(Bloomberg) — Shopify Inc.’s plan to enhance Chief Executive Officer Tobi Lutke’s power was likely opposed by most of the company’s shareholders — yet it passed anyway because of a single influential director, according to investor advisory firm Glass Lewis & Co.
Shopify said last week that shareholders voted 54% to approve a board proposal to grant Lutke a “founder share” with special voting rights at the company’s June 7 annual meeting.
But Glass Lewis says the math suggests a strong majority of shareholders actually opposed giving Lutke the special share. It appears the proposal squeaked through only because of the votes of longtime director John Phillips, whose Klister Credit Corp. is the only shareholder other than Lutke to control a significant number of Shopify Class B shares.
The B shares, which aren’t listed on an exchange, carry 10 votes each, giving Phillips just enough power to tip the vote in favor of Lutke despite the opposition of the much larger group of common shareholders, according to Glass Lewis.
In fact, if Klister’s shares had been counted as having only one vote each instead of 10, the proposal would have been soundly defeated, 65% to 35%, Glass Lewis said in a blog post.
“The vast majority of minority shareholders who opposed the new multi-class arrangement, only to see it edged over the line by the existing multi-class structure, may feel aggrieved by the outcome,” the advisory firm said. Glass Lewis questioned why “the Phillips family was permitted to participate with a 10:1 advantage in the vote of ‘disinterested’ shareholders.”
The founder share guarantees that Lutke will hold at least 40% of the voting rights at the Ottawa-based company under certain conditions, including that he remains at the firm.
Leading up to the meeting, Glass Lewis and Institutional Shareholder Services Inc. recommended that investors vote against the founder-share proposal. Three major public funds — Canada Pension Plan Investment Board, the Caisse de Depot et Placement du Quebec and California Public Employees’ Retirement System — have disclosed that they voted against it.
Dual-class share structures are common in the technology sector, helping founders shield companies from activist investors and unwanted takeover bids. In the case of Shopify, the proposal does not provide adequate protections for shareholders and gives Lutke effective control of the board, Glass Lewis said.
“While it doesn’t represent a majority of the voting stock, a 40% stake is generally enough to exercise effective control of a public company in which not every shareholder will vote,” Glass Lewis said. “As such, non-affiliated shareholders at Shopify will have relatively little recourse to influence governance at the company going forward.”
Shopify declined to comment on Glass Lewis’s remarks. Phillips didn’t respond to an emailed question from Bloomberg.
Shopify’s stock has been pummeled amid the broad tech selloff, falling more than 76% this year in Toronto.
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