WASHINGTON (CN) — Attorneys for the digital workplace giant Slack fought at the Supreme Court on Monday to quash claims about its direct listing on the New York Stock Exchange in June 2019.
The company was among the first on Wall Street to take advantage of the direct listing mechanism after the SEC approved it in 2018, allowing early investors or insiders to list their shares on a public exchange without the company undergoing a formal public offering.
Slack registered 118 million shares on the NYSE and permitted 165 million additional insider shares to be traded. Trading opened at $38.50 per share on June 20, 2019, but that price fell about 33% to less than $26 in three months — a loss of $1.48 billion in market capital. Fiyyaz Pirani quickly went to court with misrepresentation claims, but Slack says the lawsuit can only advance if Pirani proves that the shares he bought were registered.
To otherwise allow Pirani's lawsuit “would run roughshod over the core statutory distinction between registered and exempt shares," Gibson Dunn attorney Thomas Hungar argued this morning before the Supreme Court, urging the justices to reverse a Ninth Circuit decision.
“And it would dramatically expand the scope of liability, disrupt the capital formation process, and upset settled expectations by overturning decades of case law and SEC interpretation consistently holding that plaintiffs must prove they purchased registered shares,” Hangar continued.
In the direct listing process, unregistered insider shares and shares registered with the SEC are available to investors in tandem, making it impossible for brokers to tell whether a share purchased is SEC registered or not. Pirani's attorneys argued in their response brief that there is no difference in this type of offering between shares that are registered and sold and those that are not registered and sold.
"The direct listing registers certain of a company’s shares held by early investors and insiders which had to be registered because they did not meet Rule 144’s holding requirements for resale, and creates a public market for those shares," the brief explains. "At the same time, the direct listing also creates a public market for the same type of shares that could be resold without having to be registered because they met the SEC holding requirements for exempt securities."
In an initial public offering, by contrast, insiders are usually restricted initially from selling their shares during a “lockup period” that allows brokers to distinguish between the two kinds of shares when they are sold to the public.
Pirani accuses Slack of violating Sections 11 and 12 of the Securities Act of 1933 by making misleading statements in its registration statement and understating its potential liability to users for service disruptions. He says Slack also misrepresented its competition with Microsoft Teams.
Slack, which was acquired by Salesforce in 2021 for $27.7 billion in cash and stock, petitioned the justices to review the case last year.
“The Ninth Circuit’s policy-driven departure from text and precedent creates needless uncertainty over who may sue under the Securities Act and upsets the careful balance struck by Congress,” it wrote. “By making the country’s largest circuit a dramatically more favorable forum for Section 11 and 12 claims than any other circuit, the decision below also virtually guarantees that all such claims will now be brought exclusively in the Ninth Circuit under the Securities Act’s generous venue provision, precluding further development of the law absent this Court’s review.”
If true, Slack’s argument would mean Pirani has no standing to sue the company under Section 11, which allows suits by “any person acquiring such security,” as the tech giant holds.
Pirani argued against this.
“Under the applicable SEC rules, regardless of whether the securities were registered or unregistered, the securities could not be sold to the public on a national exchange without an effective registration statement being on file,” the response brief from his attorneys states. “In Slack’s case, all of the shares sold to the public, registered and unregistered, were previously issued shares of Slack’s Class A common stock. Under the circumstances, all of the securities that were purchased fit neatly into the term ‘such security’ in Section 11.”
Representing Pirani on Monday, attorney Kevin Russell focused on the words "such security" in Section 11.
“Petitioner says 'such security' refers exclusively to what they call registered shares," he said. "But the statute doesn't use that term or provide a definition for it. And neither do petitioners.
“The body of law that they're pointing to simply says you have to show that you purchased under the registered offering that was governed by the registration statement that you said was misleading, as opposed to issued a notice and registration statement a few years earlier,” Russell continued.
Justice Ketanji Brown Jackson seemed concerned at arguments over an exemption in the statute.
“If you were right about your thesis, if you were right, that 12(a) really is all about registered shares, then we wouldn't see an exemption,” Jackson told Hungar.
Justice Brett Kavanaugh meanwhile seemed concerned about the lack of precedent for Slack's appeal.
“I'm a bit concerned about citing that issue without the SEC here without more law out there without knowing more about the section 12 issue,” Kavanaugh said.
“Why not allow the lower courts to sort out the section 12 issue before we give a definitive ruling on that?” Kavanaugh questioned.
Pointing to an amicus brief from former SEC officials, the Trump appointee suggested that the regulatory commission expected that direct listing the registration statement would cover all the securities.
“They say that your position would essentially transform the [law] into an opt-out regime for direct listings and that we shouldn't do that,” Kavanaugh pointed out.
“That's clearly wrong for multiple reasons,” Hungar responded. “In the first place ... the SEC approved the registration in this case and indeed allowed it to take effect in advance of the normal timeframe after reviewing it.”
Justice Elena Kagan seemed hesitant on Slack’s argument as well, saying sections 11 and 12 targeted “two very different things.”
“One is targeting dishonesty and creating a registration statement and the other is targeting dishonesty in certain kinds of sales period with or without a registration statement,” she said.
Pirani’s lawyer agreed with this point.
“They have very different language,” said Russell. “The textual ambiguity that arises in Section 11 comes from the fact that such security doesn't have a grammatical reference. It does in Section 12. And unambiguously refers to a security not a registered security.”
Justice Sonia Sotomayor asked what Russell would recommend happen if the court finds that registration tracing is required.
“No, I think you should leave it to the lower court,” said the lawyer.
Chief justice John Roberts seemed unpersuaded by Russell’s argument.
“The statute says ‘such security,’” the chief justice said. “I mean, that's a big hurdle for you to get over.”
“You say that Congress must have intended everybody to be able to sue and that we should not be too punctilious about looking at such and such security,” Roberts continued.
Kagan agreed.
“It does seem to me like you have a hard road to hoe here," she said. "Granted, ‘such security’ doesn't have an antecedent, but why shouldn't we read it Mr. Hungar’s way?”
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