In Slack Technologies, LLC vs. Pirani, 2023 WL 3742580 (June 1, 2023), a unanimous Supreme Court held that to state a viable claim under Section 11 of the Securities Act of 1933 (the “Securities Act”), a shareholder must plead (and ultimately prove) that the purchased shares can be attributed to a specific issuer registration statement. The Court rejected the Ninth Circuit’s recent attempt to create an exception to what had previously been considered a fairly well-established search requirement for unregistered stocks purchased through direct listings. In light of the Court’s insistence that the research requirement of Article 11 applies equally, whether an issuer proceeds with a traditional IPO or a listing comprising both a registered offer and a direct listing of previously issued unregistered shares, this decision will make it more difficult for plaintiff shareholders to establish their ability to bring an action under Article 11 against an issuer that has gone public via a direct listing which encompasses at the both registered and unregistered shares.
In 2019, Slack, a workplace messaging company, went public on the New York Stock Exchange via a direct listing instead of a traditional IPO. Unlike a traditional IPO, where all shares are registered pursuant to a registration statement filed with the Securities and Exchange Commission under the Securities Act, Slack’s direct listing simultaneously offered 118 million newly issued shares registered under the Securities Act and 165 million unregistered. shares, which had been issued under registration exemptions or in private offers to Slack shareholders prior to the IPO. The 283 million shares were offered together under the direct listing, which the district court found would make it impossible to trace particular shares due to the simultaneous listing of registered and non-registered shares. Pirani vs. Slack Tech., Inc., 445 F. Add. 3d 367, 379 (ND Cal. 2020). In other words, buyers of Slack shares after the direct listing event would have a very hard time determining whether the particular shares they purchased were newly registered or purchased from the unregistered pool of pre-listed shares. IPO listed simultaneously with the registered shares.
Plaintiff Fiyyaz Pirani bought 30,000 Slack shares the day Slack went public and another 220,000 shares over the next few months. After Slack’s share price plummeted, Mr. Pirani filed a putative shareholder class action lawsuit alleging that Slack’s registration statement in connection with its direct listing was materially misleading in violation of Articles 11 and 12 securities law. Slack requested the dismissal, arguing that Mr. Pirani lacked standing to sue because he “did not allege that he purchased shares traceable to the allegedly misleading registration statement” as opposed to shares not recorded.
The district court denied Slack’s motion to dismiss, but certified its decision for an interlocutory appeal. A split Ninth Circuit panel upheld the district court’s decision. Dissenting, Circuit Judge Eric D. Miller explained that while “the factual framework of the case may be novel, the legal issues it presents are not.” Pirani vs. Slack Techs., Inc., 13 F.4e 940, 950 (9th Cir. 2021). Citing Justice Friendly’s decision in Barnes v. Osofsky, 373 F.2d 269 (2d Cir. 1967), the dissent explained that for more than fifty years it has been settled law that shareholders lack standing to bring an action under section 11 s they cannot prove that the shares they purchased were issued under the disputed particular registration statement under the Securities Act. The Ninth Circuit also concluded that there was legal status under Section 12 “to the extent that (Section 12) parallels Section 11”. Pirani vs. Slack Techs., Inc.13 F.4th at 950.
The Supreme Court paid little heed to the lower court’s new titles.
Focusing on the section 11 allegation, the opinion began with an analysis of the text of section 11 (15 USC § 77k(a)), which provides:
In the event that any part of the registration statement, when effective, contains a misrepresentation of a material fact or omits to state a material fact which was required to be stated therein or which was necessary for the statements contained therein are not misleading, any person acquiring such security (unless it is proved that at the time of such acquisition he had knowledge of such falsehood or omission) may, at law or in equity, before any competent court, prosecute….
The Court explained that the plain text of the statute makes it clear that the only persons entitled to bring an action under Section 11 based on a material inaccuracy or omission in a registration statement are the persons who have acquired “such a guarantee”. 2023 WL 3742580, at *4.
The key issue before the Court was whether “the phrase ‘this warranty’ refers to a warranty issued pursuant to the allegedly misleading registration statement” or whether that phrase may also “sometimes encompass a warranty that does not has not been issued pursuant to the allegedly misleading registration statement” misleading registration statement. Identifier. The Court determined that the first possibility was correct: the term “this guarantee”, as used in Section 11, only refers to a registered guarantee pursuant to the allegedly misleading registration statement. Identifier. at 5. The Court considered four contextual “indicators” drawn from the text of Article 11 to support its interpretation:
- First, the Court emphasized that “the law imposes liability for false statements or misleading omissions in ‘THE registration statement. ‘” The Court explained that the statute’s use of “the definite article to refer to the alleged particular registration statement as misleading…seems to suggest that the plaintiff must ‘acquire (e) such security’ under the terms of this document.”
- Second, the Court explained that “the statute repeatedly uses the word ‘such’ to narrow the subject matter of the statute” and determined that this “suggests that, when dealing with ‘such a title’, the law speaks of a title registered under the particular registration statement alleged to contain a falsehood or misleading omission”.
- Third, the Court found that, as used in other provisions of the Securities Act, the term “such security” refers to “shares subject to registration”.
- Finally, the Court explained that Article 11(e) “caps damages against an underwriter” at “the value of the registered shares alone”, a measure of damages which “would make little sense” if “the liability extended beyond the registered shares”.
Identifier. Based on this analysis, the Court came to the same conclusion that Justice Friendly and the Second Circuit had reached decades ago and several other circuit decisions had followed: “best reading” of the article. 11″ requires a plaintiff to plead and prove that he purchased shares traceable to the allegedly defective registration statement. Identifier. The Court then rejected the purchaser’s policy arguments, which it found to be flawed for multiple reasons, not the least of which was that they were not based on the statutory text. Identifier. at 6.
The Court carefully limited its analysis within the meaning of Article 11 and sent the case back to the lower courts to decide whether the pleadings of this particular shareholder can satisfy Article 11.
Although the Court expressly declined to comment on the standing requirements under Section 12 of the Securities Act, reversing the Ninth Circuit’s decision and sending it back for further consideration on this issue of interpretation, she pointedly noted that she had not “endorsed the Ninth Circuit’s apparent belief that § 11 and § 12 necessarily travel together” and cautioned that “the two provisions contain distinct language that deserves careful consideration”. Identifier. to *6 n.3.
This decision may have two practical impacts on Article 11 claims:
First, issuers conducting direct listings may be protected from liability under Section 11 if some of the shares subject to the direct listing are not offered pursuant to a Securities Act registration statement. However, in footnote 1 of the notice, the Court noted that the parties had “litigated this matter on the basis that Slack was not required to register all shares sold in its direct listing” and that “(f)or the first time in this Court, Mr. Pirani challenges this premise, suggesting that it was Slack’s responsibility to record all securities sold in its direct listings on the NYSE. Identifier. to *4 n.1. The Court did not consider this argument because the matter had “not been properly presented for decision”. Identifier. In light of this footnote, shareholder plaintiffs in future cases may seek to challenge the premise that issuers are not required to register under the Securities Act all securities sold in the direct quotation framework.
Second, the Soft The ruling should apply more broadly to the most common factual situation where an issuer makes both an IPO and a subsequent subsequent offering. In this scenario, disgruntled shareholders sometimes bring Section 11 claims based on purchases on or after the date of the follow-up offer, even though they cannot know whether their shares were sold at originated in the IPO or follow-on offering. The Court’s decision not only clarifies that the search is mandatory, but also, by making that decision in the context of a motion to dismiss and making it in the context of who has standing to sue (identifier. to *4), can help issuers fend off plaintiffs who attempt to defer this important blocking issue from the pleading stage to the case class certification stage.