By Rachel O’Brien, Law360
— A shareholder of messaging platform Slack Technologies Inc. filed a derivative suit on Friday in Delaware federal court, alleging the company’s executives hid its financial woes and the success of a competitor around the time of its direct public offering, causing a sharp decline in its stock shortly after executives reaped millions.
The complaint by Illinois resident Kristen Gorenberg, with allegations similar to an investor suit filed in September in California federal court, claims that Slack’s platform had “myriad service outages” in 2018 and the “platform remained highly susceptible to such outages,” a fact hidden from investors at the time of the direct public offering in June 2019.
Slack’s executives compounded the problem by agreeing to reimburse subscribers for outages at 100 times their subscription rates, even if the subscriber hadn’t had an outage or requested a reimbursement, at a cost of $8.2 million, the suit says.
The suit also claims that one of Slack’s chief competitors, Microsoft Teams, had already gained a significant foothold in the industry and was rapidly increasing its market share, something investors were unaware of at the time of the offering.
In fact, Microsoft Teams claimed 13 million daily average users, compared with Slack’s 10 million, and expanded that lead significantly in the ensuing months, 20 million users to 12 million, the complaint says.
The suit says seven named executives of the San Francisco-based company, including CEO Steward Butterfield, conspired to hide its problems before the direct public offering.
“The director defendants breached their duties of loyalty and good faith by causing the company to issue false and misleading statements in its offering documents,” it says. “As a result, the company has expended, and will continue to expend, significant sums of money related to investigations and lawsuits.”
The complaint comes two days after the Slack shareholder pressing the California complaint regarding service outage credits decided not to amend some dismissed claims.
The judge in that case partially granted a motion to dismiss in April, finding that several of the company’s statements that shareholders had been challenging weren’t misleading.
U.S. District Judge Susan Illston gave plaintiff Fiyyaz Pirani until May 6 to amend his complaint regarding the dismissed claims. But on May 6, Pirani told Judge Illston in a letter that he wouldn’t be amending the complaint.
The service outages, the generous reimbursements given to subscribers and competition from Microsoft Teams led to Slack’s stock price dropping, Gorenberg claims in Friday’s suit, a few months after executives made millions on their stock sales.
Slack sold 118 million shares of its existing stock in its direct public offering last June 20, with the share price opening at $38.50 and trading as high as $42 before closing at $38.62.
“Slack’s existing stockholders, especially its officers and directors, made a fortune selling their shares to investors in the DPO,” the suit said.
Butterfield sold approximately 1.4 million shares in the DPO, making more than $53 million, while DPO investors were less fortunate, investors said.
By Sept. 9, shares had dropped to $24.92, a more than 35% decline, according to the suit.
“The director defendants, collectively and individually, initiated a course of conduct that was designed to and did conceal that Slack’s stock was materially and systematically overstated during the relevant period,” the investors allege.
A Slack representative declined to comment Monday.
Attorneys for investors didn’t immediately respond to a request for comment Monday.
Gorenberg is represented by Ryan M. Ernst of O’Kelly & Ernst LLC and Justin A. Kuehn and Fletcher W. Moore of Moore Kuehn PLLC.
Slack is represented by Michael D. Celio, Matthew S. Kahn and Michael J. Kahn of Gibson Dunn & Crutcher LLP.
The case is Kristen Gorenberg v. Steward Butterfield et al., case number 1:20-cv-00625, in the U.S. District Court for the District of Delaware.
–Additional reporting by Hailey Konnath and Emilie Ruscoe. Editing by Brian Baresch.
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