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US Supreme Court to hear dispute over Slack’s direct stock listing

The U.S. Supreme Court on Tuesday agreed to hear a bid by Slack Technologies Inc, part of Salesforce Inc, to avoid a lawsuit accusing the workplace communication software company of misstatements in its 2019 direct listing – an alternative to an initial public offering.

The justices took up San Francisco-based Slack’s appeal of a lower court’s ruling last year that an investor named Fiyyaz Pirani could pursue a class action lawsuit against the company and its executives without proving the shares he bought in Slack’s direct listing were registered, rather than unregistered.

The company, acquired by Salesforce last year for $27.7 billion in cash and stock, was among the first to offer shares in a direct listing after the U.S. Securities and Exchange Commission approved the process in 2018.

In initial public offerings, insiders are often restricted initially from selling their shares. In direct listings, unregistered insider shares and registered shares issued pursuant to offering materials are available to investors at the same time.

Because brokers do not differentiate between them, it is practically impossible to know whether a share purchased in a direct listing was registered or not.

In June 2019, Slack registered 118 million shares for resale, allowing 165 million more shares exempt from registration to be traded.

Months later, investors sued in a federal court in San Francisco after the company revealed an $8.2 million revenue hit tied to service outages. They said Slack’s offering materials misleadingly failed to disclose downtime issues and the strength of competitor Microsoft Corp’s Teams application.

The San Francisco-based 9th U.S. Circuit Court of Appeals ruled that the case could go forward, rejecting Slack’s argument that Pirani could sue only if he could show that the shares he owned were registered under the allegedly misleading offering materials.

The 9th Circuit ruled that blocking lawsuits by investors in direct listings would create a “loophole” in U.S. securities law and incentivize companies to use the method to avoid liability for overly optimistic claims.

In its appeal to the Supreme Court, Slack said the 9th Circuit’s ruling conflicted with decisions by other courts and would allow investors to sue over offering materials without tracing their stock back to the applicable offering.

Pirani wrote in court papers that previous cases dealt with successive offerings and that the 9th Circuit was the first to consider direct listings.

The U.S. Chamber of Commerce business lobby filed a brief in support of Slack, while a group of pension funds urged the Supreme Court to let the 9th Circuit ruling stand. US News

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