The Supreme Court decided on Dec. 13 that it will take up the appeal of instant-messaging company Slack Technologies, which is accused of making false statements in connection with public disclosures it made in 2019 when it offered corporate shares for sale.
Pro-business groups say a lower court ruling against the company that allowed the lawsuit to move forward unnecessarily interfered with markets and would ultimately hurt investors by making it more difficult to do business. The company’s investors, on the other hand, say they were treated unfairly and are demanding redress.
San Francisco-based Slack was purchased for close to $28 billion in a cash-and-stock transaction. But instead of going the usual route and making a formal public stock offering, the company made a direct listing after the U.S. Securities and Exchange Commission approved the alternative procedure in 2018.
In initial public offerings, insiders are generally restricted initially from selling their shares, but in direct listings, unregistered insider shares and registered shares made available by way of offering materials are presented to investors at the same time. Brokers don’t differentiate between the two kinds of stock, so it’s nearly impossible to know if a share bought in a direct listing has been registered, according to a Reuters summary.
In mid-2019, Slack registered 118 million shares for resale, which permitted 165 million more shares exempt from registration to go on the market. A few months later, investors sued in federal court in California after the company disclosed that it lost $8.2 million because of service interruptions. The investors claimed that Slack’s disclosure documents didn’t mention downtime issues or discuss problems with the Teams application developed by Microsoft Corp.
The U.S. Court of Appeals for the 9th Circuit declined to block the investors’ class-action lawsuit, disagreeing with Slack’s contention that investors could move forward with the suit only if they could demonstrate the shares in question had been registered under offering materials that are alleged to have been misleading.
The court determined that halting lawsuits brought by investors in direct listings would give rise to a “loophole” in securities law and provide companies with incentives to go the direct listing route in order to escape liability for making excessively sunny claims.
Slack argued that the 9th Circuit’s decision is in conflict with other appellate court decisions and would give investors a green light to litigate over offering materials without connecting the stock to the appropriate offering.
Several pension funds filed friend-of-the-court briefs with the high court urging it to allow the decision, while business groups filed briefs supporting Slack’s position.
The case is Slack Technologies v. Pirani, court file 22-200.
The Epoch Times reached out for comment to Slack’s attorney, Thomas G. Hungar of Gibson, Dunn and Crutcher LLP, and the investors’ attorney, Lawrence Paul Eagel of Bragar Eagel and Squire PC, but didn’t receive a reply from either by press time.
However, two groups supporting Slack did comment on the record.
Jennifer J. Schulp, director of financial regulation studies at the Cato Institute’s Center for Monetary and Financial Alternatives, welcomed the ruling.
“We’re pleased that the Supreme Court has chosen to grant certiorari in the Slack matter,” she said by email.
“The 9th Circuit’s wrongly decided decision in this case undoes one of the longest standing precedents in federal securities case law and threatens not only the viability of direct listings but also of the entire initial public offering ecosystem.”
Cory L. Andrews, general counsel and vice president of litigation at Washington Legal Foundation, said the high court’s decision to accept the appeal “is encouraging.”
For more than 50 years, federal courts of appeal have “uniformly held” that to prove a violation of securities law, “a plaintiff first must ‘trace’ their shares to the offering that made the alleged misrepresentations or omissions.”
The 9th Circuit’s “departure from this consensus” and from the text of securities legislation “upsets Congress’s carefully balanced liability framework,” Andrews said by email.
