News & Analysis

Carlyle gives in on arbitration

The firm, which registered for an IPO in September, had planned to bar its future unitholders from the ability to file class-action lawsuits, but has backed off on that provision.

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The Carlyle Group has dropped its efforts to force its future unitholders to go to private arbitration to resolve grievances, a provision it had included in its public filing registration as a way to save the organisation money and time from costly class-action lawsuits.

“After consultation with the [US Securities and Exchange Commission], Carlyle investors and other interested parties, we have decided to withdraw the proposed arbitration provision,” a spokesperson for the firm said in a statement.

Carlyle, which filed registration forms to raise $100 million in September, sought the provision to force arbitration as some recent Supreme Court decisions seemed to favour the arbitration route for public company investors, according to a source with knowledge of the firm’s thinking.

More importantly, the arbitration process would be less costly – both in terms of money and time – for Carlyle’s unitholders, the person said.

“It’s more cost effective, and more efficient for unitholders,” the person said. “It’s better for them because class-action lawsuits are amazingly expensive, and that cost eventually gets passed on to unitholders.”

However, groups including the SEC and various US politicians pressured Carlyle into losing the provision.

“Requiring the individual, confidential arbitration of shareholder claims would limit shareholders’ ability to enforce their rights,” according to a letter from US Senators Al Franken, Richard Blumenthal and Robert Menendez to SEC chairman Mary Shapiro.

Class-action lawsuits by public shareholders against corporations are not unusual; The Blackstone Group has been fighting a class-action lawsuit brought by investors who bought 133 million units of the firm’s initial public offering for $3.5 billion. The investors are seeking to recover money lost when the shares declined in value. Blackstone failed to mention in IPO documents problems experienced by two portfolio companies, as well as its exposure to the subprime mortgage crisis, the plaintiffs argued, according to court documents.