At first glance, the proposed restructuring at Shopify SHOP-T seems warm and fuzzy: Founder Tobias Lutke agrees to some restrictions on his shareholding in exchange for a “founder’s share” that locks in his voting power in the company. For longer-term shareholders who have seen remarkable gains in Shopify stock, it seems like everyone wins.
A dive into the documents, however, suggests that all is not so rosy.
Shopify is actually racing to trigger a corporate settlement that would completely eliminate the company’s two-class structure and Mr. Lutke’s special rights, turning it into a true shareholder democracy. The proposed changes, however, would enshrine Mr. Lutke, 41, as a leader for life. Shopify shareholders should seriously consider voting “no” to this plan to cement founder control.
Here are some of the facts, most of which can only be extracted by a thorough reading of the company’s recently filed proxy statement for the June shareholders’ meeting.
Shopify has two classes of actions. There are more than 114 million Class A shares you can buy on the Toronto and New York stock exchanges, each of which gets a vote on most corporate issues. And there are just under 12 million Class B shares, held by the original owners of privately held Shopify. They get 10 votes each.
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When Shopify went public in 2015, Class B shares made up 88.3% of total shares outstanding, and Mr. Lutke only owned 14.6% of Class B shares. Combined with his Class A shares, his total voting power at the IPO was 14.5%, according to Shopify.
Since then, several things have happened. The first is that a certain number of class B shareholders have converted their shares into class A shares, the only means of cashing in all or part of their assets. And the other is that Shopify has issued tens of millions of Class A shares for acquisitions and to settle employee stock options.
Today, Mr. Lutke owns just under two-thirds of the Class B shares, and the company estimates his voting power at 33.8%. Class B shares now represent only 9.5% of the total outstanding shares.
This last fact is important. As currently provided for in the company’s articles of incorporation, once the number of outstanding Class B Multiple Voting Shares is less than 5% of the total outstanding, all Class B Shares are automatically converted into category A single vote. This ends the two-class, multiple-vote structure.
And Shopify ran a real risk in the medium term. Indeed, the proxy statement shows that more than a year ago Shopify’s board began discussing the ramifications of continuing to issue stock for acquisitions and for stock options. stock purchase, ultimately triggering the end of the current structure.
The provision also makes it difficult for 71-year-old director John Phillips to sell a significant amount of his 3.75 million Class B shares without further restricting Shopify’s ability to issue stock. The more B shares it converts to A shares for sale, the closer Shopify gets to a forced conversion from B to A.
The company’s board, most of whom have been with Shopify and Mr. Lutke since its IPO, clearly didn’t want that to happen. In a letter announcing the proxy, the special board committee recommending the new plan calls Mr. Lutke “a proven leader who has created significant shareholder value.”
In the negotiations between the board and Mr. Lutke, detailed in the proxy statement, the board seemed very concerned about the possibility that Mr. Lutke or other Class B holders would pass the shares to family members with the special super-voter. rights. And who can blame them? If that happened, a founder’s child, deemed insufficiently competent to run the company, could suddenly and shockingly fire a long-term successful CEO. Hypothetically, of course.
As part of the proposal, the board removed Mr Lutke’s ability to transfer superior voting shares to his children, but it came at a cost.
After negotiations focused on the concept of a single, mega-voting “founder’s share”, the committee suggested locking the voting power at 34% – roughly where it currently sits – and set limits to be determined on the amount of Class B shares that Mr. Lutke could sell annually. If he sold more than half of his shares in total, the company would terminate the founder’s share. (Mr. Lutke sold $623 million worth of shares in 2021; his remaining stake is worth more than US$5 billion.)
Mr Lutke, however, rejected any annual limit on his share sales, wanted to sell up to 80% of his holdings without losing special voting rights and counter-proposed that the founder’s share should get 45% of the voice.
The final deal comes closer to Mr. Lutke’s wishes than the board’s: there’s no annual limit on stock sales; Mr. Lutke can sell up to 70% of his Class B shares; and the Founder’s Share will be worth 40% of the Shopify votes. That’s more power than Mr. Lutke has ever had since Shopify went public. The founder’s share will exist after Mr. Lutke leaves the company, as long as Shopify is his “core engagement” as a consultant.
As long as he’s sentient, he basically controls the business. And a lot of people will think that’s great: even with a remarkable drop – Shopify stock has fallen 67% since its peak in November – the stock has delivered considerable shareholder value, up 3,300% from relative to their IPO price.
The proposal presented to shareholders in June, however, does the opposite of what some believe: it would entrench a two-class, multiple-vote system that was set to go away in years to come. There have always been many of these structures in Canada, and their proponents continue to argue that they promote a long-term view that delivers superior shareholder value. But a company can produce superior returns until the day it does not. Then its limited voting rights that didn’t matter suddenly do – and shareholders may find themselves wishing they could keep the company and get rid of the people running it.
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