The U.S. Supreme Court – in a short, concise, unanimous opinion – has ruled that to assert Section 11 claims against Slack in connection with the company’s June 2019 direct listing, the plaintiff must plead and prove that he purchased shares pursuant to Slack’s allegedly misleading registration statement. Slack had offered both registered and unregistered shares in the direct listing. Even though the plaintiff had not alleged that the shares he purchased were registered shares, the Ninth Circuit had allowed the plaintiff’s claims to stand. The Supreme Court vacated the Ninth Circuit’s order and remanded the case to the district court. At a minimum, the Supreme Court’s ruling means Section 11 plaintiffs must plead that their shares are traceable to the offering. The practical implication of the Court’s ruling may be that the companies conducting direct listings cannot be sued under Section 11. A copy of the Court’s June 1, 2023, opinion can be found here.

Background

Slack is a business software company. The company went public in June 2019 through a direct listing of its shares rather than through a traditional IPO. In connection with the listing, the company filed a registration statement registering 118 million shares which were offered simultaneously with 165 million unregistered shares.

In September 2019, a plaintiff shareholder filed a securities class action lawsuit against the company and certain of its directors and officers alleging misrepresentations in connection with the company’s June 2019 share listing. The defendants moved to dismiss the plaintiff’s complaint, alleging that the plaintiff could not establish standing to bring his claims under the ’33 Act because he could not show that he purchased shares pursuant to the company’s registration statement. In making this argument, the defendants relied on the language found in Sections 11 and 12(a) of the ’33 Act specifying that liability claims under those sections may be brought by a person acquiring “such security” – their argument is that this phrase refers to a security registered pursuant to a registration statement.

In an April 21, 2020 order, Northern District of California Judge Susan Illston denied the defendants’ motion to dismiss (here), despite Slack’s argument that the plaintiff could not trace the purchase of his shares to the registration statement. The district court certified Slack’s request for an interlocutory appeal.

The Ninth Circuit’s Opinion

On September 21, 2021, the Ninth Circuit, in a 2-1 opinion written by Judge Jane A. Rastani, affirmed the district court, holding that in connection with Slack’s direct listing both the registered and unregistered shares were sufficiently traceable to the registration statement and therefore that the plaintiff had standing to bring the ’33 Act claims. An important component of the appellate court’s ruling was its view that in light of its remedial purposes, the statute should be construed broadly in order to effectuate its purposes; a narrower reading, the appellate court said, would undermine the availability of the remedy in the event of a direct listing. 

Judge Eric Miller dissented from the majority opinion based on his view that the majority opinion conflicted with the reading adopted by every other court to take up the standing question. He said further that the statutory language at issue did not support standing to bring ’33 liability claims based on the purchases of shares that cannot be traced to the registration statement, and that if this results in a policy problem, it was up to Congress to address the issue.

Slack petitioned the U.S. Supreme Court for a writ of certiorari. In December 2022, the Supreme Court granted the writ, and heard oral argument in the case in April 2023.

The Supreme Court’s Opinion

In a short June 1, 2023, opinion written by Justice Neil Gorsuch for a unanimous Court, the U.S. Supreme Court vacated the Ninth Circuit’s opinion and remanded the case to the district court for the plaintiff to attempt to plead and show that the shares he purchased are traceable to the registration statement.

In reaching its conclusion, the Court addressed the meaning of the phrase “such security” in Section 11. Slack had argued that “such security” refers only to a security issued pursuant to the allegedly misleading registration statement. The Court said that “contextual clues” – statutory context and language – “persuade us that Slack’s reading of the law is the better one.” Moreover, the Court said, “every court of appeals to consider the issue has reached the same conclusion,” that is, that to support a Section 11 claim, a plaintiff’s securities “must be traceable to the particular registration statement alleged to be false or misleading.”

The plaintiff had argued that the phrase “such security” also includes, in addition to shares traceable to the registration statement, other securities that bear some relationship to the registration statement, contending that but for the registration statement, none of the securities (including both the registered and unregistered securities) would have been available for purchase. The Court said this argument failed to show how it was derived from Section 11 and could not be squared with the “contextual clues.”

The Court also rejected the plaintiff’s argument that the more expansive reading of “such security” he urged the Court to adopt would better accomplish the remedial purpose of the’33 Act. The Court said it “could not endorse this line of reasoning,” saying it could not “assume any result consistent with one party’s accord of a statute’s purpose must be the law.”

Congress, the Court said, remains free to revise the securities laws, adding that “our only function lies in discerning and applying the law as we found it.” The “better reading” of the provision at issue “requires a plaintiff to plead and prove that he purchased shares traceable to the allegedly defective registration statement.”

Discussion

The Court’s ruling here basically preserves the status quo; it upholds the long-standing principle, endorsed by numerous courts of appeals, that in order to have standing, a Section 11 plaintiff must be able to show that his or her shares are traceable to the allegedly misleading registration statement. However, the ruling does seem to create a situation where purchasers in a direct offering in which both registered and unregistered securities are made available for sale will, as a practical matter, have no remedy under Section 11 for misrepresentations in the registration statement.

Indeed, the Skadden law firm labeled its June 1, 2023 memo about the U.S. Supreme Court’s opinion in Slack “SCOTUS Bars Section 11 Claims Based on Direct Listing” (here), adding in the text of the memo that  “the Court held that Section 11 liability does not apply to directly listed shares.”

While the Court’s decision clearly is important and represents a win for the defense side, the opinion’s practical effect may be limited by the fact that direct listings are still relatively rare; there have been less than a dozen and a half such offerings in total. At a minimum, the Skadden law firm memo notes, the Supreme Court “shut the door on an effort to significantly expand liability under Section 11.”

Interestingly, the Court’s opinion speaks only to Section 11; the plaintiff had also asserted claims under Section 12(a)(2), and indeed, as noted here, much of the discussion at oral argument had focused on Section 12(a)(2). While it is generally assumed that Section 12 claims rise of fall with Section 11 claims, Justice Kavanaugh expressly raised at oral argument the possibility that the case should be remanded to the district court to permit the court to focus on Section 12. That may well be what will happen next when the case returns to the district court. However, it could also be that the Court’s resolution of the Section 11 issues takes care of Section 12 as well; that certainly will be what Slack will argue on remand.

When the Court had first agreed to take up the Slack case, I had thought that the Court’s resolution of the case might provide some insight into the implications of the Court’s conservative lineup (generally viewed as representing a 6-3 majority) for business related cases. In the end, the Court’s unanimous resolution of the case negates any possible implications arising from the court’s lineup. Here, even the supposedly more liberal justices drew back from the more expansive reading of the statute that the plaintiffs’ urged.

I had also hoped that the Court’s consideration of the standing issues might provide some insight into the “tracing” debate, or at least provide some guidelines around the sometimes-bewildering discussion of tracing issues. However, while the Court did say that plaintiff’s shares must be traceable to the registration statement for a Section 11 plaintiff to have standing, the Court had little to say about what is required to establish the requisite tracing. Alas, the tracing debate will likely continue – perhaps in this case, on remand to the district court.