Supreme Court Reverses Ruling Against Slack Technologies Over Direct Listing

The Supreme Court ruled in favor of a Big Tech company on June 1, issuing a unanimous ruling that limits the power of shareholders to sue over misleading statements made by companies when selling shares in a direct listing. Justice Neil Gorsuch wrote the court’s unanimous opinion (pdf) in Slack Technologies v. Pirani (court file 22-200). Slack is a unit of Salesforce Inc., a business software maker that is headquartered in San Francisco. Slack, an instant-messaging company, was accused of making false statements in connection with public disclosures it made in 2019 when it offered corporate shares for sale. Slack, based in San Francisco, was purchased for almost $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 (IPOs), 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 whether 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 other problems. The U.S. Court of Appeals for the 9th Circuit refused 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 that the shares in question had been registered under offering materials that are alleged to have been misleading. The appeals 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 make direct listings in order to escape liability for making excessively sunny claims. Slack argued in front of the Supreme Court that the 9th Circuit’s decision was 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. Shareholders argued that Slack violated the federal Securities Act of 1933 and that the company’s disclosure documents provided inaccurate information about service outages, customer credits for service disruptions, and the competition Slack’s product faced from businesses that used Teams, a software made by Microsoft. In its decision on June 1, the Supreme Court agreed with Slack, vacating the 9th Circuit’s ruling and remanding the case to that court for further proceedings. Lower federal courts have for many years held that liability under Section 11 of the Securities Act “attaches only when a buyer can trace the shares he has purchased to a false or misleading registration statement,” Gorsuch wrote for the court. But in a recent ruling, the 9th Circuit went in another direction, holding that a plaintiff may sometimes recover under Section 11 “even when the shares he owns are not traceable to a defective registration statement.” To bring a Section 11 claim, “the securities held by the plaintiff must be traceable to the particular registration statement alleged to be false or misleading,” Gorsuch wrote. To be successful, a plaintiff must “plead and prove that he purchased shares traceable to the allegedly defective registration statement,” the justice wrote. Jennifer J. Schulp, director of financial regulation studies at the Cato Institute’s Center for Monetary and Financial Alternatives, hailed the new ruling. The Cato Institute filed a friend-of-the-court brief in the case. “The Supreme Court’s unanimous decision preserves Congress’s authority to determine the delicate balance between creating liability for inaccurate disclosure and incentivizing companies to go public,” Schulp told by email. “The Court sided with decades of precedent limiting strict liability under the Securities Act to purchasers of registered securities,” Schulp wrote. “Rather than putting an end to direct listings, as the 9th Circuit’s ruling threatened to do, the Supreme Court decision keeps the playing field level, allowing this alternative method of going public to provide paths for companies that may have otherwise chosen to stay private due to the expense and delay of a traditional IPO.”

Supreme Court Reverses Ruling Against Slack Technologies Over Direct Listing

The Supreme Court ruled in favor of a Big Tech company on June 1, issuing a unanimous ruling that limits the power of shareholders to sue over misleading statements made by companies when selling shares in a direct listing.

Justice Neil Gorsuch wrote the court’s unanimous opinion (pdf) in Slack Technologies v. Pirani (court file 22-200). Slack is a unit of Salesforce Inc., a business software maker that is headquartered in San Francisco.

Slack, an instant-messaging company, was accused of making false statements in connection with public disclosures it made in 2019 when it offered corporate shares for sale.

Slack, based in San Francisco, was purchased for almost $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 (IPOs), 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 whether 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 other problems.

The U.S. Court of Appeals for the 9th Circuit refused 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 that the shares in question had been registered under offering materials that are alleged to have been misleading.

The appeals 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 make direct listings in order to escape liability for making excessively sunny claims.

Slack argued in front of the Supreme Court that the 9th Circuit’s decision was 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.

Shareholders argued that Slack violated the federal Securities Act of 1933 and that the company’s disclosure documents provided inaccurate information about service outages, customer credits for service disruptions, and the competition Slack’s product faced from businesses that used Teams, a software made by Microsoft.

In its decision on June 1, the Supreme Court agreed with Slack, vacating the 9th Circuit’s ruling and remanding the case to that court for further proceedings.

Lower federal courts have for many years held that liability under Section 11 of the Securities Act “attaches only when a buyer can trace the shares he has purchased to a false or misleading registration statement,” Gorsuch wrote for the court.

But in a recent ruling, the 9th Circuit went in another direction, holding that a plaintiff may sometimes recover under Section 11 “even when the shares he owns are not traceable to a defective registration statement.”

To bring a Section 11 claim, “the securities held by the plaintiff must be traceable to the particular registration statement alleged to be false or misleading,” Gorsuch wrote.

To be successful, a plaintiff must “plead and prove that he purchased shares traceable to the allegedly defective registration statement,” the justice wrote.

Jennifer J. Schulp, director of financial regulation studies at the Cato Institute’s Center for Monetary and Financial Alternatives, hailed the new ruling. The Cato Institute filed a friend-of-the-court brief in the case.

“The Supreme Court’s unanimous decision preserves Congress’s authority to determine the delicate balance between creating liability for inaccurate disclosure and incentivizing companies to go public,” Schulp told  by email.

“The Court sided with decades of precedent limiting strict liability under the Securities Act to purchasers of registered securities,” Schulp wrote.

“Rather than putting an end to direct listings, as the 9th Circuit’s ruling threatened to do, the Supreme Court decision keeps the playing field level, allowing this alternative method of going public to provide paths for companies that may have otherwise chosen to stay private due to the expense and delay of a traditional IPO.”