Director, Center for Supreme Court AdvocacyNational Association of Attorneys General
This Report summarizes cases granted review on December 13, 2022 (Part I).
Case Granted Review: Slack Technologies, LLC v. Pirani, 22-200
Slack Technologies, LLC v. Pirani, 22-200. The Court will resolve “[w]hether Sections 11 and 12(a)(2) of the Securities Act of 1933 require plaintiffs to plead and prove that they bought shares registered under the registration statement they claim is misleading.” Federal securities law provides that securities cannot be sold unless they are registered or qualify for an exemption from registration. Under the Securities Act of 1933, if shares must be registered, the issuer must file a registration statement with the SEC that includes a prospectus making a thorough disclosure about the shares. Section 11 of the Securities Act permits suits alleging misrepresentations in a registration statement only if the plaintiffs “acquir[ed] such security.” 15 U.S.C. §77k(a). Section 12(a)(2) of the Act provides that someone who “offers or sells a security . . . by means of a prospectus” may be liable for misstatements in that prospectus “to the person purchasing such security.” 15 U.S.C. §77l(a)(2). (Section 10 of the Securities Exchange Act, by contrast, does not limit the class of shareholders who may sue, but requires plaintiffs to plead and prove scienter.)
Petitioner Slack, which offers business-collaboration software, went public on the New York Stock Exchange in 2019 through a “direct listing” rather than an IPO. After a direct listing, both registered and unregistered shares are immediately tradeable on an exchange.
When Slack went public, there were 283 million Slack shares that could be sold to the market by Slack’s existing shareholders. The registration statement filed by Slack registered only 118 million of those shares; the other 165 million shares were not registered. Respondent Fiyyaz Pirani bought Slack shares on the NYSE soon after the company went public. He does not allege, however, that they were part of the 118 million shares registered under the registration statement filed in connection with Slack’s direct listing. After Slack’s stock price dropped, Pirani sued Slack, along with some of its officers, directors, and early investors, under Sections 11, 12(a)(2), and 15 of the Securities Act. He claimed that Slack’s registration statement was misleading because (among other reasons) “it did not alert prospective shareholders to the generous terms of Slack’s service agreements, which obligated Slack to pay out a significant amount of service credits to customers whenever service was disrupted, even if the customer did not experience the disruption.” Slack moved to dismiss on the ground that Pirani did not plead and prove that he bought shares registered under the challenged registration statement. The district court denied Slack’s motion to dismiss, and a divided panel of the Ninth Circuit affirmed. 13 F.4th 940.
The Ninth Circuit majority reasoned that unregistered Slack shares qualified as “such securit[ies]” under Section 11 because they “were sold to the public ‘when the registration statement . . . became effective.’” The court pointed to the rules of the NYSE, which require a registration statement to be filed before any shares (registered or unregistered) can be sold on the exchange. Because no Slack shares could be sold on the NYSE until Slack filed a registration statement, the majority decided that all shares—unregistered and registered alike—must qualify as “such securities” under Section 11. The majority supported its conclusion by noting that, although the legislative history does not specifically delineate the meaning of “such security,” it discusses “securities sold upon a registration statement.” (Quoting H.R. Rep. No. 73-85, at 9) (emphasis in opinion). The court then concluded that because Pirani had standing to sue under Section 11, he also had standing to sue under Section 12.
Slack argues in its petition that all seven other circuits to have addressed the issue have “held that ‘such security’ in Section 11 means a share registered under the registration statement the plaintiffs claim is misleading.” On the merits, Slacks contends that “Sections 11 and 12 impose ‘virtually absolute’ liability, ‘even for innocent misstatements,’ but they are ‘limited in scope’ because they severely curtail the class of shareholders who may sue. Section 10, by contrast, ‘is a “catchall” antifraud provision’ that permits any shareholder to sue, but ‘requires a plaintiff to carry a heavier burden to establish a cause of action’— namely, the burden to ‘prove that the defendant acted with scienter.’ By eliminating the standing requirements of Sections 11 and 12, the Ninth Circuit has ‘render[ed] superfluous any claim for the same grievance under section 10(b) with its more stringent burdens of proof,’ thereby ‘overrul[ing], sub silentio, section 10(b) as a remedy for purchasers.’” (Citations omitted.) Slack adds that “the prospect of dramatically expanded opportunities for winning relief under Sections 11 and 12, without the necessity of proving fraud under Section 10(b), will greatly impact private securities litigation. Plaintiffs’ lawyers will look to challenge any information in registration statements that, with the benefit of hindsight, appears misleading—and therefore might be a basis for potentially ruinous strict liability. None of this will help investors, who ultimately bear the costs of these gotcha securities suits.”
Editor’s note: Some of the language in the background sections of the summaries below was taken from the petitions for writ of certiorari and briefs in opposition.