Pirani v. Slack Techs., Inc.

• Decision Date: 21 April 2020
• Docket Number: Case No. 19-cv-05857-SI
• Citation: 445 F.Supp.3d 367
• Parties: Fiyyaz PIRANI, Plaintiff, v. SLACK TECHNOLOGIES, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of California

445 F.Supp.3d 367

Fiyyaz PIRANI, Plaintiff,

v.SLACK TECHNOLOGIES, INC., et al., Defendants.

Case No. 19-cv-05857-SI

United States District Court, N.D. California.

Signed April 21, 2020

Marion Curry Passmore, William Scott Holleman, Lawrence Paul Eagel, Pro Hac Vice, Bragar Eagel and Squire, P.C., New York, NY, Melissa Ann Fortunato, Bragar Eagel & Squire, P.C., San Francisco, CA, for Plaintiff.

Michael D. Celio, Michael James Kahn, Raena Ferrer Calubaquib, Gibson, Dunn & Crutcher LLP, Palo Alto, CA, Matthew Stewart Kahn, Gibson, Dunn & Crutcher LLP, San Francisco, CA, for Defendants Slack Technologies, Inc., Stewart Butterfield, Allen Shim, Brandon Zell, Andrew Braccia, Edith Cooper, Sarah Friar, John OFarrell, Chamath Palihapitiya, Graham Smith.

Michael D. Celio, Raena Ferrer Calubaquib, Gibson, Dunn & Crutcher LLP, Palo Alto, CA, for Defendants Social+Capital Partnership GP II L.P., Social+Capital Partnership GP II Ltd., Social+Capital Partnership GP III L.P., Social+Capital Partnership GP III Ltd., Social+Capital Partnership Opportunities Fund GP L.P., Social+Capital Partnership Opportunities Fund GP Ltd., Accel Growth Fund IV Associates L.L.C., Accel Growth Fund Investors 2016 L.L.C., Accel Leaders Fund Associates L.L.C., Accel Leaders Fund Investors 2016 L.L.C., Accel X. Associates L.L.C., Accel Investors 2009 L.L.C., Accel XI Associates L.L.C., Accel Investors 2013 L.L.C., Accel Growth Fund III Associates L.L.C., AH Equity Partners I L.L.C., A16Z Seed-III LLC.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS AND GRANTING LEAVE TO AMEND

Re: Dkt. No. 52

SUSAN ILLSTON, United States District Judge Before the Court is defendants’ motion to dismiss the Amended Class Action Complaint ("ACAC") filed by lead plaintiff Fiyyaz Pirani. Pursuant to Civil Local Rule 7-1(b) and General Order 72, the Court finds this matter appropriate for resolution without oral argument. Having considered the papers submitted and for good cause shown, the motion is GRANTED in part and DENIED in part, and plaintiff is GRANTED leave to amend. If plaintiff wishes to amend the complaint, he shall do so by May 6, 2020.

BACKGROUND

I. The Parties and the Direct Listing

This securities class action is brought by lead plaintiff Fiyyaz Pirani ("plaintiff") against Slack Technologies, Inc. ("Slack") and other named defendants. Plaintiff purchased 30,000 shares of Slack's Class A common stock at $40/share on June 20, 2019, the first day of Slack's public listing, and approximately another 220,000 shares at various prices from June 21 to September 9, 2019. Holleman Decl. in Supp. of Mot. to Appoint Lead Pl., Ex. A (Dkt. No. 26-1). Plaintiff brings this case "on behalf of a class consisting of all persons and entities that purchased or otherwise acquired Slack common stock pursuant to and/or traceable to the Offering Materials." ACAC ¶ 38 (Dkt. No. 42).

Slack is a San Francisco-based software company "that offers a cloud-based collaboration and productivity platform" for workspace computing. Id. ¶ 2. Other named defendants include CEO Stewart Butterfield, CFO Allen Shim, and CAO Brandon Zell; and Board of Directors ("Board") members Andrew Braccia, Edith Cooper, Sarah Friar, John O'Farrell, Chamath Palihapitiya, and Graham Smith (collectively "Individual Defendants"). Id. ¶¶ 19-29.

The complaint also names as defendants three venture capital firms: Accel, which appointed defendant Braccia to the Board; Andreessen Horowitz, which appointed defendant O'Farrell to the Board; and Social+Capital, which appointed defendant Palihapitiya to the board (collectively "VC Defendants"). Id. ¶¶ 22, 25, 26, 30-33. The VC Defendants "collectively held more than 47% of the Company's voting power and included 3 members of the Board at the time of the Offering." Id. ¶ 34. They "caused Slack to effectuate the Offering." Id. They also "caused [Slack] to indemnify them from any liabilities arising from the Securities Act [of 1933] and the Securities Exchange Act of 1934" and "to obtain and maintain a directors and officers insurance policy for them." Id. Upon Slack's listing, the VC Defendants "sold more than 12.5 million shares for gross proceeds of more than $484 million." Id.

Slack's Class A common stock shares began trading on the New York Stock Exchange ("NYSE") on June 20, 2019 under the ticker symbol "WORK." Id. ¶ 4. Slack did not take the traditional route of an Initial Public Offering ("IPO"), in which "a company will offer a certain amount of new and/or existing shares to the public ... [to] help raise additional capital for company operations and expansion." Id. ¶¶ 66-67. Instead, Slack opted for a direct listing: no new shares were issued, but insiders and early investors of the company were able to sell their preexisting shares to the public. Id. ¶¶ 66, 69.¹ Because these shares were not subject to a lockup period as in an IPO, they were available for sale immediately upon Slack's listing. Id. ¶ 70.

In preparation for the direct listing, Slack filed a Form S-1 resale shelf registration statement (the "Registration Statement") and a Form 424B4 prospectus (the "Prospectus") (collectively the "Offering Materials") with the Securities Exchange Commission ("SEC"). Id. ¶¶ 71-75. Slack, with defendants Butterfield and Shim, also "hosted an ‘investor day’ in New York City to generate investor interest" on May 13, 2019. Id. ¶ 72. The contents of the Offering Materials applied to "up to 118,429,640" shares offered for resale to the public. Id. ¶ 4; see Kahn Decl. in Supp. of Mot. to Dismiss, Ex. A (Dkt. No. 54-1).² The Offering Materials noted that additional shares were available for resale and exempt from registration pursuant to SEC Rule 144³ : "approximately 164,932,646 shares of common stock immediately after [Slack's] registration." Kahn Decl. Ex. A at 164; see ACAC ¶ 4.

II. The Offering Materials

Plaintiff alleges that he and other class members suffered losses to the value of their purchased shares as a result of misstatements or omissions of material facts in the Offering Materials. Id. ¶¶ 11-12. These include statements regarding service outages and Slack's Service Level Agreements ("SLAs") in the case of such outages; competition from Microsoft Teams; scalability and purported key benefits; and growth and growth strategy. Id. ¶ 76.

Regarding outages, Slack disclosed that it had "service level commitments to [its] paid customers" in the event of service disruptions and noted that if Slack failed to meet those commitments, it "could be obligated to provide credits for future service ... which could harm [its] business, results of operations, and financial condition." Id. ¶ 95 (emphasis removed). However, Slack did not disclose alleged vulnerabilities it was already suffering that "caused severe service disruptions," including a failure to meet its uptime guarantee for "7 out of 12 months" in 2018 alone. Id. ¶ 96. Slack also failed to disclose that its service level commitment was "highly unusual and punitive." Id. "[W]hile most competitors guaranteed uptime of three-nines (99.9%), Slack guaranteed four-nines (99.99%)." Id. ¶ 63. Failure to meet that guarantee would require a refund or credit payout of "100 times what the customer would have paid during the downtime as opposed to the actual cost of service lost during the downtime," automatically and regardless of whether or not specific customers actually experienced the downtime or requested the credit. Id.

Regarding competition, the Offering Materials identified Microsoft as its primary competitor but stated that "we are uniquely positioned to more rapidly innovate and respond to new technologies and customer requirements than our competitors." Id. ¶¶ 83-84. Defendants allegedly "downplayed the impact" of these competitors, including "the impact ... Microsoft in particular[ ] was already having on [Slack's] expansion into enterprise customers prior to the Offering." Id. The competitor product Microsoft Teams launched in March 2017; in December 2017, defendant Butterfield acknowledged in a Business Insider interview that "Microsoft is the main competitor. They're the third largest company in the world and if they start channeling all their resources against you, that's a lot to compete with." Id. ¶¶ 52-53. In 2018, when Microsoft Teams introduced a free tier and a feature for adding people outside of an organization, it began "to compete head-to-head with Slack's freemium model." Id. ¶ 52. That same year, Slack acquired intellectual property from another software company, Atlassian, and announced a close partnership between them. Id. ¶¶ 54-55. PCMag.com reported: "What went unsaid in both [Slack's and Atlassian's] statements is that they're partnering up to take on an even bigger competitor in Microsoft Teams." Id. ¶ 57.

Plaintiff alleges that the Offering Materials touted various "key benefits to users, teams, and organizations" and that Slack built its "technology infrastructure using a distributed and scalable architecture on a global scale," and that these statements "implied that the Slack App was a market leader with unique advantages over its competitors and that the Company possessed the ability to scale up its services to reach more lucrative enterprise customers." Id. ¶¶ 91-93 (emphasis removed). Slack also stated that it had a "[d]ifferentiated go-to-market strategy," comprised of a customer engagement model and expansion within larger organizations, and implied this was responsible for " ‘rapid[ ]’ growth ... high customer engagement ... [and] revenue growth and decreasing net losses from 2017 through 2019." Id. ¶¶ 77-78. But Slack's "growth was slowing down in several aspects, including its key metric, [daily active users]." Id. ¶ 82.

III. Performance After the Direct Listing

On the first day of trading, June 20, 2019, shares began selling at $38.50. Id. ¶ 4. On June 28, 2019, Slack experienced a service outage of approximately fifteen hours affecting customers in the United States...