Carlyle Group Abandons Mandatory Arbitration Clause in Its IPO


A two-decades-old rule by the Securities and Exchange Commission prevents companies from going public if the company attempts to limit the rights of shareholders from filing a class-action lawsuit. The ruling has prompted the Carlyle Group, a multinational asset management firm, to remove a mandatory arbitration clause in its initial public offering.

Seeking to go public after 24 years as a private equity group, the Carlyle Group recently abandoned the provision rather than file a lawsuit against the SEC. It faced opposition from the SEC and various members of Congress.

Senator Richard Bloomenthal, D-Conn., said in an interview with Bloomberg that a mandatory arbitration clause in an IPO would “open the door to arbitration clauses in all IPOs, and thereby eviscerate shareholder rights.”

However, Hal Scott, a professor at Harvard Law School, told Bloomberg that “competitiveness is at stake,” and that if the SEC was going to block Carlyle’s IPO, it was entitled to know why the SEC found class action lawsuits by stockholders helpful, as opposed to arbitration.

From 2001 to 2010, settlements from class action lawsuits by shareholders have totaled $52.7 billion, according to Cornerstone Research.

The U.S. Supreme Court in recent years has held that arbitration is the preferred method of resolving stockholder disputes. In addition, Carlyle is a limited partnership, which would be key to any decision by the Supreme Court. Delaware state law, which governs most U.S. corporations, allows partnerships more leeway regarding fiduciary duties to shareholders. Thus, many legal experts have speculated that if the Carlyle Group had taken the issue to the Supreme Court, it would have allowed the private equity firm to go public with a ban on class action lawsuits.

The Supreme Court has held that brokerages can force arbitration for customer disputes, but has yet to rule on whether public companies can extend the same concept to their shareholders.

For questions regarding the legality of an IPO or securities transaction, consult an experienced business and securities law firm.

Schedule a free initial consultation by calling Shustak Reynolds & Partners, P.C. toll free at 888-748-8748, or contact us online.

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