WASHINGTON (CN) — The Supreme Court dealt a blow Thursday to the class action that Slack Technologies faces over its direct listing on the New York Stock Exchange.
Approved only since 2018, direct listings are a new possibility for companies that want to sell their shares without undergoing an initial public offering. Early investors or insiders in a company can instead list their shares directly. The case here hinges on a particularity in the direct listing process where 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.
In an IPO, 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.
Slack claims that any investor suing it for misrepresentation would lack jurisdiction without proof that they bought registered shares.
A leader in the digital workplace space, Slack was among the first on Wall Street to take advantage of the direct listing mechanism. It 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 in three months that price had fallen about 33% to less than $26 — a loss of $1.48 billion in market capital. One investor, Fiyyaz Pirani, quickly went to court with misrepresentation claims and thus far has survived Slack's efforts to dismiss.
The Supreme Court ended that track record in a unanimous ruling Thursday.
“Our only function lies in discerning and applying the law as we find it,” Justice Neil Gorsuch wrote for the court. “And because we think the better reading of the particular provision before us requires a plaintiff to plead and prove that he purchased shares traceable to the allegedly defective registration statement, we vacate the Ninth Circuit’s judgment.”
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.
The high court took issue, however, with Piriani’s argument that Slack issued a flawed registration statement.
“A reading like that would allow his case to proceed because, but for the existence of Slack’s registration statement for the registered shares, its unregistered shares would not have been eligible for sale to the public,” Gorsuch wrote. “Beyond assuring us that the rule he proposes would save his case, however, Mr. Pirani does not offer much more. He does not explain what the limits of his rule would be, how we might derive them from §11 [Section 11 of the Securities Act of 1933], or how any of this can be squared with the various contextual clues we have encountered suggesting that liability runs with registered shares alone.”
The high court further declined to endorse the plaintiff’s argument that a broader reading of the Securities Act, one that expanded liability for falsehoods and misleading omissions, would better accomplish the purpose of the law.
“That Congress could have been clearer, no one disputes. But none of this proves it adopted anything like the rule Mr. Pirani proposes,” Gorsuch wrote.
Gibson Dunn attorney Thomas Hungar argued for Slack this past April, while Pirani was represented by attorney Kevin Russell.
Neither lawyer immediately responded to a request for comment on the ruling Thursday.
In 2021, Slack was acquired by Salesforce for $27.7 billion in cash and stock.
This story is developing and will be updated.
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