Slack direct listing investor can sue for misrepresentation - 9th Circuit - Reuters

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(Reuters) - The 9th U.S. Circuit Court of Appeals said an investor who bought shares in Slack Technologies Inc's direct listing can sue the company for misrepresentations, signaling that laws written for more traditional offerings apply to the new method.

Ruling 2-1, the appeals panel found that investor Fiyyaz Pirani can sue the company and its executives for alleged misstatements in the offering documents without proving the shares he bought in the 2019 listing were registered, rather than unregistered.

An attorney for Pirani and a spokesperson for Slack declined to comment on Monday.

The workplace communication software company was among the first to use a direct listing, an alternative to an initial public offering, after the U.S. Securities and Exchange Commission approved the process three years ago.

In initial public offerings, insiders are often restricted initially from selling their shares. In direct listings, unregistered insider shares and registered shares issued pursuant to offering materials are available to investors at the same time.

In June 2019, Slack registered 118 million shares for resale, allowing 165 million more shares exempt from registration to be traded.

Investors sued months later, after the company revealed an $8.2 million revenue hit tied to service outages. Investors alleged Slack had violated the Securities Act, which prohibits misleading offering materials, by failing to disclose downtime issues and the strength of competitor Microsoft's Teams application.

On Monday, the 9th Circuit rejected Slack's argument that Pirani had no standing to sue if he could not trace the shares back to the allegedly misleading offering materials, which courts have required in other cases over successive offerings.

Judge Jane Restani, sitting by designation from the U.S. Court of International Trade, wrote for the court that applying such a rule to direct listings would drive companies toward direct listings in attempts to avoid liability under the Securities Act. She wrote that such an application of the rule would create "a loophole large enough to undermine the purpose" of the law.

Chief Circuit Judge Sidney Thomas joined in the opinion.

Circuit Judge Eric Miller dissented, saying that the law's ambiguous reference to a security should be read, as in other cases, to mean a security issued under the challenged offering materials.

The case is Pirani v. Slack Technologies Inc, No. 20-16419, 9th U.S. Circuit Court of Appeals, No. 20-16419,

For Slack: Michael Celio of Gibson, Dunn & Crutcher

For Pirani: Melissa Fortunato of Bragar Eagel & Squire

Read more:

Slack urges 9th Circ to end shareholder suit over direct listing

Jody Godoy

Jody Godoy reports on banking and securities law. Reach her at jody.godoy@thomsonreuters.com

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