Back in 2019, at the time of its direct listing, Slack did not disclose financial problems to potential investors – now unhappy shareholders are suing Salesforce, its owner since July 2021, in a case that could have repercussions over how such listings operate in future.
- Slack owner Salesforce battling US Supreme Court over 2019 direct listing
- Shareholders say they were ‘misled’ before investing
- iShares Expanded Tech-Software Sector ETF [IGV] down 36% in 2022
Last week it was reported that Salesforce [CRM], the owner of popular workplace platform Slack, is attempting to block shareholders from suing over Slack's direct listing, which was made back in 2019 – before Salesforce was its owner.
The US Supreme Court has said it will review a decision which greenlit a suit by a shareholder, who is attempting to sue under Sections 11 and 12 of the 1933 Securities Act.
Fiyyaz Pirani, who bought unregistered Slack shares, says a registration statement issued by Slack didn’t reveal information about ongoing service problems and the need to offer credits to customers as a result.
Since 13 December, the day of the announcement, the Salesforce share price has slumped by 5.3%, continuing losses that have led to a decline of 49.5% year-to-date.
Since Salesforce acquired Slack for a massive $27.7bn on 21 July 2021 – it’s largest-ever acquisition – its share price has dived by 47%. At the time CEO Marc Benioff called the deal “a match made in heaven”.
A direct offering on shaky ground
The Slack vs Pirani case could be a significant test of whether shareholders can sue after a direct listing – which is an alternative to a traditional initial public offering (IPO) that was authorised by the US securities and exchange commission (SEC) in 2018.
A direct listing lets companies go public without having to sell any shares through an IPO, instead selling existing securities directly to the public. This allows companies to save money, as IPOs can be expensive and require hiring financial intermediaries or underwriters.
In the summer of 2019, Slack registered 118 million shares for resale, but another 165 million shares did not need to be registered for trading.
At the time of the direct listing, Slack lost $8.2m in total revenues due to services being interrupted. Unhappy investors say that Slack didn’t disclose these issues.
Salesforce has argued back, saying as Pirani snapped up unregistered shares, he shouldn’t be able to sue under any alleged misleading terms.
Salesforce can likely survive the upheaval
Eleven institutional investors backing Pirani argue that “allowing public offerings of securities without the risk of liability if investors are not provided the complete and accurate disclosures required” could negatively impact both markets and investors. In short, they say it could create a “loophole” where companies get away with dodging important safeguards for investors.
Slack is currently facing key management upheavals which could also hammer investor confidence. On 17 December, co-founder and CEO Stewart Butterfield announced he will be leaving the company in January. The news comes closely on the heels of news that co-CEO Bret Taylor has also resigned.
For now, despite recent challenges, Salesforce looks like it might weather the storm. Salesforce stock is currently rated a ‘buy’ at CNN Business, with 37 out of 51 analysts offering this rating, 11 ‘holds’ and three ‘outperform’ ratings. A median 12-month price target of $200 given by a consensus of 43 analysts would be a considerable 55.6% increase from its last close.
Fund in focus: iShares Expanded Tech-Software Sector ETF
Salesforce is presently the third-largest holding in the software-focused fund iShares Expanded Tech-Software Sector ETF [IGV], and has an 8.04% weighting in the portfolio as of 19 December. It sits behind Adobe [ADBE], which is the largest holding in the fund, and Microsoft [MSFT], which is second largest. The fund is down 35.8% year-to-date.
Salesforce is also held in the First Trust Dow Jones Internet Index Fund [FDN], where it is the fifth-largest name in the portfolio with a 4.64% weighting as of 19 December, behind Amazon [AMZN], Meta [META], Cisco [CSCO] and Alphabet [GOOGL]. Year-to-date, the fund has sunk by 45.5%.
Salesforce also has exposure in the Fidelity Cloud Computing ETF [FCLD], where it is the third-biggest holding with a 4.54% weighting. Year-to-date, the fund is down 41.1%.