Supreme Court sides unanimously with Slack in dispute with shareholder

By 
 June 3, 2023

Despite all of the talk of a bitterly partisan and divided Supreme Court, the bench will at times come together unanimously in ruling on a particular case.

That is what happened on Thursday when all nine justices sided with messaging platform Slack in a lawsuit filed by one of its shareholders, Axios reported.

The decision could ultimately prove consequential in how companies choose to offer stock shares to the public going forward in terms of the more traditional initial public offering, or IPO, as compared to a new method known as a direct listing.

A question of liability for "registered" and "unregistered" shares

At issue here, according to SCOTUSblog, is a dispute over the interpretation of Sec. 11 of the Securities Act of 1933, which holds companies liable to be sued over "false or misleading material" in a required statement of registration that must be filed with the Securities and Exchange Commission before shares can be publicly sold on the stock market.

Under a traditional IPO, all of the new shares offered by a company are considered to have been "registered" with the SEC along with the filed registration statement, and generally, any pre-existing shares held by company executives and employees are held back for a period of time before they can be made available for public sale.

Things are different under a direct listing, however, as there is nothing to prevent the pre-existing "unregistered" shares from also being sold to the public at the same time as the new "registered" shares.

Defining language and context used in statute

That difference between IPOs and direct listings came to a head, per Axios, when Slack Technologies conducted a direct listing on the New York Stock Exchange in 2019 and, along with the required statement of registration filed with the SEC, made available to the public 118 million new registered shares as well as 165 million pre-existing unregistered shares.

The plaintiff in the suit is Fayyiz Pirani, who ultimately purchased 250,000 Slack shares over the course of several months and then filed a lawsuit when the stock price dropped significantly a short time later, alleging misstatements in Slack's statement of registration under Sec. 11 of the Securities Act of 1933.

Slack fought back and argued that Sec. 11 liability only applied to registered shares, and given that there was no way for Pirani to prove whether the shares he purchased were registered or unregistered, sought the dismissal of the suit.

A district court sided with Pirani and ruled against Slack, as did the Ninth Circuit Court of Appeals, but the Supreme Court reversed course and instead sided with Slack and proceeded to vacate and remand the Ninth Circuit's decision in the unanimous opinion authored by Justice Neil Gorsuch.

In reaching that conclusion, Gorsuch delved into the relevant language and context of the Sec. 11 statute and other provisions of the law to ultimately determine that liability for alleged misstatements or omissions in the SEC statement of registration only applied to the registered shares but not the unregistered shares.

As such, given the inability to conclusively determine whether Pirani's shares were registered or unregistered, the lower courts' rulings in his favor were vacated and the Ninth Circuit was instructed to rehear the case again in light of the high court's decision on Sec. 11's applicability.

Pirani reveals intent to keep fighting

Axios noted that Slack declined to comment on the ruling but Pirani released a statement that said, "I am profoundly disappointed with this ruling, which I believe fails to adequately protect the interests of investors."

"While I respect the Court's authority, I maintain that all investors, whether in registered shares or not, deserve transparency and accountability. I will continue to explore all available legal avenues," he added.

" A free people [claim] their rights, as derived from the laws of nature."
Thomas Jefferson
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