Carlyle Group LP, the Washington-based buyout company that'spreparing to go public, is seeking to bar its future shareholdersfrom filing individual and class-action lawsuits.

The firm revised its governing documents last week to say thatinvestors who purchase company shares must settle any subsequentclaims against Carlyle through arbitration in Wilmington, Delaware.That could limit the ability of stockholders to win big awards forsecurities-law violations such as fraud, several attorneyssaid.

The U.S. Supreme Court has issued a series of rulings in recentyears upholding the right of companies to require the use ofarbitration to resolve disputes with consumers. Carlyle is seekingto extend this principle to public shareholders, a move that couldrun up against a bedrock of U.S. securities law, the ability ofinvestors to seek redress in federal court.

“What we are talking about is legally uncharted territory,” saidDonald Langevoort, a law professor at Georgetown University inWashington who previously worked for the U.S. Securities andExchange Commission. “I would be surprised if the courts allow anycompany to entirely foreclose shareholder rights to sue underfederal securities laws.”

Chris Ullman, a spokesman for Carlyle, declined to comment.

At issue are provisions of U.S. securities laws that barinvestors from waiving their rights to seek damages.

After the Supreme Court ruled in the late 1980s that thislanguage applied only to substantive rights and not to proceduralones, brokerages began including mandatory arbitration clauses intheir customer contracts, according to a 2006 report by theindependent Committee on Capital Markets Regulation. The committeesaid the court had yet to rule on whether securities litigationagainst a public company can be brought to arbitration.

“If you really could enforce it, you would see every publiclytraded company having that, and you don't,” said Kevin LaCroix, anexecutive vice president at OakBridge Insurance Services LLC, aBloomfield, Connecticut, firm that helps corporations obtainofficers' and directors' liability insurance. Arbitration clauseshave primarily been used in bilateral contracts between companiesand their customers, LaCroix said.

The capital markets committee, in a November 2006 reportrequested by then-U.S. Treasury Secretary Henry Paulson,recommended that public companies be allowed to hold shareholdervotes on the use of arbitration to resolve securities law and otherclaims. The threat of class-action suits was discouraging privateas well as foreign companies from going public in the U.S., thecommittee said.

'Powerful Reasons'

“Carlyle would be highly sensitive to this question because theyhave looked at it over and over again in the context of whether totake private companies public,” Hal Scott, a professor at HarvardLaw School in Cambridge, Massachusetts and the committee'sdirector, said in a telephone interview. “There are powerfulreasons to do what Carlyle is trying to do.”

The SEC must approve Carlyle's registration statement before theprivate-equity firm can sell shares to the public. The agency hashistorically refused to permit a public offering by a company whosecharter mandates arbitration and precludes class actions, JohnCoffee, a professor at Columbia Law School in New York, said in ane-mail response to questions.

Carlyle may be considered different because it's a limitedpartnership rather than a corporation, Coffee said.

“It will be a difficult precedent to contain if the SEC permitsthis,” he said.

Florence Harmon, a spokeswoman for the SEC, declined tocomment.

Carlyle, co-founded by David Rubenstein,William Conway and Daniel D'Aniello, is at least the fifth buyoutfirm to go public since Fortress Investment Group LLC held aninitial public offering in February 2007, followed by BlackstoneGroup LP, KKR & Co., and Apollo Global Management LLC. Carlylewould be the first to impose an arbitration requirement, accordingto copies of the limited-partnership agreements the companies haveon their websites or in SEC filings.

Blackstone was named in six 2008 lawsuits that were laterconsolidated into a class-action complaint alleging that theprospectus for the company's IPO was false and misleading, in partbecause it overstated the value of the firm's private- equity andreal estate investments. The plaintiffs seek damages and costs, aswell as other relief, Blackstone said in its latest quarterlyreport, adding that the case is “totally without merit” and thatthe firm intends to “vigorously” defend itself. Blackstone sharestrade at about half the company's June 2007 IPO price of $31each.

Carlyle Capital Suits

From 2009 through 2011, Carlyle was targeted in lawsuits tied toCarlyle Capital Corp. Ltd., a publicly traded bond fund the buyoutfirm shuttered at a cost of more than $152 million after its assetsplummeted in value. The plaintiffs include Carlyle Capital'sliquidators, who sought $1 billion in damages through fourcomplaints filed in July 2010 in Delaware, New York, the Districtof Columbia and Guernsey, two of which have since beendismissed.

When Carlyle initially filed for the stock sale in September,the firm said its limited-partnership agreement would require anyshareholder lawsuits be filed in Delaware Chancery court, which isknown for its expertise in adjudicating such claims. Carlylerevamped the agreement, according to an amended registration filedJan. 10, to say that arbitration would be the “exclusive manner”for the resolution of any claims, suits, actions or proceedings,including those made under federal securities laws.

Investors won't be able to bring claims in federal or statecourt, or file or participate in class-action suits, even througharbitration, Carlyle said in the IPO filing. All proceedings andawards will be confidential, according to the document. Investorswho buy Carlyle shares will have automatically agreed to theprovision, the filing said.

Requiring the arbitration of individual claims in lieu ofclass-action lawsuits makes it more expensive for plaintiffs topursue damages and more difficult to win big awards, said JamesHill, who runs the private-equity practice for the Cleveland lawfirm Benesch LLP. That's partly because attorneys are limited intheir ability to take depositions from senior executives and todemand internal documents that can provide facts to support largerclaims, he said.

S&L Rejected

“If you are on the moneyed side, you would like to put anarbitration clause in every contract,” Hill said in a telephoneinterview. “It's a far more limited opportunity for theplaintiff.”

The SEC blocked a 1990 IPO by a Philadelphia savings and loanthat had included a shareholder-arbitration clause in its corporatecharter, according to Carl Schneider, a former securities attorneywho represented the thrift. The SEC said the provision seriouslyimpaired the “deterrent function” of shareholder lawsuits and actedas a “collective waiver of rights” without giving adequate noticeto investors who bought shares in the secondary market, accordingto an article he wrote that year in InSights magazine.

“The commission went ballistic,” Schneider said in a telephoneinterview. “They refused to let the offering go public” until theclause was removed, said Schneider, who was a partner at theonetime Philadelphia law firm Wolf, Block, Schorr & Solis-Cohenand is now retired.

The business environment has changed since 1990, with theSupreme Court issuing a number of decisions during the past severalyears favoring arbitration as a means of resolving disputes,according to Schneider. The court ruled in April that an AT&TInc. unit could bar wireless customers from bringing class-actionclaims under mandatory-arbitration clauses in their cell-phonecontracts.

“It's the class issue that was important,” said Harvard's Scott.“Class arbitration is even worse than class litigation” becausecertain rights, such as the ability to appeal, are more limited, hesaid.

Publicly traded limited partnerships have also been granted moreleeway than corporations in restricting the ability of investors tomake claims, said John Olson, a securities attorney in theWashington office of Gibson, Dunn & Crutcher LLP. While theselimited partnerships have primarily been in the energy and mineralresources businesses, Olson said buyout firms should be eligiblefor similar treatment.

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