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	<title>IGOPPDual-class shares &#8211; IGOPP</title>
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		<title>Shopify and the Problem of Shareholder “Approval” at Multi-Class Companies</title>
		<link>https://igopp.org/en/shopify-and-the-problem-of-shareholder-approval-at-multi-class-companies/</link>
		<comments>https://igopp.org/en/shopify-and-the-problem-of-shareholder-approval-at-multi-class-companies/#respond</comments>
		<pubDate>Wed, 07 Aug 2024 14:32:54 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[IGOPP in the Medias]]></category>
		<category><![CDATA[IGOPP in the medias]]></category>
		<category><![CDATA[Dual-class shares]]></category>
		<category><![CDATA[Proxy Advisors]]></category>
		<category><![CDATA[Say on Pay]]></category>

		<guid isPermaLink="false">https://igopp.org/shopify-and-the-problem-of-shareholder-approval-at-multi-class-companies/</guid>
		<description><![CDATA[Media reporting can make proxy season seem more dramatic than it is. While breathless coverage of board strife, impossibly high executive pay figures and shareholder activism at well-known companies is the norm, the overwhelming majority of director election and executive compensation proposals pass with majorities of 90% and upwards. The handful of proposals that fail [&#8230;]]]></description>
		<content><![CDATA[Media reporting can make proxy season seem more dramatic than it is. While breathless coverage of board strife, impossibly high executive pay figures and shareholder activism at well-known companies is the norm, the overwhelming majority of director election and executive compensation proposals pass with majorities of 90% and upwards.

The handful of proposals that fail understandably draw headlines – yet many proposals opposed by a majority of shareholders fly under the radar. That’s because (with some notable exceptions [1]) most reporting fails to acknowledge how multi-class share structures, which give certain shares typically held by founders and insiders more voting power than those held by institutional and retail investors, obscure investor sentiment.

Proxy voting is highly technical in and of itself, and its ultimate influence on how companies are run is even more complicated. So why does the impact of multi-class share structures matter? Because giving insiders and founders disproportionate voting power often serves to effectively silence ordinary shareholders, threatens the agency and objectivity of the board and removes a key safeguard against excessive pay, related party transactions, and other potential misuses of investor capital.

In this post, we look at how inequitable voting rights influenced 2024 AGM results at Shopify, and at the broader impact of multi-class share structures on the board and its role.

Case Study: Shopify Inc.

Two years ago, Shopify controversially [2] implemented a “founder share” that gave CEO Tobi Lutke 40% voting rights indefinitely, even if his actual economic stake in the company goes down as low as ~2%. A majority of the company’s shares were voted against this arrangement – but because not all of the company’s shares had the same voting power, the founder share was nonetheless granted to Lutke.

At the 2024 AGM, Shopify’s now-cemented triple-class share structure again swung the vote on several proposals. Yet, as in 2022, most media coverage of the general meeting painted an incomplete picture of the results. A Financial Post headline on the day of the meeting read [3] “Shopify shareholders approve executive pay plan they were urged to reject” while thelogic.co reported [4] “Shopify shareholders approve executive pay plan, rejecting proxy push.” Shopify’s subsequent filings announced that all agenda items had been approved.

Like two years ago, the word “approve” is doing a lot of lifting.

According to S&#38;P Capital IQ, institutional investors currently hold 815,336,783 shares in Shopify, or 63.3% of the economic exposure to the company’s share price performance. This translates into roughly 40% voting power, equivalent to that of the founder-CEO who only holds 6.2% of company’s total outstanding equity.

If the multi-class structure were collapsed and all shares voted on a one-to-one basis, the results indicate that well under half of shareholders supported the pay proposals, with support ranging from 34% for the option plan to 45% for the advisory say on pay. Meanwhile, we calculate that the re-election of director Gail Goodman would only have received 57% support.



[...]

Impact on Transparency

It’s notable that we had to perform the above calculations to untangle vote results ourselves. Even proponents of multi-class share structures, like the Institute for Governance of Private and Public Organizations (“IGOPP”) in Canada (see “Policy Paper No. 11: The Case for Dual-Class of Shares [5]”, 2019), call for companies to disclose a breakdown of their voting results so that shareholders can more easily isolate the effect of the superior voting shares. The failure to provide such disclosure indicates that companies see value in opacity, and that directors who effectively owe their seat to the grace of the CEO are not in a position to extract even modest concessions.

Read more [6]

[1] https://www.theglobeandmail.com/business/commentary/article-rbi-dentalcorp-nuvei-agm-shareholder-votes/
[2] https://www.glasslewis.com/shopify-shareholders-approve-controversial-founder-share-with-the-help-of-the-existing-multiple-voting-shares/
[3] https://financialpost.com/news/retail-marketing/shopify-shareholders-approve-executive-pay-plan
[4] https://thelogic.co/briefing/shopify-shareholders-approve-executive-pay-plan-rejecting-proxy-push/?synckey=1948957d-bee6-4d85-9c95-dee765098202%3Fwpa_error_token%3Dtrue
[5] https://igopp.org/en/the-case-for-dual-class-of-shares-2/
[6] https://igopp.org/wp-content/uploads/2024/08/GLASSL2.pdf]]></content>
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		</item>
		<item>
		<title>Going public: a thing of the past?</title>
		<link>https://igopp.org/en/going-public-a-thing-of-the-past/</link>
		<comments>https://igopp.org/en/going-public-a-thing-of-the-past/#respond</comments>
		<pubDate>Tue, 16 Jul 2024 20:39:50 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[Reports & Studies]]></category>
		<category><![CDATA[Dual-class shares]]></category>
		<category><![CDATA[IPO]]></category>
		<category><![CDATA[Private governance]]></category>

		<guid isPermaLink="false">https://igopp.org/entree-en-bourse-un-reve-du-passe/</guid>
		<description><![CDATA[In Canada, 2023 was a lean year for new companies embarking on initial public offerings (IPOs) on the TSX, the country’s main stock exchange. In fact, only one company, Lithium Royalty Corp., proceeded with an IPO, raising about $150 million in March 2023. More than a year later, at the end of June 2024, no [&#8230;]]]></description>
		<content><![CDATA[In Canada, 2023 was a lean year for new companies embarking on initial public offerings (IPOs) on the TSX, the country’s main stock exchange. In fact, only one company, Lithium Royalty Corp., proceeded with an IPO, raising about $150 million in March 2023. More than a year later, at the end of June 2024, no new conventional[1] company has since been listed via IPO on the TSX. This is an abnormally long—even historic—period.

“The public markets are a great economic equalizer, allowing small retail investors, supported by appropriate investor protections, to participate directly in the growth of [the] economy” (Capital Markets Modernization Taskforce, 2021). Studies show that the size of a country’s capital market is positively correlated with its economic development (measured by the long-term real growth rate of GDP per capita), and that, in the case of stock markets, the relationship is estimated at 1:1 (Kaserer and Rapp, 2014). Healthy, attractive markets are essential, as they also promote innovation, economic diversification and greater sharing of created wealth, while making a country’s economy more resilient to shocks (European IPO Task Force, 2020).

For entrepreneurs, an IPO offers many advantages. First and foremost, of course, it is a means of financing growth, but it also enhances brand awareness and reputation (Pešterac, 2020). Compliance requirements imposed by regulators and stock market operators lend companies a high degree of credibility, making it much easier to recruit and retain employees and managers. It is also an undeniable plus when negotiating with local and foreign suppliers.

Of course, an IPO inevitably comes with additional costs associated with public disclosure requirements and other compliance obligations, not to mention the risk of hostile takeover attempts or having to deal with an attack from an activist shareholder. Table 1 lists some of the most frequently raised arguments for and against an IPO.

[1] A conventional company refers to a company with traditional business activities (manufacturing products, providing services, retailing, financial and banking services, etc.), which excludes financial vehicles such as exchange-traded funds, special-purpose acquisition companies, mutual funds, split-share companies, closed-end investment trusts, and so on.
]]></content>
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		</item>
		<item>
		<title>Family Controlled Companies: Drivers of Canadian Economy</title>
		<link>https://igopp.org/en/family-controlled-companies-key-drivers-of-canadian-economic-sustainability-panel-2/</link>
		<comments>https://igopp.org/en/family-controlled-companies-key-drivers-of-canadian-economic-sustainability-panel-2/#respond</comments>
		<pubDate>Wed, 18 Oct 2023 02:51:19 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[Videos ]]></category>
		<category><![CDATA[Actions multivotantes]]></category>
		<category><![CDATA[Dual-class shares]]></category>
		<category><![CDATA[Parties prenantes]]></category>
		<category><![CDATA[Stakeholders]]></category>

		<guid isPermaLink="false">https://igopp.org/family-controlled-companies-key-drivers-of-canadian-economic-sustainability-panel-2/</guid>
		<description><![CDATA[To listen to the full panel with Louis Audet (board member of IGOPP), about the most recent report of IGOPP on family businesses, please click here or on the image below (the panel&#8217;s duration is 43 minutes):]]></description>
		<content><![CDATA[To listen to the full panel with Louis Audet (board member of IGOPP), about the most recent report of IGOPP [1] on family businesses, please click here  [2]or on the image below (the panel's duration is 43 minutes):

[1] https://igopp.org/en/the-performance-of-canadian-controlled-companies-listed-on-the-sptsx/
[2] https://www.youtube.com/watch?v=EneTrzShDZM]]></content>
		<wfw:commentRss>https://igopp.org/en/family-controlled-companies-key-drivers-of-canadian-economic-sustainability-panel-2/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Family Controlled Companies: Key Drivers of Canadian Economic Sustainability &#8211; Panel</title>
		<link>https://igopp.org/en/family-controlled-companies-key-drivers-of-canadian-economic-sustainability-panel/</link>
		<comments>https://igopp.org/en/family-controlled-companies-key-drivers-of-canadian-economic-sustainability-panel/#respond</comments>
		<pubDate>Wed, 18 Oct 2023 02:34:41 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[IGOPP in the Medias]]></category>
		<category><![CDATA[IGOPP in the medias]]></category>
		<category><![CDATA[Dual-class shares]]></category>
		<category><![CDATA[Parties prenantes]]></category>
		<category><![CDATA[Stakeholders]]></category>

		<guid isPermaLink="false">https://igopp.org/family-controlled-companies-key-drivers-of-canadian-economic-sustainability-panel/</guid>
		<description><![CDATA[To listen to the full panel with Louis Audet (board member of IGOPP), about the most recent report of IGOPP on family businesses, please click here or on the image below (the panel&#8217;s duration is 43 minutes):]]></description>
		<content><![CDATA[To listen to the full panel with Louis Audet (board member of IGOPP), about the most recent report of IGOPP [1] on family businesses, please click here  [2]or on the image below (the panel's duration is 43 minutes):

 [3]

[1] https://igopp.org/en/the-performance-of-canadian-controlled-companies-listed-on-the-sptsx/
[2] https://www.youtube.com/watch?v=EneTrzShDZM
[3] https://www.youtube.com/watch?v=EneTrzShDZM]]></content>
		<wfw:commentRss>https://igopp.org/en/family-controlled-companies-key-drivers-of-canadian-economic-sustainability-panel/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>The performance of Canadian controlled companies listed on the S&#038;P/TSX</title>
		<link>https://igopp.org/en/the-performance-of-canadian-controlled-companies-listed-on-the-sptsx/</link>
		<comments>https://igopp.org/en/the-performance-of-canadian-controlled-companies-listed-on-the-sptsx/#respond</comments>
		<pubDate>Fri, 13 Oct 2023 14:12:45 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[Reports & Studies]]></category>
		<category><![CDATA[Dual-class shares]]></category>
		<category><![CDATA[Private governance]]></category>

		<guid isPermaLink="false">https://igopp.org/la-performance-des-societes-canadiennes-controlees-inscrites-au-sptsx/</guid>
		<description><![CDATA[Family-run businesses are the cornerstone of market economies. These companies are often imbued with a strong culture rooted in the values of their founder, a culture that develops and strengthens over time, sometimes even beyond the first generations who succeed one another at the helm of the business. They tend to make decisions with a [&#8230;]]]></description>
		<content><![CDATA[Family-run businesses are the cornerstone of market economies. These companies are often imbued with a strong culture rooted in the values of their founder, a culture that develops and strengthens over time, sometimes even beyond the first generations who succeed one another at the helm of the business. They tend to make decisions with a long-term horizon, in consideration of all their stakeholders and the environment, as it is natural for them to want to ensure that future conditions remain favourable. This is the very essence of sustainable value creation.

As they grew, the largest of these companies eventually had to go public. Their founder-entrepreneurs were concerned with maintaining control over the company’s operations in order to further a culture that reflects the values central to the company’s past successes. As such, they sought to preserve the unique character of their business and ensure they could continue to uphold their long-term vision despite the presence of new shareholders, most of them anonymous and changing.

Given their own imperatives at the time of their company’s IPO, some founder-entrepreneurs were unable to raise the necessary funds without diluting their equity stake below the level required to retain control, or did not wish this risk to materialize. They therefore resorted to mechanisms to ensure that control was maintained, notably through the use of different share classes (DCS), each conferring specific rights (multiple voting rights for one of the classes, for example, or exclusive rights to appoint members to the board in order to maintain a majority).

Whether control is exercised through a direct stake or by resorting to a DCS structure, these companies are frequently targeted by categories of investors who consider their governance to be deficient, at least according to the guidelines established for companies with widely held ownership (i.e. without a controlling shareholder). This criticism is often even sharper where DCS companies are concerned, due to the control exercised without an economic stake that is commensurate with exclusive nomination rights or the percentage of votes cast. A number of pressure groups are strongly advocating that all forms of DCS structure be eliminated.

Is this criticism warranted? Does the long-term economic, social and environmental performance of Canadian controlled listed companies support this perception of “bad governance?”

These topics are fiercely debated in various governance forums and have been the focus of considerable research in academic circles. While some voices are raised against founding shareholders and their families maintaining control, others are increasingly being heard in favour of allowing new generations of entrepreneurs to use DCS structures. Several countries have recently revised their rules to allow them on their main stock exchanges, and others, such as France and Germany, are seriously considering doing so in the near future.

The aim of our study is first to situate the debate and summarize the findings of the most recent research. We then compare the performance of Canadian controlled companies in the S&#38;P/TSX Index with that of Canadian companies with widely held ownership in the same group. Comparisons are based both on ESG ratings (Environmental, Social and Governance performance) and total shareholder return over five and 10 years.
]]></content>
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		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Is the Sun Setting on Dual Class Share Structures?</title>
		<link>https://igopp.org/en/is-the-sun-setting-on-dual-class-share-structures/</link>
		<comments>https://igopp.org/en/is-the-sun-setting-on-dual-class-share-structures/#respond</comments>
		<pubDate>Tue, 16 May 2023 16:45:04 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[IGOPP in the Medias]]></category>
		<category><![CDATA[IGOPP in the medias]]></category>
		<category><![CDATA[Dual-class shares]]></category>
		<category><![CDATA[Shareholders]]></category>

		<guid isPermaLink="false">https://igopp.org/?p=15579/</guid>
		<description><![CDATA[Teck’s Dual Class Amendment Teck Resources Limited (“Teck”) recently announced that it will be collapsing its dual class share structure (“DCSS”) by introducing a six-year sunset for the multiple voting rights attached to its Class A common shares (the “Dual Class Amendment”). An overwhelming majority of Teck’s shareholders voted in favour of the Dual Class [&#8230;]]]></description>
		<content><![CDATA[Teck’s Dual Class Amendment

Teck Resources Limited (“Teck”) recently announced that it will be collapsing its dual class share structure (“DCSS”) by introducing a six-year sunset for the multiple voting rights attached to its Class A common shares (the “Dual Class Amendment”). An overwhelming majority of Teck’s shareholders voted in favour of the Dual Class Amendment at the annual and special meeting of shareholders on April 26, 2023.

Prior to the Dual Class Amendment, Teck’s Class A common shares each had 100 votes per share, whereas the Class B common subordinate voting shares each had one. On Friday, May 12, 2023, the effective date, each outstanding Class A common share was exchanged for one new Class A common share and 0.67 of a Class B subordinate voting share. The terms of the new Class A common shares are identical to the terms of old Class A common shares, but provide that six years from the effective date, all new Class A common shares will automatically be exchanged for Class B subordinate voting shares, all of which will be renamed “common shares.” In effect, the Dual Class Amendment will collapse Teck’s DCSS by May 12, 2029.

While not common among publicly traded corporations in Canada, DCSS have long been a part of the Canadian securities market and continue to be employed by many corporations.[1] [1] This bulletin will discuss the basic components of a DCSS, its advantages and disadvantages, as well as common measures implemented alongside DCSS to increase shareholder protection.

[...]

Concerns with DCSS

Conversely, DCSS can give rise to corporate governance concerns. By their nature, DCSS result in a misalignment between voting rights and economic interest within a company. For example, in Teck’s case, the holders of approximately 1.5% of the total number of outstanding Teck shares are entitled to exercise approximately 60.5% of the votes attached to all Teck shares. Critics of DCSS claim that these structures allow company executives to “have their cake and eat it too” because they permit executives to raise capital without giving up control.[2] [2] Further, because DCSS can allow executives to hold relatively small equity stakes within their companies, they can be insulated from the financial repercussions of poor decision-making and corresponding share price decreases.

Simultaneously, DCSS expose minority shareholders to significant risks and potential undesirable outcomes. In addition to restricting the control that the subordinate voting shareholders have over board composition and company strategy, DCSS can also result in executive compensation for the holders of the superior voting class shares, leadership transition issues, and payment of significant premiums to collapse the DCSS. In 2021, the battle for control of Rogers Communications revealed that DCSS can also result in a unilateral determination of a board’s makeup, which may or may not be in the best interest of all shareholders.[3] [3]



Shareholder Protection in DCSS

The concerns notwithstanding, there are ways to reduce risks for shareholders of subordinate voting shares, while allowing all shareholders to reap the benefits of DCSS. By enacting certain shareholder protections, such as coattail provisions and sunset clauses, companies can create DCSS that provide for greater alignment of interests between all common shareholders.

(1) Coattail Provisions

Canadian DCSS companies have almost universally adopted a coattail provisions.[4] [4] Coattail provisions ensure that holders of subordinate voting shares can convert their holdings to superior voting shares in the event of a takeover offer, thus allowing them to participate in the offer on the same terms. Coattail provisions have been a TSX listing requirement since 1987 and have removed most of the potential “private benefits of control” through a DCSS.

(2) Sunset Clauses

Sunset clauses impose a pre-determined end date for DCSS. These sunsets limit the relative freedom given to the shareholders of the superior voting right shares. Sunsets come in a variety of forms, including:

 	Time-based sunsets: whereby the superior voting rights cease after a specified time period (e.g., Teck’s Sunset).
 	Dilution sunsets: whereby the multiple voting shares return to single votes when the controlling shareholder’s voting power falls below a given threshold.
 	Event-driven sunsets: where the DCSS collapse follows a certain event, usually the death or disability of founder/controlling shareholder.

Certain proxy advisory services have started to recommend against voting in favour of multi-class share structures and unequal voting rights amongst shareholders, unless the company provides for a reasonable sunset of its multi-class share structure. Glass Lewis and the Institutional Shareholder Services consider sunsets of seven years or less to be reasonable, according to their 2023 proxy voting guidelines.[5] [5]

Conclusion

While Teck’s Dual Class Amendment marks another step in the growing trend towards the disappearance of DCSS in Canada, it might be too soon to say that the sun is setting on them entirely. Where shareholder concerns can be properly alleviated, these structures are a great way for founders to raise capital and confidently pursue their business goals. For the time being however, it does appear that the sun is rising on shareholder rights and protections in DCSS. The team at McMillan will continue to report on these developments.

[...]

[4] Institute for Governance of Private and Public Organizations, “The Case for Dual-Class of Shares – Policy Paper Number 11 [6]” (2019), page 8.

Read more [7]

[1] https://mcmillan.ca/insights/publications/is-the-sun-setting-on-dual-class-share-structures/#1
[2] https://mcmillan.ca/insights/publications/is-the-sun-setting-on-dual-class-share-structures/#2
[3] https://mcmillan.ca/insights/publications/is-the-sun-setting-on-dual-class-share-structures/#3
[4] https://mcmillan.ca/insights/publications/is-the-sun-setting-on-dual-class-share-structures/#4
[5] https://mcmillan.ca/insights/publications/is-the-sun-setting-on-dual-class-share-structures/#5
[6] https://igopp.org/wp-content/uploads/2019/09/IGOPP_PP_CaseDualShareClass_PP11_EN_v13_WEB.pdf
[7] https://igopp.org/wp-content/uploads/2023/05/McMillan-Is-the-sun-setting-on-dual-class-share-structures_May-2023.pdf]]></content>
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		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Shopify Shareholders ‘Approve’ Controversial “Founder Share” – With the Help of the Existing DCS</title>
		<link>https://igopp.org/en/shopify-shareholders-approve-controversial-founder-share-with-the-help-of-the-existing-multiple-voting-shares/</link>
		<comments>https://igopp.org/en/shopify-shareholders-approve-controversial-founder-share-with-the-help-of-the-existing-multiple-voting-shares/#respond</comments>
		<pubDate>Thu, 09 Jun 2022 17:22:59 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[IGOPP in the Medias]]></category>
		<category><![CDATA[IGOPP in the medias]]></category>
		<category><![CDATA[Actions multivotantes]]></category>
		<category><![CDATA[Chef de la direction]]></category>
		<category><![CDATA[Dual-class shares]]></category>

		<guid isPermaLink="false">https://igopp.org/shopify-shareholders-approve-controversial-founder-share-with-the-help-of-the-existing-multiple-voting-shares/</guid>
		<description><![CDATA[The 2022 Shopify AGM put the spotlight on two controversial theories for driving corporate success: the founder-CEO and multi-class share structures. When it went public in 2015, Shopify’s multi-class structure was fairly standard for an aspirational tech unicorn, if still unusual relative to capital markets as a whole. In recent years an increasing proportion of [&#8230;]]]></description>
		<content><![CDATA[The 2022 Shopify AGM put the spotlight on two controversial theories for driving corporate success: the founder-CEO and multi-class share structures.

When it went public in 2015, Shopify’s multi-class structure was fairly standard for an aspirational tech unicorn, if still unusual relative to capital markets as a whole. In recent years an increasing proportion of companies going public in the United States and Canada have opted for multi-class (also known as “dual-class”) share structures that provide superior voting rights to a designated share class over “subordinate” shareholders who buy in at or after the IPO. The designated superior shareholders are typically the founder(s) and early investors.

How did that work in practice? Prior to the 2022 AGM, Shopify’s founder and CEO, Tobi Lütke, together with fellow board member John Phillips, effectively dictated the outcome of all shareholder voting resolutions through their ownership of Class B Multiple Voting shares, which carry 10 votes each. Class B shares are 9.5% of outstanding equity but 51% of voting rights, with Lütke alone worth 34% of voting power. Both hold minimal Class A Subordinate voting shares. Class B shares can be converted on a 1:1 basis into Class A (but lose their multiple votes) for the purpose of being sold by the holder.

In most cases, the multi-class share structures are intended to be temporary, allowing the founders and early investors to maintain their influence over the company as it transitions into publicly listed status. In Shopify’s case, the company has become Canada’s greatest stock market success story of the high-tech era since Blackberry. And despite (or perhaps because of?) the successful transition, the board and management didn’t want to rock the boat quite yet.

Under Shopify’s former covenants, the multi-class structure would automatically collapse when Class B shares represent less than 5% of all outstanding equity (the “Dilution Sunset”). This event was deemed likely to occur in the coming months or years (we believe it was more likely to be sooner than later).

Why was the Dilution Sunset approaching? Because of the ballooning of the Class A share count since Shopify’s 2015 IPO, primarily through Class B shareholders converting to Class A and substantial equity-based employee compensation, all of which have reduced the Class B share capital proportionate to the aggregate outstanding equity, thereby making the collapse of the structure more likely as the 5% threshold nears.

At its June 7, 2022 annual shareholder meeting, Shopify proposed a drastic and novel rearrangement of its capital structure to pre-empt the Dilution Sunset and preserve the disproportionate voting power of the CEO.

The board, after negotiating with the CEO, recommended an arrangement under which Shopify would issue to the CEO a “Founder share” cementing disproportionate voting rights of 40% for life, provided that Mr. Lütke serves as at least one of: (i) board member, (ii) executive officer or (iii) consultant whose “primary engagement” is with Shopify.

Not only that, but Mr. Lütke would be permitted to reduce his economic stake by up to 70% of his current holdings, which currently equate to 6.3% of all outstanding equity, without giving up a single percentage point of his total voting power.

What was the board thinking?

It doesn’t take an expert in hostage negotiations to see that the independent board members were dealing from a position of relative weakness, or at the very least deference, compared to the already-powerful CEO.

For starters, as a matter of basic arithmetic, all Shopify board members owe their presence on the board to the support, or at least acquiescence, of the Class B multiple voting shareholders.

The special committee of independent directors also signposted early on that Mr. Lütke’s position as the individual “guiding the ship” was paramount. During negotiations lasting over the course of a year, the committee generally did not initiate any proposals to the CEO; rather, it waited for Lütke to propose terms. His first offer was to set and preserve the multiple voting power at 49.99%. Aside from one counter-proposal for 34% alongside a tighter service-based sunset and stricter divestment restrictions than those desired by Mr. Lütke, the committee did not push back. The final terms are as described above.

Clear from this is that the board places enormous faith in Mr. Lütke.

The history of corporate (North) America is replete with examples of one-company CEOs. The mythology of the self-made founder-CEO speaks to what for many are the most persuasive qualities of capitalism America-style. Shopify’s rise has seen it and Mr. Lütke compared to similar modern software and internet success stories with long-serving founder-CEOs, notably Microsoft (Bill Gates), Apple (Steve Jobs), Facebook (Mark Zuckerberg) and Amazon (Jeff Bezos). Of the aforementioned, all but Facebook have simple, equitable single class share structures, and an examination of their long-term record suggests that they were able to execute a vision that delivered enormous value to shareholders despite having one vote for each share.

Mr. Bezos maintained a substantial stake – enough to exercise effective control through an equitable structure – over many years; Mr. Bezos held approximately 25% in 2007, 19% in 2013 and today still holds approximately 13% despite having stepped down as CEO in 2021. Even Zuckerberg owns around 13% of all outstanding Meta Platforms (fka Facebook) stock, even though he’d need less than that to still guarantee effective control.

Shopify’s proposal to Mr. Lütke allows him to maintain effective control even while selling down up to 70% of his current 6% stake.

The Theory

The debate over whether multi-class structures should be permitted is contested. Proponents of either side can point to individual companies that have performed especially well or poorly, or indeed to singular events like the Succession-style blow-up in 2021 at Rogers Communication; in any case, performance assessments are relative, with some such companies, particularly in Canada, using a dual class structure to embed a founding family’s control of the business for multiple decades.

Like fractal geometry, the debate doesn’t end at the largest scale of the topic – i.e. should multi-class structures be permitted or not – but diverges into sub-debates around areas of best practice for application of the structure: what should be the ratio of voting superiority between the special class and the subordinate class? What form of sunset (expiry date) should be adopted – should it be service-based (e.g. the founder-CEO leaves their role), time-based (such as the seventh anniversary of the IPO) or dilution-based (where the multiple-voting shares automatically dissolve into the common stock class when they represent less than, for instance, 5% of all shares outstanding)? Should the sunset be a mix of all these?

While Glass Lewis in 2022 adopted a voting policy against multi-class structures without a reasonable time-based sunset (in our opinion, seven years or less from IPO), we are sympathetic to criticism of time-based sunsets as overly arbitrary.

In Canada, among the most thoughtful arguments against a blanket negative approach to dual class companies are those made by the Institute for Governance of Private and Public Organizations (“IGOPP”). The IGOPP has argued that companies with dual class structures are just as likely, if not more so, to deliver long-term growth as one-share-one-vote companies (see “Policy Paper No. 11: The Case for Dual-Class of Shares” [1], 2019.)

IGOPP believes there is “much merit to dual-class companies and family firms, provided holders of shares with inferior voting rights are well protected. [IGOPP’s emphasis].” IGOPP’s recommendations for ensuring the protection of subordinate shareholder rights include:

 	That voting strength of superior shares be capped at a ratio of 4:1, such that 20% of the equity would be required for absolute control (50%+ of votes). IGOPP implies that a ratio of greater than 10:1 is unacceptable and states that classes of shares with no voting rights should be prohibited.
 	Public disclosure of separate vote tallies for each class of shares.
 	That subordinate shareholders be entitled to elect one-third of board members.
 	Dilution sunset that would be triggered by the controlling shareholder’s voting power dropping below a percentage generally considered as a “blocking minority” – 33% (which would be 11.1% with a 4:1 ratio).

Shopify’s proposed Founder share and accompanying “governance update” does not include any of the above safeguards.

Glass Lewis View

In reviewing the proposed Founder share arrangement, we were struck by the degree to which the original dual-class structure (i.e. the Class A 1 vote / Class B 10 votes) appears to have aligned with its intended aims, with shareholder expectations and with those of other best practice standard-setters.

Shopify’s performance since listing publicly has been remarkable. So, to the extent that its dual-class structure insulated its early investors and leadership from short-term pressures, it fulfilled its purpose. Shareholders of Class A subordinate shares have been taken along for a glorious ride as Shopify became one of the main success stories in an extended bull market in which software and e-commerce companies outperformed. The company benefitted from a favourable consumer perception, peaking during pandemic-induced lockdowns, as the ‘anti-Amazon’ since its platform enables small businesses to sell to their customers directly, rather than having to compete in a single online marketplace and outsource order fulfilment.

As is often the way in the early years of a public company, particularly for a tech concern with a seemingly rocket-fuelled stock, common shareholders probably didn’t mind that their votes at general meetings were effectively meaningless.

Glass Lewis believes in the principle of one share, one vote, but our policy guidelines clearly earmark the period in each public corporation’s lifecycle in which an inequitable voting structure might be desirable: the early years. We agree that freeing up the founding leadership to concentrate on growing the business and trying to realize its vision is a strategy that works for some companies.

While in 2022 we settled on a seven-year time-based sunset as a general policy for newly public dual-class companies, sunset mechanisms may achieve a similar result via a different route.

If Shopify’s original dilution sunset is indeed close to triggering – and the board’s clamouring to propose the Founder share at this AGM suggests that it is – then it is doing so uncannily close to the seven-year anniversary of Shopify as a public company.

One of our main concerns with multi-class structures is that they may foster misaligned incentives between the superior voters and dispersed common shareholders, and that these can be exacerbated over the long-term. This is especially true of companies where the subordinate class has zero votes per share or where the gulf in votes per share is especially large (as noted above, best practice proponents recommend not exceeding 4 votes per share in order to preserve a semblance of economic alignment between superior and subordinate shareholders).

As such, a well-crafted dilution sunset makes sense: the superior shareholders may decide to use their disproportionate control of the company to, for example, issue a deluge of stock options to employees as the company grows and competes for talent. They may be totally justified in doing so (we’ve heard that software engineers can be expensive and that they tend to expect equity compensation). But a dilution sunset at least keeps the experience of the superior shareholders tethered to that of ordinary shareholders, who have good reason to be concerned both about excessive dilution and about the spectre of a shareholder with a small economic stake exercising effective control.

Read more [2]

&#160;

[1] https://igopp.org/wp-content/uploads/2019/09/IGOPP_PP_CaseDualShareClass_PP11_EN_v13_WEB.pdf
[2] https://www.glasslewis.com/shopify-shareholders-approve-controversial-founder-share-with-the-help-of-the-existing-multiple-voting-shares/]]></content>
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		<title>Shopify shares rise as tech company announces 10-for-1 stock split</title>
		<link>https://igopp.org/en/shopify-shares-rise-as-tech-company-announces-10-for-1-stock-split/</link>
		<comments>https://igopp.org/en/shopify-shares-rise-as-tech-company-announces-10-for-1-stock-split/#respond</comments>
		<pubDate>Mon, 11 Apr 2022 17:52:18 +0000</pubDate>
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		<description><![CDATA[Shopify Inc. co-founder, chair and chief executive Tobias Lutke has three young children. The billionaire is willing to give up the opportunity to pass along the company to his offspring in exchange for maintaining control for as long he works at the online commerce giant. Ottawa-based Shopify, Canada’s largest tech company, announced on Monday it plans [&#8230;]]]></description>
		<content><![CDATA[Shopify Inc. co-founder, chair and chief executive Tobias Lutke has three young children. The billionaire is willing to give up the opportunity to pass along the company to his offspring in exchange for maintaining control for as long he works at the online commerce giant.
Ottawa-based Shopify, Canada’s largest tech company, announced on Monday it plans a 10-for-1 stock split in late June; the share price promptly jumped by 3 per cent on the Toronto Stock Exchange. Shopify is the latest tech company to see its shares soar on news of a split; similar moves took place at Amazon.com Inc. and Tesla Inc. in recent weeks.
The Shopify board also unveiled a governance structure that would award Mr. Lutke newly minted founder’s shares that lock in 40 per cent voting control, even if the company issues additional stock – for example, to pay for a takeover – or Mr. Lutke sells a significant portion of his stake, currently worth more than $5-billion.
The wrinkle here is the 41-year-old founder’s new shares come with a sunset clause – they expire when Mr. Lutke leaves Shopify, or his holding falls to less than 30 per cent of current levels.
If shareholders approve Shopify’s restructuring at a vote scheduled for June 7, the country’s tech flagship will go from a dual-share company that can pass control through generations to a one-share, one-vote structure after the founder’s departure.
“These changes will enhance Shopify’s strategic flexibility,” Robert Ashe, Shopify’s lead independent director, said in a news release. “Tobi is key to supporting and executing Shopify’s strategic vision, and this proposal ensures his interests are aligned with long-term shareholder value creation.”
Shopify’s board unanimously recommended shareholders vote in favour of the new structure, along with the stock split. Investors should applaud this evolution. In a 2019 report, Institute for Governance of Private and Public Organizations chair Yvan Allaire said sunset clauses have “gained salience as institutional shareholders and various agencies try to curtail, rein in and put a time limit on the relative freedom that a dual-class of shares provides to entrepreneurs and family corporations.”
Shopify’s plans are a welcome break from the entrenched ownership at many family-controlled companies, including Rogers Communications Inc., and at entrepreneur-controlled tech businesses such as Facebook parent Meta Platforms Inc.
While more than 60 companies with dual-class shares are listed on the Toronto Stock Exchange, a number of entrepreneur-led companies, such as Onex Corp. and Alimentation Couche-Tard Inc., feature sunset clauses, similar to the planned structure at Shopify. It’s worth noting that Couche-Tard’s founders tried to extend their control of the company in 2015, only to abandon the move in the face of shareholder resistance.
Mr. Lutke founded Shopify in 2004 after writing the software needed to operate his online snowboard business. The company went public in 2015, with investors offered Class A shares that carry one vote, while Mr. Lutke and other insiders maintained control by owning Class B shares that carry 10 votes each, stock that can be transferred to spouses or offspring.
Last year, regulatory filings show, Mr. Lutke cashed out $623-million in Shopify stock under an automatic sales program put in place more than two years ago.
Right now, Mr. Lutke and Shopify director John Phillips, a retired lawyer and early investor, control 97 per cent of the company’s Class B shares, while current and former employees and directors own the rest. If shareholders approve the founder’s share, Mr. Phillips will convert all his class B shares into single-vote shares.
After Mr. Phillips swaps his multiple voting stock, Mr. Lutke will hold about 40 per cent of the votes at Shopify. In a news release, the board said using the founder’s shares to preserve this stake “was appropriate as it is approximately the voting power he would hold under the current share structure.”
Read more [1]

[1] https://mcusercontent.com/d1c76e2e88e07148ab7072c66/files/6bdb1d3c-f5a5-178f-9570-119892ca2d06/The_Globe_and_Mail_Shopify_shares_rise_as_tech_company_announces_10_for_1_stock_split_May_2022_.pdf]]></content>
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		<title>Couche-Tard’s end of special voting rights will be closely watched by critics, defenders of dual-class share structures</title>
		<link>https://igopp.org/en/couche-tards-end-of-special-voting-rights-will-be-closely-watched-by-critics-defenders-of-dual-class-share-structures/</link>
		<comments>https://igopp.org/en/couche-tards-end-of-special-voting-rights-will-be-closely-watched-by-critics-defenders-of-dual-class-share-structures/#respond</comments>
		<pubDate>Sun, 05 Dec 2021 19:53:34 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
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		<guid isPermaLink="false">https://igopp.org/couche-tards-end-of-special-voting-rights-will-be-closely-watched-by-critics-defenders-of-dual-class-share-structures/</guid>
		<description><![CDATA[n will set this week on the special voting rights held by the four founders of Alimentation Couche-Tard Inc., leaving the Canadian convenience store giant more exposed to investor pressure than ever before. Its fate will be closely watched by both critics and defenders of dual class share structures. Laval, Que.-based Couche-Tard is one of [&#8230;]]]></description>
		<content><![CDATA[n will set this week on the special voting rights held by the four founders of Alimentation Couche-Tard Inc., leaving the Canadian convenience store giant more exposed to investor pressure than ever before. Its fate will be closely watched by both critics and defenders of dual class share structures.
Laval, Que.-based Couche-Tard is one of Canada’s biggest companies, with a current market capitalization of $50.6-billion. It’s controlled by executive chairman Alain Bouchard and three other founders through a special class of stock that gives them 10 votes for every share they own. A so-called sunset clause – put in place in 1995 when the founders were in their 30s and 40s – says those super-voting rights will end when the youngest of them turns 65 or dies.
That clause will be triggered on Dec. 8, when the youngest founder, Jacques D’Amours, celebrates his birthday. The company’s two classes of shares will subsequently become one class, with uniform voting power. All of the company’s Class B shares will be delisted from the TSX at the close of trading on Dec. 7, and only Class A shares will trade at open the next day under the same ticker, ATD, Couche-Tard said Friday evening in an update on the process.
Mr. Bouchard, who grew up living in a trailer with five siblings and climbed from poverty to become one of Canada’s richest men through his corner store empire, has said that while this is an important moment in Couche-Tard’s history, the end of the company’s dual class share structure is largely a “non-event” for its operations. In his view, Couche’s continued strong performance will help keep any activist investors at bay, while its sheer size will limit the number of companies that could raise the amount of money needed to mount a hostile takeover attempt.
“We have been planning for this for some time,” Mr. Bouchard said in the update. He added that the founders will remain as directors and stay closely involved in the organization. “My commitment and leadership of the business will not change, and I am more confident than ever before that our size, our winning culture and strategy, and the structures that we have put in place … will serve the business well.”
There is more at stake, however, than the emotions of the founders, all of whom are now billionaires as a result of the company’s share price appreciation over the years. At a time when dual class share structures have once again come under scrutiny – a result of the family battle at Rogers Communications Inc. – what happens to Couche-Tard in the months and years ahead could have broader repercussions for the Canadian corporate landscape, observers say.
The number of companies adopting dual class share structures in both Canada and the United States is rising, even as governance experts continue to warn about the drawbacks of such systems. Critics say dual class shares can entrench a company’s leadership when it performs poorly, by limiting the power of shareholders to vote in new directors.
More companies with dual class systems listed on the TSX in the first nine months of 2021 than in the prior two years combined, according to data from the TMX Group.
In Canada, companies that unwind their dual class share structures are “really rare,” said Catherine McCall, executive director of the Canadian Coalition for Good Governance (CCGG). She said what happens at Couche-Tard will be a petri dish experiment that will show how things can unfold for other companies. Her organization represents 54 major institutional investors in Canada, which collectively manage $5-trillion in assets.
The results at Couche-Tard could fuel arguments on both sides of the dual class share debate, Ms. McCall said. “If there are issues with control, then the people that are very much in favour of dual class shares are going to say ‘we told you so.’ And especially in Quebec, that’s an issue.”
All four founders have been selling some of their stakes in the company this year as the sunset date approaches.
[...]
Together, the four founders own 22 per cent of the company’s equity, and they will continue to have 66 per cent of its voting rights while the multiple-voting system still exists. After their special rights expire, that stake, in combination with the support of friendly shareholders such as the Caisse de dépôt et placement du Québec, will still give them “almost a blockage type of group if there’s something we don’t like,” Mr. Bouchard has said.
While that might be true, Couche-Tard will lose the immunity it had against unsolicited bids when the dual class system is dissolved, said François Dauphin, chief executive of Montreal’s Institute for Governance of Private and Public Organizations.
More generally, the company will be more vulnerable to external pressure than it has ever been, he added. For example, institutional investors or proxy advisory firms could press Couche-Tard to change elements of its governance and it will have to respond. Already, the company has signalled it will move to taking analyst questions in real time on its quarterly calls instead of compiling their queries in advance.
“Some people will be happy about this,” Mr. Dauphin said of the move to a single class of shares. “We will see in a few years. If we lose a company like Couche-Tard due to a hostile takeover or reverse takeover by another company somewhere, we might be disappointed.”
In 2016, the founders proposed extending their voting rights, but the company cancelled a shareholder vote on the proposal at the last minute after concluding that it did not have the two-thirds support needed from subordinate shareholders. Behind the scenes, investors expressed uneasiness about the founders’ children inheriting control of Couche-Tard.
Mr. Bouchard took the rejection personally. But time, and the company’s growth since then, appear to have healed what was once a raw wound.
Read more [1]

[1] https://igopp.org/wp-content/uploads/2021/12/Couche-Tard’s-end-of-special-voting-rights_The-Globe-and-Mail_December-2021.pdf]]></content>
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		<title>Rogers is ‘worst case scenario’ for otherwise profitable dual-class share structures</title>
		<link>https://igopp.org/en/rogers-is-worst-case-scenario-for-otherwise-profitable-dual-class-share-structures/</link>
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		<pubDate>Mon, 08 Nov 2021 16:37:58 +0000</pubDate>
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		<description><![CDATA[A recent boardroom clash at Rogers Communications Inc. has revealed the governance risk associated with dual-class share companies, but experts say businesses with that structure can be hard to avoid for investors because they’re big profit generators. Companies with dual-class shares issue different sets of common shares that have different voting and control rights. This [&#8230;]]]></description>
		<content><![CDATA[A recent boardroom clash at Rogers Communications Inc. has revealed the governance risk associated with dual-class share companies, but experts say businesses with that structure can be hard to avoid for investors because they’re big profit generators.
Companies with dual-class shares issue different sets of common shares that have different voting and control rights. This often gives one group of shareholders an outsized share of those rights, typically the firm’s founders, family members or executives.
The structure is used by companies as wide-ranging as Google parent Alphabet and Ford Motor Company. In Canada, the list includes Shopify Inc., Canada Goose Holdings Inc., Bombardier Inc. and Alimentation Couche-Tard Inc.
Investment experts say the structure can be problematic when one class of shareholders wants to take the company in a contested direction, like Edward Rogers did with his late father’s company.
Because Edward Rogers controlled 97.5 per cent of the telecommunication’s firm’s Class A shares, he was able to replace five board members over objections from other directors including his mother and sisters.
A court on Friday confirmed Edward Rogers’ right to make the changes since he held voting control.
“The worst case (with dual-class shares) is what we see at Rogers now,” said François Dauphin, chief executive of the Institute for Governance of Private and Public Organizations in Montreal.
But even these scenarios don’t often cause investors to balk at putting money behind companies with dual-class shares because the structure is so common, especially at top-earning companies, he said.






[...]






Dauphin pointed out that a lot of the names on that list — Shopify, Stingray Group Inc., Lightspeed Commerce Inc. and Nuvei Corp.-- have performed well on the stock market in recent years, making them hard to ignore for investors concerned about dual-class structures.
For example, Shopify shares were worth about $50 five years ago, but are worth nearly $2,000 now.
“Someone not investing in new class share structures would have missed out on a lot of very good, nice new companies, which do have the growth potential that no other companies do have now,” said Dauphin.
While Dauphin understands why people might worry about dual-class shares, he thinks they often make favourable investments because of the influence they have on entrepreneurs.
“They can really have a longer term horizon ... which is extremely interesting for those new technology companies that need that time in order to get those new ideas to mature,” he said.
He also likes the structure because it typically offers some immunity to hostile takeovers, as the higher class and number of shares held by family members or founders is often enough to thwart an acquisition or merger, even if it’s supported by another class of shareholders.
However, for Alexander Dyck, professor of finance, economic analysis and policy at the University of Toronto, the protection against hostile takeovers is what he finds problematic.
“After the founder is no longer in charge, it might be very useful to have someone else coming in and overviewing and if management is not up to task, replacing them or having a take over in some other way,” he said.
Dyck finds the longer a company goes with a dual-class structure, the more likely it is to encounter problems, especially as a firm changes hands to a new generation of a family, sometimes one with less business acumen.
Despite the challenges and his belief in the need for oversight in corporate governance, Dyck agrees many dual-class share companies have had tremendous returns.
“It’s a risk, but when you’re trying to take a look at risk and return, you might find that there’s more return relative to the risk in this company,” he said.
“Investors understand that, so there is a cost.”
Read more [1]

[1] https://igopp.org/wp-content/uploads/2021/11/Rogers-is-‘worst-case-scenario’-for-otherwise-profitable-dual-class-share-structures-_-The-Star_November-2021.pdf]]></content>
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