Shares of Salesforce Inc (NYSE: CRM) surges around 2% in early trading session on Tuesday as in a case involving Salesforce Inc.’s Slack business, the US Supreme Court hinted at a restricted judgment as the court explored restraining shareholder actions over company statements released as part of a public listing.
Brett Kavanaugh and Neil Gorsuch, two potentially important justices, have shown interest in remanding part of the case to a federal appeals court rather than giving a final verdict.
The Supreme Court is considering a direct listing for the first time since the Securities and Exchange Commission permitted the practice in 2018. Companies that go public through a direct listing do so without selling shares in an initial public offering, instead allowing early investors to sell their registered and unregistered shares on a public exchange.
The Supreme Court is deliberating on a lawsuit filed by Fiyyaz Pirani, who claims that a 2019 Slack registration statement failed to disclose the degree to which the firm would be required to issue credits to users due to service disruptions. In 2021, Salesforce will purchase Slack.
Salesforce claims Pirani lacks legal standing to sue under Sections 11 and 12 of the 1933 Securities Act because he purchased unregistered shares rather than the allegedly deceptive statement’s registered shares. The litigation was allowed to proceed by a federal appeals court.
Both Kavanaugh and Gorsuch signaled that they could agree with Slack on Section 11 but send the issue back to the appellate court to reconsider Section 12. Kavanaugh stated that he was “worried about making a mistake” since neither the lower courts nor the SEC had thoroughly examined the Section 12 problem.
Section 11 deals with deceptive registration statements, whereas Section 12 deals with prospectuses and oral communications.
Slack’s registration statement covered 118 million of the 283 million shares that were marketable. An SEC regulation exempted the remaining 165 million shares from registration.
According to Thomas Hungar, Salesforce’s lawyer, courts often ask investors to track their shares back to the registration statement.
Contrary interpretations of federal securities legislation “would dramatically expand the scope of liability, disrupt the capital formation process, and upset settled expectations,” according to Hungar.
Kevin Russell, Pirani’s lawyer, stated that such a requirement would be “exceedingly burdensome not only for the parties, but also for the courts and juries who will have to determine the registration status of potentially millions of individual shares of stock.”
Chief Justice John Roberts questioned whether Russell’s theory fit with Section 11, which authorizes challenges over registration statements by anyone who acquire “such security.”
“That’s a big hurdle for you to get over,” he remarked.
