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A Fresh Take

Insights on M&A, litigation, and corporate governance in the US.

| 2 minutes read

Freshfields Represents Jay Clayton and Joe Grundfest in Amicus Brief in Direct Listing Case before the Supreme Court

On Friday, February 3, 2023, a securities litigation team from Freshfields’ Silicon Valley office filed a brief in the United States Supreme Court in support of defendants in Slack Technologies LLC, et al. v. Pirani, No. 22-200. The Freshfields team represented amici curiae the Hon. Jay Clayton, former Chairman of the SEC, and the Hon. Joe Grundfest, former SEC Commissioner.

The appeal was taken from the denial of a motion to dismiss a securities class action brought after Slack’s direct listing in 2019. Slack addresses the crucial issue of standing for securities class actions brought under the Securities Act of 1933: namely, the requirement that shareholders suing under Section 11 be able to “trace” their shares to the offering of securities they challenge. Though Slack itself concerns tracing in the context of a direct listing, the Supreme Court’s ruling will have implications for all shareholder lawsuits brought under the Securities Act, regardless of form. Oral argument in the case is scheduled for April 17, 2023.

The Ninth Circuit’s decision in Slack invented an entirely new definition of Section 11 standing that conflicts with all precedent on point. First, The Ninth Circuit’proposed definition extended liability far beyond the distribution of securities the direct listing. If literally applied, the Ninth Circuit’s definition of standing would dramatically expand Section 11 liability across a vast array of situations that are entirely unrelated to direct listings. It would achieve those results by substituting a judicially implied remedy for the judgment of Congress, regulators, and sophisticated market participants.

Slack also conflicts with the Securities Act’s plain text. Its holding cannot be reconciled with the statute’s damages formula or its fundamental structure, including its exemptive provisions, or with governing SEC regulations. The Ninth Circuit failed to consider sixty other instances in which the phrase “such security” appears in Securities Act, and proposes a definition that is inconsistent with the same term’s meaning in those sixty instances. Legislative history offers no support for the Ninth Circuit’s divergence from established precedent. The Ninth Circuit’s purposive rationale conflicts with norms of statutory construction urged by the Supreme Court.

If tracing creates a challenge that requires correction through government action, a plaintiff can, of course, petition Congress for relief. But, more fundamentally, the SEC can take a variety of administrative actions to address the tracing challenge that arises in direct listings, and in all other forms of Section 11 litigation. A radical judicial rewrite of Section 11 has no support at law and is even more inappropriate when the matter of purported concern could be addressed by market practice, administrative action, or legislation. The amici ask the Supreme Court to reverse.

The full text of the brief can be found here.