Carlyle Drops Class-Action Ban

PE firm amends IPO documents amid mounting opposition.

Carlyle Group LP abandoned a plan to ban shareholders from filing class-action lawsuits after U.S. regulators threatened to block a stock sale the private-equity firm is seeking to complete as soon as April.

The Washington-based firm amended the documents for its initial public offering on Jan. 10 to include a provision that would have required future stockholders to resolve any claim against Carlyle through arbitration rather than in court. The move provoked controversy among lawmakers and shareholder rights advocates, who urged the U.S. Securities and Exchange Commission not to approve the arbitration clause.

The SEC subsequently told Carlyle that it wouldn’t sign off on the IPO as long as the provision was included, according to a statement the agency issued today. In addition, the proposal was likely to draw opposition from public pensions and agencies, which provided about 40 percent of the capital commitments to Carlyle’s funds as of Sept. 30 and would also have been potential customers for the IPO.

“My guess is they were getting pushback from investors” on the arbitration provision, said Stephen Bainbridge, a corporate and securities law professor at the UCLA School of Law in Los Angeles. “Probably their underwriters were telling them that the investor community was not going to go for it.”

The American Association for Justice, the primary trade group for trial lawyers, urged its members to contact public pension funds and ask them to weigh in with Carlyle and the SEC, according to Michelle Widmann, a spokeswoman for the Washington-based association. The Council of Institutional Investors, an association of pension funds, endowments and foundations that oversee more than $3 trillion in assets, had also placed the Carlyle proposal on its policy committee agenda for review, according to Jeff Mahoney, the organization’s general counsel.

The underwriters Carlyle picked for the IPO, including JPMorgan Chase & Co., Citigroup Inc. and Credit Suisse Group AG, are planning a road show early in the second quarter to market the shares to investors, according to a person with direct knowledge of the plans, who asked not to be identified because the information isn’t public. The road show is one of the final steps before a company goes public.

Carlyle’s initiative followed a series of U.S. Supreme Court rulings that said arbitration was the preferred method of resolving disputes between corporations and their customers and employees. That concept could have been extended to U.S. securities markets had Carlyle succeeded in going public with a mandatory-arbitration clause.


Earlier SEC Decision

More than two decades ago, the SEC blocked a stock sale by Franklin First Financial Corp., a Wilkes Barre, Pennsylvania, savings and loan that had also included a mandatory-arbitration provision in its corporate charter, according to Carl Schneider, a former securities attorney who represented the thrift. John Nester, an SEC spokesman, said that the agency was prepared to take similar steps in response to Carlyle’s IPO.

“We advised them that the staff was not prepared to clear the filing with the mandatory-arbitration provision included,” Nester said in an e-mailed statement. “We are pleased they have announced that they plan to remove this provision.”

Carlyle believed that arbitrating claims would have been more efficient, cost effective and beneficial for its investors, Chris Ullman, a spokesman for the firm, said in a statement. The buyout firm decided to withdraw the proposal “after consultations with the SEC, Carlyle investors and other interested parties,” according to the statement.

Democratic Senators Richard Blumenthal of Connecticut, Al Franken of Minnesota and Robert Menendez of New Jersey today urged SEC Chairman Mary Shapiro not to clear the IPO unless Carlyle drops the arbitration clause. Schapiro also served as one of the agency’s five commissioners in the late 1980s, when the SEC blocked the Franklin First IPO.

The provision “would unlawfully deprive investors of their ability to vindicate their statutory rights,” the senators wrote. The SEC should “maintain its longstanding policy of opposing the inclusion of provisions requiring mandatory arbitration of shareholder disputes.”

Former SEC Chairman Harvey Pitt said the issue probably faced a 3-2 ideological split on the current commission, which includes two Republicans, two Democrats and a politically independent chairman who usually votes with the Democrats. If it had come to a different commission, the odds may have been better, he said in an interview yesterday.


‘Done Its Job’

“If somebody tells you that you’re going to have a very different set of remedies if you make this investment, and you still want to invest, it seems to me government has done its job,” said Pitt, a Republican. “It would have passed on my commission.”

Carlyle, co-founded by David Rubenstein, William Conway and Daniel D’Aniello, would be at least the fifth buyout firm to go public since Fortress Investment Group LLC held an IPO in February 2007, followed by Blackstone Group LP, KKR & Co. and Apollo Global Management LLC. Carlyle would have been 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.

Blackstone was named in six 2008 lawsuits that were later consolidated into a class-action complaint alleging that the prospectus for the company’s IPO was false and misleading, in part because it overstated the value of the firm’s private- equity and real estate investments.

The plaintiffs seek damages and costs, as well as other relief, Blackstone said in its latest quarterly report, adding that the case is “totally without merit” and that the firm intends to “vigorously” defend itself.

Blackstone shares trade at about 46 percent below the company’s June 2007 IPO price of $31 each.

From 2009 through 2011, Carlyle was targeted in lawsuits tied to Carlyle Capital Corp., a publicly traded bond fund the buyout firm shuttered at a cost of more than $152 million after its assets plummeted in value. The plaintiffs include Carlyle Capital’s liquidators, who sought $1 billion in damages through four complaints filed in July 2010 in Delaware, New York, the District of Columbia and Guernsey. Two of the complaints have since been dismissed.

The independent Committee on Capital Markets Regulation, in a November 2006 report requested by then-U.S. Treasury Secretary Henry Paulson, recommended that public companies be allowed to hold shareholder votes on the use of arbitration to resolve securities law and other claims. The threat of class-action suits was discouraging private as well as foreign companies from going public in the U.S., the committee said.

“What’s at stake is the competitiveness of our capital markets,” Hal Scott, a professor at Harvard Law School in Cambridge, Massachusetts, and the committee’s director, said in an interview today. “If the SEC is going to take this position, we are all entitled to know why they think securities class actions are helpful.”



For an earlier report, see Carlyle Seeks to Ban Investor Suits.


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