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Carlyle Group, the Washington (D.C.) buyout firm that’s preparing to go public this year, wants to bar future shareholders from filing individual and class actions. The firm revised its offering documents on Jan. 10 to say that investors who purchase company shares must settle any subsequent claims against Carlyle through arbitration in Wilmington, Del. That could limit the ability of stockholders to win big awards for securities law violations such as fraud, several attorneys say.
The Supreme Court has issued a series of rulings in recent years upholding the right of companies to require the use of arbitration to resolve disputes with consumers. Carlyle is seeking to extend this concept to public shareholders, a move that could run up against a bedrock principle of U.S. securities law—the ability of investors to seek redress in federal court. “What we are talking about is legally uncharted territory,” says Donald C. Langevoort, a law professor at Georgetown University in Washington who previously worked for the Securities and Exchange Commission. “I would be surprised if the courts allow any company to entirely foreclose shareholder rights to sue under federal securities laws.” Christopher W. Ullman, a spokesman for Carlyle, declined to comment.
At issue are provisions of U.S. securities laws that bar investors from waiving their rights to seek damages. After the Supreme Court ruled in the late 1980s that this language applied only to substantive rights and not to procedural ones, brokerages began including mandatory arbitration clauses in their customer contracts, according to a 2006 report by the independent Committee on Capital Markets Regulation. The committee said the court had yet to rule on whether securities litigation against a public company can be brought to arbitration. “If you really could enforce it, you would see every publicly traded company having that, and you don’t,” says Kevin LaCroix, an executive vice-president at OakBridge Insurance Services, a Bloomfield (Conn.) firm that helps corporations obtain officers’ and directors’ liability insurance.
Carlyle, co-founded by David M. Rubenstein, William E. Conway Jr., and Daniel D’Aniello, is at least the fifth buyout firm to go public since Fortress Investment Group (FIG) held an initial public offering in February 2007, followed by Blackstone Group (BX), KKR (KKR), and Apollo Global Management (APO). Carlyle would be the first to impose an arbitration requirement, according to copies of the limited partnership agreements the companies have on their websites or in SEC filings.
The SEC must approve Carlyle’s registration statement before the private equity firm can sell shares to the public. Florence Harmon, a spokeswoman for the SEC, declined to comment. The agency has historically refused to permit a public offering by a company whose charter mandates arbitration and precludes class actions, John C. Coffee Jr., a professor at Columbia Law School in New York, said in an e-mail. The SEC blocked a 1990 IPO by a Philadelphia savings and loan that had included a shareholder arbitration clause in its corporate charter, according to Carl E. Schneider, a former securities attorney who represented the thrift. Coffee says the SEC may consider Carlyle to be different because it’s a limited partnership rather than a corporation: “It will be a difficult precedent to contain if the SEC permits this.”
The bottom line: Carlyle, at least the fifth private equity firm to go public, is trying to be the first to ban shareholder lawsuits.