additionally, Shopify investors voted to carry out a 10-for-one split of the company’s class A and class B shares. The split is a way to make shares more affordable for a broader segment of the population – its class A shares have traded at more than $2,000 in the past year – and to diversify Shopify’s ownership base, chief financial officer Amy Shapero said at the meeting. Stock splits have been a trend across the technology sector this year, with companies such as Amazon.com Inc. and Google parent Alphabet Inc. announcing similar measures.
Three leading proxy advisory firms – Institutional Shareholder Services Inc., Glass, Lewis & Co. and Egan-Jones Rating Co. – had recommended their clients not vote in favour of giving Mr. Lutke special voting rights, stating that the proposal is against industry standards and would cause issues of board entrenchment. ISS said the new arrangement will cause a ballooning effect for the disparity between voting power and equity interest at Shopify. Egan-Jones took the additional step of calling Mr. Lutke’s new role as both CEO and chairman of the board “an inherent potential conflict.”
Tuesday’s call with investors ran for just about 30 minutes, with only two questions from shareholders, neither of which were about Mr. Lutke’s founder share. Prior to the meeting, a special committee of the company had recommended shareholders vote in favour of the proposal, calling it a beneficial way to modernize the company’s governance structure.
Some portfolio managers and Shopify investors were critical of the move to solidify Mr. Lutke’s voting power, saying Mr. Lutke is attempting to reap the benefits of having a public company while maintaining the control more commonly seen at private firms. In a brief but blunt tweet, Norman Levine, the recently retired managing director of Portfolio Management Corp., said Tuesday was “a bad day for corporate governance in Canada.”
Kevin Thomas, CEO of the Shareholder Association for Research and Education, said: “At its heart, the idea of dual-class shares is to allocate more power to insiders and transfer more risk to outsiders, and entrench that system so it is invulnerable to democratic change.”
Shopify did not disclose a vote tally on Tuesday. A spokesperson for the company said that information would be published later this week.
The California Public Employees’ Retirement System confirmed to The Globe and Mail that it voted against the motion to provide Mr. Lutke with a founder share on Tuesday. “We don’t have any comment beyond our vote,” information officer Amy Morgan said in an e-mail.
Richard Leblanc, a professor of governance, law and ethics at York University, described Tuesday’s votes as “a huge concentration of power” for Mr. Lutke. “You’re essentially betting on the person now, and no longer the company which we know as Shopify,” Mr. Leblanc said in an interview.
“It’s the worst combination. He’s the chairman, the CEO, has all the voting power. You cannot possibly get more concentration than that. And what it essentially does is bullet-proofing Shopify from any other leader or even remote shareholder activism.”
Shahab Siddiqui, a shareholder at Shopify for about five years, said in an interview that he voted by proxy in favour of both the stock split and the founder-share motion.
“I know this is a big voting stake for Tobi, but he’s the founder and he knows how to take us to the next level. I trust him over anyone else and want him around for the next decade at the company. He really represents the culture at Shopify and this makes sure he doesn’t look elsewhere for other opportunities,” Mr. Siddiqui added.
“There could be a leadership crisis if he leaves. And for me, he’s the only one holding it together.”
In a statement, a spokesperson for Shopify said: “We are pleased with the support expressed by our shareholders for the proposed updates to our governance structure, which will modernize Shopify’s governance and support the company’s continued growth. The new structure more closely aligns the company’s governance profile with its long-term market opportunities, positioning Shopify to remain mission-driven and merchant-obsessed while sustaining an innovative culture.”
Amid a broad market sell-off that has particularly hit the tech sector, the price of Shopify’s stock has sunk more than 70 per cent since its late 2021 peak of $2,228.73.
On Tuesday, Shopify shares closed at $476.52 on the Toronto Stock Exchange, up 5.3 per cent from Monday’s close.
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