Shopify seeks to protect CEO’s voting power, split stock

The e-commerce company’s shares, which surged above $1,600 last year during the pandemic, have fallen about 55% so far this year. They closed Friday at $603.18 on the New York Stock Exchange, giving the company a $76 billion market valuation.

Under the proposal, co-founder and Chief Executive Tobi Lütke will receive a new “founder share" that, combined with his existing supervoting Class B shares, will increase his voting power to 40% from 34%. Mr. Lütke, who is 41 years old, will keep the founder share as long as he remains at Shopify as an executive, a board member or a consultant.

A computer programmer who started the company in 2006, Mr. Lütke can’t pass the founder share along to his family and also will lose his right to transfer the Class B shares to them. If he sells the Class B shares, they automatically convert to Class A shares and lose their supervoting power. Still, the founder share gives the billionaire 40% voting control even if he sells a significant amount of his Class B shares under the proposed arrangement.

Robert Ashe, the lead independent director, said Mr. Lütke proposed changing the structure in December, in a bid to preserve control of the company. Under the current structure, if the proportion of supervoting Class B shares falls below 5% of total shares outstanding, they would automatically convert to Class A shares, creating a situation in which any equity issuance for financing or acquisitions poses a threat to Mr. Lütke’s control.

“The company is looking to get the influence of our future in Tobi’s hands," said Mr. Ashe. The CEO and the board “felt that the capital structure didn’t make sense for the opportunity and the ability for him to exercise his influence going forward."

Mr. Lütke declined to comment.

Shopify’s Class B shares carry 10 times the voting power of each Class A share. They make up about 9.5% of all shares outstanding.

Institutional Shareholder Services, the proxy advisory firm, criticized Shopify’s corporate governance structure in a report last year. The firm said it was concerned by a stock option grant of $15 million for Mr. Lütke, and a lack of provisions that would allow the board to claw back pay. More than 77% of shares voted were in favor of the stock option plan, and the incentive plan was supported by almost 80% of those who voted.

Monday’s proposed changes require a two-thirds majority vote of all shares cast at the shareholder meeting, as well as a majority of shares voted for each of the two share classes, excluding those controlled by Mr. Lütke and his affiliates.

Shopify, which provides software and services to businesses that want to sell goods online, was one of the biggest winners during the pandemic. As people went into lockdown, e-commerce activity surged and Shopify’s stock increased more than 300% between the beginning of 2020 and its peak in late 2021. This year, as pandemic restrictions have eased, shoppers returned to physical stores and the company outlined plans to invest to build its own delivery network, the company’s share price has tumbled.

Tesla Inc., Alphabet Inc. and Amazon.com Inc. have announced stock splits in recent weeks. Stock splits don’t change the value of a company or an investor’s stake, yet investors have rewarded the companies this year. Tesla’s shares climbed 8% after it announced its split. Alphabet’s and Amazon’s shares also rose in the trading sessions after their moves.

Shopify will be asking shareholders to approve the founder share structure and the 10-for-1 split at its annual meeting on June 7.

Mr. Ashe said the company decided to split the stock to make it easier to compensate employees and allow more individual investors access to the stock. Shopify executives told employees at a meeting on Thursday that it would allow them to choose between cash and stock in compensation packages.

Though investors can trade partial shares of companies whose share prices may otherwise have put those stocks out of reach, employees don’t get partial shares in compensation packages, said Mr. Ashe. Lower-priced shares would make adding stock to pay packages easier.

—Theo Francis contributed to this article.