Shopify Faces Off Against Calpers, ISS After $125 Billion Slide

(Bloomberg) — Shopify Inc. is asking investors to put their faith in Chief Executive Officer Tobi Lutke with a proposal to preserve his voting power. That couldn’t have come at a more inopportune time.

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Shares of the Canadian company have tumbled 74% this year, costing it more than $125 billion in market value. Investors have lost their enthusiasm for e-commerce stocks now that the Covid-19 pandemic has eased and consumers have returned to physical stores. Amid the downward spiral, Lutke is asking for a special “founder share,” designed to ensure he keeps at least 40% of the votes as long as he’s with the company.

Investors will vote Tuesday on the arrangement, which took a year for Lutke and the board to negotiate and needs a majority of shareholders (other than Lutke and his affiliates) to pass. But the plan faces opposition from two shareholder advisory firms, Institutional Shareholder Services Inc. and Glass Lewis & Co. The California Public Employees’ Retirement System has already said it will vote against it. Spokespeople for Shopify and Calpers declined to comment.

“There is never a good time for a proposal to provide greater control to a founder,” said Richard Leblanc, professor of governance, law and ethics at York University in Toronto. “For tech companies, shareholders often invest in the founder. The Shopify proposal is simply strengthening this ability.”

These structures aren’t uncommon in tech. Dual-class shares are used at Meta Platforms Inc., Alphabet Inc. and other firms to concentrate voting power among founders. They’re seen as a bulwark against unsolicited bids like the one Elon Musk foisted upon Twitter Inc.’s board.

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Still, some bristle at the undemocratic nature of giving founders or insiders so much power. In advising its clients to vote against Shopify’s proposal, Glass Lewis argued that it carries “inadequate protection” for minority shareholders. Lutke is 41 years old; giving him special voting rights may mean entrenching those rights for decades.

Others are more sanguine. “Obviously when the stock is not doing well, you’re going to get grumpy shareholders,” said Eric Jackson, CEO and founder of Toronto-based hedge fund EMJ Capital Ltd., which most recently bought and sold Shopify shares in February.

Jackson added that if he currently owned Shopify shares, he would vote for the proposal. “Tobi is a great founder and CEO. He’s done a phenomenal job with the company. If I were in his position, I’d probably want to do the same thing. Some leaders are better than others and I would put Tobi at the top of the list,” he said.

“It is a bold proposal that says to the market: you are investing in the founder, Mr. Lutke, as much if not more than the company,” York University’s Leblanc said. “The proposal will have the effect of not looking over your shoulder all the time — like Twitter is doing now with Musk — and thinking longer-term with the board.”