Tag: Section 11 standing
SEC’s Investor Advisory Committee discusses tracing in §11 litigation and shareholder proposals—will they recommend SEC action?
Last week, at the SEC’s Investor Advisory Committee meeting, the Committee discussed two topics described as “pain points” for investors: tracing in §11 litigation and shareholder proposals. In the discussion of §11 and tracing issues, the presenting panel made a strong pitch for SEC intervention to facilitate tracing and restore §11 liability following Slack Technologies v. Pirani. The panel advocated that the Committee make recommendations to the SEC to solve this problem. With regard to shareholder proposals, the Committee considered whether the current regulatory framework appropriately protected investors’ ability to submit shareholder proposals or did it result in an overload of shareholder proposals? Was Exxon v. Arjuna a reflection of exasperation experienced by many companies? No clear consensus view emerged other than the desire for a balanced approach and a stable set of rules. Recommendations from SEC advisory committees often hold some sway with the staff and the commissioners, so it’s worth paying attention to the outcome here.
SCOTUS decides Slack—in direct listings, tracing required for §11 standing
On Thursday, SCOTUS decided Slack Technologies v. Pirani in a unanimous opinion by Justice Gorsuch holding that, even in a registration by direct listing, §11(a) liability extends only to shares that are traceable to an allegedly defective registration statement. As you know, §11 provides statutory standing to sue for misstatements in a registration statement to any person acquiring “such security,” historically interpreted to mean a security registered under the specific registration statement. However, in Pirani v. Slack Technologies, a divided three-judge panel of the 9th Circuit had ruled that the plaintiff could recover under §11 even in the absence of tracing to the registration statement for the direct listing. Now, SCOTUS has reversed and remanded the case for reconsideration in light of the Court’s decision. Given the difficulty of tracing in connection with direct listings, where both registered and preexisting unregistered shares may be sold at the same time, the question put to Slack counsel by Justice Kavanaugh during oral argument in April looms large: does the Court’s determination in this case “essentially transform the ’33 Act into an opt-out regime for direct listings”?
SCOTUS hears oral argument in Slack direct listing case—did the Court float its likely resolution?
When the SEC was considering the NYSE’s proposal to permit direct listings of primary offerings, one of the frequently raised difficulties related to the potential “vulnerability” of “shareholder legal rights under Section 11 of the Securities Act.” Section 11 provides statutory standing to sue for misstatements in a registration statement to any person acquiring “such security,” historically interpreted to mean a security registered under the specific registration statement. The “vulnerability” was thought to arise as a result of the difficulty plaintiffs may have—in a direct listing where both registered and unregistered shares may be sold at the same time—in “tracing” the shares purchased back to the registration statement in question. In approving adoption of the NYSE rule, the SEC said that it did not “expect any such tracing challenges in this context to be of such magnitude as to render the proposal inconsistent with the Act. We expect judicial precedent on traceability in the direct listing context to continue to evolve,” pointing to Pirani v. Slack Technologies. As the NYSE had observed, only the court in Slack had addressed the issue, and had concluded that, at the pleading stage, plaintiffs could still pursue their claims even if they could not definitively trace the securities they acquired to the registration statement. However, the NYSE noted, the case was on appeal. (See this PubCo post.) The case, Pirani v. Slack Technologies, was decided by a divided three-judge panel of the 9th Circuit, with the court affirming, with one dissent, the district court’s order, ruling that the plaintiff had standing to sue under Section 11. But that decision was appealed to SCOTUS, which granted cert. On Monday, SCOTUS heard oral argument. Justice Kagan may be a bellwether: addressing Pirani’s counsel, she advised that “it does seem to me like you have a hard row to hoe here.” But that was about Section 11. Section 12(a)(2)? Well, that’s another matter.
9th Circuit decides Section 11 standing in a direct listing
When the SEC was considering the NYSE’s proposal to permit direct listings of primary offerings, one of the frequently raised problems related to the potential “vulnerability” of “shareholder legal rights under Section 11 of the Securities Act.” Section 11 provides standing to sue for misstatements in a registration statement to any person acquiring “such security,” typically interpreted to mean a security registered under the specific registration statement. The “vulnerability” was thought to arise as a result of the difficulty plaintiffs may have—in a direct listing where both registered and unregistered shares may be sold at the same time—in “tracing” the shares purchased back to the registration statement in question. In approving adoption of the NYSE rule, the SEC said that it did not “expect any such tracing challenges in this context to be of such magnitude as to render the proposal inconsistent with the Act. We expect judicial precedent on traceability in the direct listing context to continue to evolve,” pointing to Pirani v. Slack Technologies. As the NYSE had observed, only the district court in Slack had addressed the issue, and had concluded that, at the pleading stage, plaintiffs could still pursue their claims even if they could not definitively trace the securities they acquired to the registration statement. However, the NYSE noted, the case was on appeal. (See this PubCo post.) That appeal, Pirani v. Slack Technologies, has just been decided by a three-judge panel of the 9th Circuit. The Court affirmed, with one dissent, the district court’s order, ruling that the plaintiff had standing to sue under Section 11.
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