(Reuters) – A U.S. Supreme Court justice on Monday weighed a bid by Salesforce Inc.’s Slack Technologies to avoid a lawsuit over its 2019 IPO in a case that could undermine shareholders’ ability to sue companies for alleged wrongdoing when they go public.
The justices heard arguments in an appeal by Slack, which makes workplace communication software, of a lower court ruling that allowed the proposed class action filed by shareholder Fiyyaz Pirani for alleged violations of a federal investor protection law to proceed. A direct listing is an alternative to a traditional IPO.
Questions asked by the justices indicated that even if they side with Slack on part of the case, they may send it back to lower courts to further consider the full scope of Mr. Pirani̵7;s claim.
Slack argues that Pirani’s lawsuit alleging violations of Sections 11 and 12 of a federal law called the Securities Act of 1933 must be dismissed because he cannot prove that he purchased registered shares that were specified in the company’s allegedly misleading registration statement for the direct listing. , rather than shares that were exempt from registration. The registration statement was filed with the US Securities and Exchange Commission.
Salesforce, a major business software maker, bought Slack for $27.7 billion in 2021.
The justices appeared open to Slack’s view that Section 11 of the Securities Act, which allows plaintiffs to sue for falsehoods in a registration statement if they purchased “such securities,” refers to registered, not unregistered, shares.
“The statute says, ‘such certainty.’ I mean that’s the big hurdle for you to get over,” conservative Chief Justice John Roberts told Mr. Pirani’s lawyer, Kevin Russell.
Liberal Justice Elena Kagan told Russell: “It seems to me that you have a hard time hacking here.”
But some judges also seemed hesitant to support Slack’s view of Section 12 claims — which focus on untrue statements in a prospectus accompanying the sale of a security — saying there is little case law and the SEC itself has not weighed in on the issue.
“That strikes me as a big question for these direct listings and something that I’m not sure we’re fully equipped for right now,” conservative Justice Brett Kavanaugh told Slack’s attorney, Thomas Hungar.
In a direct listing, an approach approved by the SEC in 2018, registered shares and unregistered shares of early investors in a company are made available to the public at the same time. It differs from an IPO, under which newly registered shares are offered to the public while existing shareholders are usually prevented from selling their unregistered shares for months.
Slack’s direct listing released 118 million shares of record under its registration statement and 165 million pre-existing shares that were exempt from registration.
When Slack’s stock price fell, Pirani sued, alleging that the company’s registration statement and prospectus contained misrepresentations about service interruptions, the credits it promised to pay customers when service was interrupted, and the competition it faced from Teams, Microsoft’s competing software.
In 2021, the San Francisco-based 9th US Circuit Court of Appeals rejected Slack’s bid to dismiss the case because Pirani can’t prove his shares were registered, saying the argument in the context of a direct listing would “create a loophole large enough to undermine the purpose of section 11.”