Carlyle Arbitration Requirement Stokes Fury

Jan 27 2012 | 11:52am ET

The Carlyle Group's plans to forestall investor lawsuits against it after its initial public offering has sparked angry recriminations from shareholders rights group and Capitol Hill.

In a revised registration statement, Carlyle said that its shareholders would be forced to take any disputes with the company to arbitration, rather than to court. "You give up your rights immediately under this construct," Rep. Gary Ackerman (D-N.Y.) told Bloomberg News. "It should not be allowed to happen."

Sen. Richard Blumenthal (D-Conn.) agreed. "The [Securities and Exchange Commission] should reject this effort to circumvent shareholder rights because it will be an extraordinary and enduring precedent," Blumenthal, the Nutmeg State's former attorney general, said. "It will open the door to arbitration clauses in all IPOs, and thereby eviscerate shareholder rights."

Indeed the SEC must approve Carlyle's registration statement before it can list on the Nasdaq Stock Market. The agency refused to approve a less-restrictive arbitration clause 20 years ago.

If it does reject Carlyle's bid, the private equity giant could seek to overturn its decision in the courts. Carlyle may argue that its status as a limited partnership and not a corporation gives it the right to demand arbitration—LPs have fewer fiduciary duties to shareholders than corporations.

"The majority of enforcement of the U.S. securities law is not done by the SEC but by attorneys for investors," Lynn Turner, the SEC's former chief accountant, told Bloomberg. "This Carlyle proposal destroys that enforcement mechanism, much to the detriment of 100 million Americans."

Gregory Smith, general counsel for the Public Employees' Retirement Association of Colorado and a member of the Council of Institutional Investors, blasted Carlyle's motives.

"This reflects a company and management team that fears accountability to the very people" who will own and run it, he told Bloomberg. "You have to ask what they are hiding or what are they preparing to hide?"


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