Carlyle Group Drops Controversial Arbitration Requirement for Shareholders

By and | February 6, 2012

Carlyle Group LP, a giant private equity firm that has filed for an initial public offering, has dropped a controversial effort to require its future shareholders to resolve claims through arbitration rather than in court.

The Washington, D.C.-based firm, with $148 billion of assets under management, said on Friday it made the change after consulting with the U.S. Securities and Exchange Commission, which must approve any plans to go public, as well as investors and other interested parties.

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

Private equity firms that go public traditionally offer shareholders little say in governance, offering “units” that confer limited voting rights and no ability to remove the general partner.

But in a regulatory filing on Jan. 10, Carlyle went one step further, requiring arbitration of any disputes and barring shareholders from pursuing individual or class-action lawsuits in court. Friday’s decision drops that limitation.

“I’m enormously pleased that Carlyle has not only done the right thing for itself, but also set an example for others contemplating IPOs and, hopefully, sent a message to the financial community about the unfairness of arbitration,” Sen. Richard Blumenthal, a Connecticut Democrat who had opposed the arbitration requirement, said in a telephone interview.

In a statement on Friday, Carlyle said it first proposed requiring arbitration, “because we believed that arbitrating claims would be more efficient, cost effective and beneficial to our unitholders.”

The firm sent a somewhat different message in the Jan. 10 filing, telling prospective shareholders that requiring arbitration could mean their “cost of seeking and obtaining recoveries may be higher than otherwise would be the case.”

No other major, publicly-listed U.S. private equity firm – Blackstone Group LP, KKR & Co or Apollo Global Management LLC – imposes a similar litigation ban on its shareholders.

“Wonderful,” Eleanor Bloxham, president of the Corporate Governance Alliance, said in an interview upon learning of the change.

“I’m sure they faced strong resistance, because they wouldn’t want to create this level of controversy around their IPO,” she added. “Our system of capitalism works because there is a host of checks and balances. This proposal represented a chipping away of shareholder rights.”

Carlyle was co-founded in 1987 by William Conway and David Rubenstein, who are its co-chief executives, and Daniel D’Aniello, who serves as chairman.

According to its website, the firm has investments in a wide range of companies such as movie theater operator AMC Entertainment, donut maker Dunkin Brands and car rental company Hertz.


The U.S. Supreme Court has made it easier in recent years for companies to enforce mandatory arbitration to resolve customer disputes, including last April in a case involving a unit of AT&T Inc.

Some consumer advocates believe arbitration favors companies by making it too costly for claimants to bring cases and more difficult to win large awards.

Lawsuits such as those alleging securities fraud, in contrast, often let parties pool their resources. This can lead to lower legal bills and often results in bigger recoveries because more claimants are able to participate.

Earlier on Friday, Blumenthal and two Democratic colleagues, Al Franken of Minnesota and Robert Menendez of New Jersey, wrote to SEC Chairman Mary Schapiro urging her not to approve Carlyle’s IPO with the arbitration clause.

“This kind of provision should be off the table,” Blumenthal said in his telephone interview. “Carlyle has rightly responded to criticism of a provision that is blatantly one-sided, potentially deceptive and clearly unfair.”

In the AT&T case, a divided Supreme Court said the company’s AT&T Mobility unit could require wireless customers to waive their right to bring class-action cases to resolve disputes, even over small sums.

Then last month, on the same day Carlyle proposed the arbitration requirement, the Supreme Court upheld the ability of Synovus Financial Corp and CompuCredit Holdings Corp to force customers to resolve credit card disputes in arbitration.

The American Association for Justice, a trade group once known as the Association of Trial Lawyers of America, in a statement called Carlyle’s change of plans “a strong signal to other companies” not to adopt forced arbitration clauses.

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