May 8, 2020

Securities Act Liability: Fed. Court Says Section 11 Applies to Direct Listings

Earlier this year, I blogged about the possibility that the use of direct listings instead of traditional IPOs might allow companies to avoid the Section 11 claims that so often accompany IPOs. This Orrick memo says that a recent California federal court decision suggests that this hope may be misplaced:

On April 21, 2020, Judge Susan Illston of the U.S. District Court for the Northern District of California denied defendants’ motion to dismiss a securities class action complaint brought by a shareholder of Slack Technologies, Inc. following the company’s 2019 direct listing. Pirani v. Slack Technologies, Inc. , No. 19-cv-05857-SI (N.D. Cal. Apr. 21, 2020).

Rejecting defendants’ argument that the plaintiff lacked standing to pursue claims under Section 11 of the Securities Act, the court held, in a matter of apparent first impression, that in the unique situation of a direct listing in which shares registered under the Securities Act become publicly tradeable on the same day that unregistered shares become publicly tradeable, a plaintiff does not lack standing to sue under Section 11 even though the plaintiff cannot show that her shares were registered.

The memo goes on to summarize the judge’s reasoning, which appears to be based almost entirely on policy considerations underlying Section 11.  We’re posting memos in our “Securities Act Liability” Practice Area.

“No Respect at All”: Are Dual Class Companies Undervalued?

Dual class companies are the Rodney Dangerfield of corporate governance – “No respect. . .I’m tellin’ ya, I don’t get no respect at all!” It’s hard to find any love for them among investor advocates, who’ve made “one share, one vote” a central underpinning of their good governance creed. But does their zeal for this revealed truth result in the undervaluation of dual class companies? That’s the conclusion of a recent study by a Cambridge University law prof. Here’s the abstract:

Dual-class stock enables a company’s controller to retain voting control of a corporation while holding a disproportionately lower level of the corporation’s cash-flow rights. Dual-class stock has led a tortured life in the US. Between institutional investor derision and the exclusion or restriction of dual-class stock from certain indices, one may assume that dual-class structure must be harmful to outside stockholders.

However, in this article, the existing empirical evidence on US dual-class stock will be reassessed by contrasting studies that use different measures of performance. It will be shown that although dual-class firms are generally valued less than similar one-share, one-vote firms, they perform as well as, and, in many cases, outperform, such firms from the perspective of operating performance and stock returns. When it comes to dual-class stock, more than meets the eye, and a presumption that dual-class stock is harmful for outside stockholders should not guide policy formulation.

The study argues that the market discounts dual-class stock to protect itself against the potential that the downsides of the structure will outweigh the benefits, but that those downsides seldom emerge. As a result, outside stockholders are not harmed by dual-class stock. Instead, they invest in dual-class stock at a discounted price which organically protects them against the potential for future abuses, and that, if anything, discounts dual-class stock too much.

Capital Markets: Time to Dust-Off the Alternative Equity Offering Playbook? 

In times like these, many public companies that otherwise might be good candidates for a traditional equity offering may need to look at alternative strategies.  That means ATMs, PIPEs, registered directs, and even equity lines are on the table for companies that haven’t previously considered them.  If you haven’t done one of those deals since the last time the world ended, you should take a look at this Proskauer memo on alternative equity offerings.  It provides a detailed overview of each of these alternative equity financing options.

If you’re considering tapping the capital markets, be sure not to miss our upcoming webcast – “Capital Raising in Turbulent Times” – which will address the current state of the new issues market for debt and equity, and explore financing and liability management alternatives.

John Jenkins