Axios Pro Rata

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January 07, 2023

Welcome to the first Saturday of 2023! This week I'm taking you through a potentially impactful U.S. Supreme Court case that flew under the radar just before the holidays, and why it matters.

  • Situational awareness: Chinese billionaire Jack Ma, who co-founded Alibaba, will give up control of Ant Group, the company announced late last night. Ant was scheduled to go public in 2020 before Beijing called it off.
  • 👋 Reminder: Feel free to send me tips or comments by replying to this email or on Twitter @imkialikethecar. (Send me all your best deal-making gossip this year, please! 🙏)

Today’s Smart Brevity™ count is 920 words, a 3½ -minute read.

1 big thing: Slack heads to SCOTUS

Photo collage of a gavel and a dollar bill.

Illustration: Shoshana Gordon/Axios

Last month the U.S. Supreme Court agreed to take up an appeal by Slack to a lawsuit over its 2019 direct listing, which alleges the company made false statements in its prospectus.

Why it matters: Slack was bought out by Salesforce in a deal worth nearly $28 billion, completed in 2021, but the decision may have ripple effects on other public listings and how unregistered (and registered) shares get marketed and sold.

State of play: In a departure from precedent, the court will have to decide whether to allow purchasers of unregistered stock to also sue issuers under Sections 11 and 12(a)(2) of the Securities Act of 1933.

  • Historically, U.S. courts have limited this broader liability, which includes innocent mistakes for (proven) purchasers of registered securities.
  • Holders of unregistered stock have only been able to sue under other laws, most notably Section 10(b) of the Securities Exchange Act of 1934, which requires that they prove what amounts to fraud.
  • As Reuters notes: "Slack’s arguments are premised on longstanding consensus in the federal courts, dating back to the 2nd Circuit’s 1967 ruling in Barnes v. Osofsky, that investors must be able to trace their shares back to a particular registration statement in order to bring Securities Act claims."
  • The U.S. Securities and Exchange Commission also pointed to the district court's opinion the district court's opinion to permit such claims when it allowed hybrid direct listings in 2020.

Catch up quick: The plaintiff in the case, Fiyyaz Pirani, purchased Slack stock shortly after it went public on the New York Stock Exchange in June 2019.

  • After the price of the stock dropped, an initial plaintiff (before Pirani took over) sued the company and some of its execs and board members. The individual claimed that Slack's registration statement was misleading.

Between the lines: The direct listing's mechanics are at the core of the debate.

  • In a typical IPO, a company issues new shares, which have to be registered with the SEC, and those are usually the only shares sold after a listing until the lockup of unregistered stock held by employees and some other shareholders expires.
  • "In direct listings, by contrast, there are no underwriters, and accordingly there is no lockup, so unregistered exempt shares remain available for resale alongside the newly registered ones," explains the Slack's petition to the court.

The intrigue: The majority of a Ninth Circuit Court of Appeals panel of judges concluded that purchasers of unregistered stock have the same right to sue because their purchase depended on the same IPO prospectus.

  • It also said that limiting this liability only to holders of registered securities "would essentially eliminate Section 11 liability ... in a direct listing for both registered and unregistered shares.... create[ing] a loophole large enough to undermine the purpose of Section 11 as it has been understood since its inception."

What's next: Oral arguments before the court are expected later this year.

2. The road to SCOTUS

Illustration of a scale with a dollar bill in the background

Illustration: Sarah Grillo/Axios

In June 2019, workplace chat company Slack became the second company to go public on the NYSE via a direct listing. It closed its first day of trading at $38.62 per share, and with a market cap of $20 billion.

Here's a timeline of its path to the U.S. Supreme Court:

  • April 26, 2019: Slack files to go public via direct listing.
  • June 20, 2019: Slack begins trading on the New York Stock Exchange.
  • June 28 and July 29, 2019: Slack experiences widespread outages (and gives out service credits to users to make up for it).
  • Sept. 4, 2019: Slack reports quarterly earnings, including the $8.2 million in credits that affected its revenue. Its stock price drops over 15% in after-hours trading following the news, per court documents.
  • Sept. 19, 2019: The original class action lawsuit, with investor Tyler Dennee as lead plaintiff, is filed in California federal district court, accusing Slack of not disclosing that its platform is susceptible to large outages and the risk increases as it adds more users. Additionally, the suit alleges it provides credits even to users who weren't affected, those credits affect its financials, and its rosy business statements have thus been misleading.
  • Jan. 7, 2020: After a few changes, investor Fiyyaz Pirani becomes the lead plaintiff for the lawsuit.
  • April 21, 2020: A California district court judge rules that Pirani has standing to proceed with the lawsuit.
  • Dec. 1, 2020: Salesforce announces it will acquire Slack for $28 billion.
  • July 21, 2021: Salesforce completes the acquisition.
  • Sept. 20, 2021: A divided three-judge panel from the 9th U.S. Circuit Court of Appeals rules in Pirani's favor.
  • May 2, 2022: The court rejects Slack's appeal to rehear the case.
  • Aug. 31, 2022: Slack files a petition with the U.S. Supreme Court, asking it to review the appeals court ruling.
  • Dec. 13, 2022: SCOTUS agrees to hear the case. Oral arguments and a decision are expected later this year.

📚 Due Diligence

  • Read the petition and other briefs submitted to the court (SCOTUS)
  • Slack's backers warn SCOTUS of hit to capital markets from direct listing case (Reuters)
  • Section 11 in the Age of Direct Listings (Business Law Prof Blog)

🧩 Trivia

Slack was only the second company to take the direct listing route, but it's had some company since.

  • Question: How many companies have gone public via direct listings so far? (Answer at the bottom.)

🧮 Final Numbers

Data: ; Chart: Axios Visuals
Data: ; Chart: Axios Visuals

🙏 Thanks for reading! And to Javier E. David and Amy Stern for editing. See you on Monday for Pro Rata's weekday programming, and please ask your friends, colleagues and SCOTUS petitioners to sign up.

Trivia answer: There have been 13.