Supreme Court Wary of Broad Ruling in Slack Shareholder Case (1)

The US Supreme Court hinted at a narrow ruling in a case involving Salesforce Inc.’s Slack unit as the court considered restricting shareholder suits over company statements issued as part of a direct listing.

Two potentially pivotal justices, Brett Kavanaugh and Neil Gorsuch, voiced interest in kicking part of the case back to a federal appeals court rather than issuing a definitive ruling.

The case marks the Supreme Court’s first look at a direct listing since the Securities and Exchange Commission authorized the practice in 2018. In a direct listing, companies go public without selling shares through an initial public offering, instead letting early investors sell their registered and unregistered shares on a public exchange.

The justices are considering a suit by Fiyyaz Pirani, who contends a 2019 Slack registration statement failed to disclose the extent to which the company would have to provide credits to customers over service disruptions. Salesforce acquired Slack in 2021.

Salesforce contends Pirani lacks legal standing to sue under Sections 11 and 12 of the 1933 Securities Act because he bought unregistered shares, rather than the shares registered under the allegedly misleading statement. A federal appeals court let the suit go forward.

Kavanaugh and Gorsuch both suggested they might side with Slack on Section 11 but return the case to the appeals court to revisit Section 12. Kavanaugh said he was “worried about making a mistake” given that neither the lower courts nor the SEC had extensively analyzed the Section 12 issue.

Section 11 centers on misleading registration statements, while Section 12 concerns prospectuses and oral communications.

Tracing Shares

Slack’s registration statement covered 118 million of the 283 million shares that became eligible for sale on the market. The other 165 million shares were exempt from registration under an SEC rule.

Salesforce’s lawyer, Thomas Hungar, said courts traditionally require investors to trace their shares to the registration statement.

Interpreting federal securities law to the contrary “would dramatically expand the scope of liability, disrupt the capital formation process and upset settled expectations,” Hungar said.

Pirani’s lawyer, Kevin Russell, said that sort of requirement would be “exceedingly burdensome not only for the parties, but also for the courts and the juries who are going to have to determine the registration status of perhaps millions of individual shares of stocks.”

Chief Justice John Roberts questioned whether Russell’s argument could be squared with the language of Section 11, which allows lawsuits over registration statements by people who acquire “such security.”

“That’s a big hurdle for you to get over,” he said.

Justice Elena Kagan voiced similar views, telling Russell he had a “hard row to hoe here.” But Kagan said Section 12 was a different matter and might well authorize suits by holders of unregistered shares.

“There’s really nothing in Section 12 that makes it like Section 11,” Kagan said.

The SEC didn’t file a brief in the case, a silence that left some of the justices perplexed. Kavanaugh called the SEC’s absence “odd.”

Justice Sonia Sotomayor said commentators have suggested the US solicitor general, who represents the administration at the Supreme Court, was having trouble figuring out what do to with the case.

“May not be the only one,” quipped Roberts.

The court is scheduled to rule by late June in the case, Slack Technologies v. Pirani, 22-200.

(Updates with comments from lawyers, Roberts, Kagan starting in 9th paragraph.)

To contact the reporter on this story:
Greg Stohr in Washington at gstohr@bloomberg.net

To contact the editor responsible for this story:
Elizabeth Wasserman at ewasserman2@bloomberg.net

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