Supreme Court grants Slack reprieve in shareholder lawsuit over 2019 direct listing

The US Supreme Court has granted Slack Technologies, a subsidiary of Salesforce, an opportunity to evade a shareholder lawsuit regarding the company’s 2019 direct listing. In a unanimous ruling, the court overturned a previous decision that allowed Fiyyaz Pirani’s proposed class action lawsuit to proceed, citing an incorrect interpretation of federal investor protection law. The San Francisco-based 9th US Circuit Court of Appeals has been instructed to review the case.

Pirani’s lawsuit alleged that Slack’s registration statement and prospectus for its direct listing contained misstatements about service outages, customer credit promises, and competition from Microsoft’s rival software, Teams. Slack argued that the lawsuit should be dismissed, as Pirani cannot prove that he purchased registered shares specified in the allegedly misleading registration statement, rather than exempt shares. The justices sided with Slack on this matter.

“Salesforce, a major business software maker, purchased Slack for US$27.7 billion in 2021.”

Slack contended that Section 11 of the Securities Act, which allows plaintiffs to sue for falsities in a registration statement if they bought “such security”, refers to registered shares, not unregistered ones. Section 12 focuses on untrue statements in a prospectus accompanying the sale of a security.

In a direct listing, approved by the SEC in 2018, registered shares and unregistered shares of early investors are made available to the public simultaneously. This differs from an IPO, where new registered shares are offered to the public, and existing shareholders are typically prohibited from selling their unregistered shares for a certain period.

“Slack’s direct listing released 118 million shares that were registered under its registration statement and 165 million pre-existing shares that were exempt from registration.”

Following a drop in Slack’s stock price, Pirani filed the lawsuit. In 2021, the 9th US Circuit Court of Appeals in San Francisco rejected Slack’s attempt to dismiss the case on the grounds that Pirani could not prove his shares were registered. The court argued that this would create a loophole in the context of a direct listing, undermining the purpose of Section 11, reports Channel News Asia.