On December 13, 2022, the U.S. Supreme Court granted the petition of Slack Technologies to have the court take up the question of the plaintiff’s standing to pursue ’33 Act liability claims against the company. The standing question arises because the plaintiff bought his Slack shares in connection with the June 2019 transaction in which Slack went public through a direct listing rather than through a traditional IPO. Though the standing questions arises in the relatively narrow context of the company’s direct listing, the standing questions at issue potentially could affect ’33 Act liability claims in other contexts as well. A copy of the U.S. Supreme Court’s December 13, 2022 order in the Slack case can be found here.
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 Ninth Circuit granted 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. The court was particularly concerned that a narrower ruling would “create a loophole large enough to undermine the purposes of Section 11 as it has been understood since its inception.”
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.
The Petition for Writ of Certiorari
The defendants filed a petition to the U.S. Supreme Court for a writ of certiorari. The defendants’ petition seeks to have the court address the question: “Whether 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.” In seeking to have the Court take up the case, the defendants argued that the circuit courts had consistently held that only persons who could trace their shares to the registration statement had standing to assert ’33 Act liability claims. The defendants also argued that the Ninth Circuit’s policy rationale (that is to ensure that investors who bought their shares in a direct listing had a remedy) should not undercut the courts’ long-standing adherence to the statutory text that Congress wrote and has elected not to amend.
In opposing the defendants’ petition, the plaintiff argued that the Ninth Circuit “correctly held that a purchaser of registered and unregistered securities simultaneously sold under and pursuant to Slack’s first and only registration statement is a purchaser of ‘such security’ as that term is used in Section 11 of the Securities Act of 1933 and therefore has standing to sue for misrepresentations and omissions in that registration statement under Section 11 and prospectus under Section 12(a)(2) of the Securities Act of 1933.”
The U.S. Chamber of Commerce, in conjunction with several financial industry trade associations, filed an amicus brief in support of the defendants’ petition, arguing that “decision broke with a half-century’s worth of case law holding that plaintiffs alleging a Section 11 claim under the Securities Act of 1933 must be able to ‘trace’ their securities to the registration statement on which they base their claim. The Ninth Circuit’s holding not only has been rejected by every court to have considered the issue, it also undermines the certainty that well-functioning capital markets require.” Several additional amicus briefs were filed in support of the petition, including briefs filed on behalf of the Cato Institute (here); Stanford Law Professor Joseph Grundfest (here); and the Washington Legal Foundation (here).
On December 13, 2022, the U.S. Supreme Court granted the defendants’ petition. The Court will hear argument in the case in 2023 and likely will decide the case by the end of June 2023.
At one level, it could be argued that this is a narrow case involving issues of limited potential applicability. According to a relatively recent compilation from PwC (here), only 14 companies have gone public via a direct listing since Spotify, as the first company to do so, completed a direct listing in 2018. Some of the other companies that have gone public through a direct listing since then, in addition to Slack, are Palantir, Asana, Roblox, and Ziprecruiter. The question of whether an investor who purchases shares in direct listing has standing to bring a ’33 Act liability action arguably affects only a very small group of investors.
Despite the case’s seemingly narrow aspect, it is nonetheless a significant development that the Court has agreed to take up the case. The fact is that the Supreme Court does not take up that many securities cases, and any time it does, it opens the possibility for the court to say something illuminating or even transformational about liability actions under the securities laws.
The fact that this particular court has taken up this case is interesting in another way, which is that it affords us a chance to see how the court’s current lineup (generally viewed as tending conservative by a 6-3 margin) will affect the court’s consideration and disposition of a securities case.
Beyond these more general considerations, there are some more specific reasons why this case could turn out to be more significant than it might appear from its seemingly narrow aspect.
For starters, there is nothing that says that the Court’s consideration of ’33 Act standing issues will be confined to the context of direct listings. The Court could have something to say about ’33 Act standing generally, that could affect cases in contexts other than just direct listings. Although I do not consider it likely, if the Supreme Court were to take up and endorse the policy reasoning of the Ninth Circuit– and in particular, the Ninth Circuit’s disposition to give consequential weight to the remedial purposes of the ’33 Act’s liability provisions — it could have a broader impact and affect ’33 Act liability actions more broadly, relating to IPOs, SPACs, and secondary offerings.
There is a particular reason why I am interested in seeing what the Supreme Court does with this case. That is, I have always found the mumbo-jumbo among securities litigation practitioners about “tracing” of securities vaguely mysterious and even a little disconcerting. (In all honesty, I have often found the conversation on this topic to be confusing.) I hope the Court will lay down some guardrail principles that will impose some controls on the whole “tracing” dialog.