Shopify shareholders approve new voting rights for CEO Tobi Lutke, stock split

Shopify CEO Tobias Lutke participates in the company's Annual General Meeting of Shareholders in Ottawa, May 29, 2019. THE CANADIAN PRESS/Justin Tang

Shopify Inc. shareholders voted to solidify founder and CEO Tobi Lutke's voting power for as long as he is at the company andensurehe, his family and affiliates will hold 40 per cent of the company's voting power.

The approval received Tuesday at the Ottawa e-commerce company's annual general meeting ushered in a new corporate governance structure to grant Lutke non-transferable founder shares.

The founder share will sunset if Lutke no longer serves as an executive officer, board member or consultant whose primary job is with the company or if Lutke, his immediate family and his affiliates no longer hold a number of class A and class B shares equal to at least 30 per cent of the class B shares they currently hold.

In the event of a sunset of the founder share, Lutke will also convert his remaining class B shares into class A shares.

At least one proxy advisory firm, which compiles reports for shareholders ahead of such votes, opposed Shopify's proposal. Glass, Lewis & Co told clients last month the move limits shareholder rights and inadequately protects minority shareholder interests.

"We have never been in favour of protective voting powers like that given to Tobi, as it doesn't instill best practices from a governance perspective," said Angelo Zino, senior equity analyst at CFRA Research, in a note to investors.

He warned that Lutke's age, 41, means the founder share could remain intact for decades and deter new investors, activists, mergers and acquisitions, but noted that dual class shares are not uncommon in tech and he feels Lutke has done a "magnificent" job.

"(The move) certainly consolidates a lot of power in the founder and you could say, to the prejudice of the minority shareholders," Richard Powers, associate professor at the Rotman School of Management in Toronto, said in an interview.

He sees the proposal as a way of giving Lutke his due for founding a "spectacularly successful" company that dates back to 2004, when he received an investment from his father-in-law Bruce McKean because was unable to find e-commerce software for a snowboard business he was building.

However, Powers pointed out there have been instances where giving a founder or his or her family so much power have caused trouble.

Last year, for example, Edward Rogers, the son of founder Ted Rogers, was able to replace five board members over objections from other Rogers Communications Inc. directors, including his mother and sisters, because he controlled 97.5 per cent of the firm's class A shares. The feud ended up in court, with Edward Rogers winning.

"These things can blow up and there's very little investors can do when you have the founder-controller," Powers said.

Shopify shareholders also approved Tuesday a 10-for-one split of the company's class A and class B shares, which Shopify has positioned as a way to make voting shares more affordable to a broader segment of the population and diversify its ownership base.

To be approved, the share split had to garner the support of a two-thirds majority of shareholders and at least a majority of the votes cast by shareholders excluding Lutke and his associates and affiliates. Shopify did not immediately say what margin of approval it received for the two measures.

Under the new structure, Shopify director John Phillips will convert all class B shares held by Klister Credit Corp., a company the early investor owns with psychologist-wife Catherine Phillips, into class A shares.

As of March 31, Glass, Lewis & Co said Shopify had about 114.2 million class A subordinate voting shares and roughly 11.95 million class B multiple voting shares. Lutke owned 5,250 class A subordinate voting shares and 7.9 million class B shares, giving him about 33.8 per cent of Shopify's voting power.

John and Catherine Phillips jointly hold 3.75 million class B shares, representing slightly more than 16 per cent of Shopify's voting power, Glass, Lewis & Co. said.

The votes come after Shopify shares plunged from a 52-week high of $2,228.73 in November to a low of $402 in mid-May. The stock closed at $476.52 on Tuesday, up $23.98 or 5.3 per cent.

In response to the stock drop, company executives, including Lutke, president Harley Finkelstein and vice-president of merchant services Kaz Nejatian tweeted they were purchasing shares as a sign of their confidence in the business.

Lutke posted that he alone placed a $10-million order for shares and reasoned that he made the purchase because "it's time to build," while Nejatian said he liquidated some of his family's portfolio to make similar moves.

"When everyone else has sought reward from safety, we have sought reward from serving others and from taking risks," he said in a note he posted to Twitter.

"And every year, we have gotten better and better at taking bigger risks and serving more people."

This report by The Canadian Press was first published June 7, 2022.