Pirani v. Slack Technologies, Inc.

Background

This securities class action concerns Slack Technologies, Inc.’s June 20, 2019 direct listing on the New York Stock Exchange. Unlike a traditional initial public offering, Slack issued no new shares. Existing shares held by insiders and early investors became available for public trading at the same time as shares registered under the Securities Act of 1933 and shares exempt from registration under Securities and Exchange Commission Rule 144.

Lead plaintiff Fiyyaz Pirani alleged that he purchased Slack shares beginning on the first day of trading and later purchased additional shares. He claimed that Slack’s registration statement and prospectus contained material misstatements and omissions concerning service outages and service-level agreements, scalability, competition from Microsoft Teams, Slack’s claimed benefits, and its growth strategy. He asserted claims under Sections 11, 12(a)(2), and 15 of the Securities Act.

The defendants moved to dismiss all claims under Federal Rule of Civil Procedure 12(b)(6), arguing that Pirani could not trace his shares to the registration statement, could not establish damages, lacked the required relationship with statutory sellers under Section 12(a)(2), had not pleaded actionable misstatements or omissions, and had not adequately pleaded that the venture-capital defendants controlled Slack. The court also granted defendants’ request for judicial notice of specified documents, without treating disputed facts in those documents as true merely because the documents were incorporated into the complaint.

Section 11 Standing and Damages

Section 11 creates liability for certain material misstatements or omissions in a registration statement. Defendants argued that Pirani lacked standing because he could not trace his shares to the registration statement. The court held that, in the unusual setting of Slack’s direct listing—where registered and unregistered shares became publicly tradeable simultaneously—the phrase “such security” can include a security of the same nature as the security issued under the registration statement. The court therefore denied defendants’ motion to dismiss for lack of Section 11 standing.

Defendants also argued that Pirani could not recover Section 11 damages because the direct listing did not have a traditional offering price. The court concluded that defendants had not shown at the pleading stage that Pirani could not recover damages as a matter of law. Pirani alleged that he bought the securities and alleged facts supporting a reasonable inference that their value was lower than the purchase price. The court also stated that he could pursue a value-based damages theory involving a fact-intensive inquiry. The court denied defendants’ motion to dismiss for lack of Section 11 damages.

Section 12(a)(2)

Section 12(a)(2) applies to certain persons who offer or sell securities through a prospectus or oral communication containing a material misstatement or omission. The court rejected defendants’ argument that liability could extend only to shares directly traceable to those registered under the prospectus. But the court explained that Section 12(a)(2) also requires a purchaser to have bought from the defendant, either because the defendant directly passed title or actively solicited the purchase for a financial purpose.

Pirani alleged that the individual defendants signed the offering materials, that some solicited sales at an investor event, and that they had financial motives to solicit sales. The court found these allegations sufficient to survive a motion to dismiss and denied defendants’ motion for failure to state a Section 12 claim. The court noted that it was unclear how Pirani contended Slack itself was a statutory seller and stated that it was not persuaded by the argument that Slack sold shares directly to Pirani and the class members.

Alleged Misstatements and Omissions

The court found the allegations about outages and service-level agreements sufficient at the pleading stage. Although Slack disclosed that it had service-level commitments and could experience outages, Pirani plausibly alleged that the offering materials omitted important details about the unusually strict uptime guarantee, the 100-times credit multiplier, and Slack’s prior failure to meet the guarantee. The court also found it plausible that Slack knew about the prior outages and that future outages could adversely affect revenue because of the service-level-agreement terms. The court denied the motion to dismiss this portion of the claims.

The court granted defendants’ motion concerning Slack’s statement that it had built its technology infrastructure using a distributed and scalable architecture. The court held that this general statement did not promise that Slack had experienced no infrastructure problems or would have no future scaling problems, particularly because Slack disclosed risks involving its ability to scale as usage increased.

The court also granted the motion concerning statements about competition with Microsoft. Slack identified Microsoft as its primary competitor, warned that competition could intensify, and described competitors’ advantages. The court held that Slack was not required to provide data comparing its performance with Microsoft’s metrics.

The court granted the motion concerning the “Summary of Key Benefits.” Pirani did not identify a particular statement in that section as false or misleading, and the court found that the general descriptions did not expressly or implicitly make claims about Slack’s market position, competitive environment, reliability, or infrastructure. The court also stated that most or all of the challenged statements appeared to be nonactionable promotional language, sometimes called puffery.

Finally, the court granted the motion concerning statements about Slack’s growth and growth strategy. Pirani did not identify particular false or misleading statements, some of the challenged information was disclosed elsewhere in the registration statement, and he did not explain how the forward-looking statements were actionable. The court held that the general descriptions of Slack’s business model and competitive advantages were not made misleading merely because they omitted unrelated information about certain risks.

Section 15 Control-Person Liability

Section 15 imposes secondary liability on a person who controls someone liable under Section 11 or Section 12. The court found that Pirani adequately alleged underlying Section 11 and Section 12 violations, leaving the question whether the venture-capital defendants were controlling persons.

Pirani alleged that the venture-capital defendants owned significant portions of Slack’s supervoting shares, each had a board representative who reviewed and signed the offering materials, helped cause Slack to undertake the direct listing, and sold shares in the listing. The court found these allegations sufficient under the pleading standard because it was plausible that discovery could develop evidence of control. The court denied defendants’ motion to dismiss for lack of Section 15 standing. The court noted that the individual defendants did not argue that they were not controlling persons.

Disposition

The court’s conclusion states that defendants’ motion to dismiss was granted in part and denied in part. The court granted Pirani leave to amend the complaint by May 6, 2020. The opinion does not state that the case itself was dismissed.