• Samuel Aby

Is Shopify's much-anticipated stock split about to fall through?

Updated: Jun 3

One of the proposed shareholder initiatives, which was expected to be well-received by investors, has encountered unexpected opposition.

Stock splits have resurfaced as a hot topic, propelled by a bull market that has pushed the value of certain stocks beyond the grasp of many ordinary investors. Shopify, an e-commerce platform provider, is one such stock (SHOP 10.33 percent ).

Following the stock's incredible run, which saw it gain as much as 6,350 percent since its IPO in 2015, management announced a 10-for-1 stock split. The motion, which calls for a change to the company's articles of incorporation, will be voted on during the company's annual and extraordinary meeting of shareholders on June 7.

However, one of the measures is encountering opposition from the two major shareholder advisory firms, raising the likelihood that the legislation may not be approved by Shopify shareholders.

The Object In Question Is..

Shopify disclosed plans for changes to its governance structure in an early April regulatory filing that was "intended to support the company's continuing long-term growth." On its "aim to make commerce better for everyone," the corporation stated that it "prioritized long-term value development."

The bill would create a new class of nontransferable founder shares, which would be controversial. The founder shares, when coupled with CEO Tobi Lütke's existing Class B shares, would provide the CEO with 40 percent of the entire voting power of the outstanding stock, which would be in place permanently.

Certain elements in the plan would "sunset" the nontransferable founder shares, such as if Lütke no longer served in a senior management role or if his overall ownership holding fell below a level equivalent to 30% of the Class B shares.

Is there a rebellion among shareholders?

Institutional Shareholder Services (ISS), a shareholder and proxy consulting firm, sent a report to clients advising them to vote against the initiative.

"Market best practices usually call for adhering to the one-share, one-vote approach, with the goal of aligning economic interest and voting power within a specific firm," according to ISS's research released last week. The founder share "needs minority shareholders to effectively adopt a multiple class share structure for far longer than was envisioned" at the time of the company's public debut, according to the company's website.

Will it make a difference?

To pass, at least two-thirds of the votes cast (in person or by proxy) at the shareholder meeting on June 7 must be in favor of the change in Shopify's proposed governance structure. It would be simple to predict that the plan will succeed because it has the support of the board of directors and Lütke himself.

But it's not that easy. Institutional investors, such as mutual funds, pension funds, hedge funds, and index funds, own the great majority of outstanding stock in publicly listed firms in the United States, accounting for around 70% of all shares. Furthermore, institutional investors are more likely to vote by proxy than individual investors, with 91 percent of institutional investors voting by proxy.

With a combined market share of 97 percent in proxy advising, ISS and Glass Lewis have a lot of leverage. According to estimates, the two companies control proxies for about 38% of all shareholder votes. Furthermore, according to certain research, the firm's ideas might influence up to 30% of the vote. It'll be interesting to see if this is enough to swing the Shopify vote next week.

The stock split will almost certainly be approved even if stockholders reject the measure regarding the founder shares. Most importantly for shareholders, the two issues — the measure regarding the founder shares and the 10-for-1 stock split — will be voted on separately at the meeting on June 7, so the stock split will almost certainly be approved even if stockholders reject the measure regarding the founder shares.

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