January 20, 2012
Carlyle's IPO: Can Carlyle's Limited Partnership Agreement Require Public Investors to Arbitrate All Claims?
Posted by Christine Hurt

Carlyle Group is the next in a line of private equity firms to want to go public in an initial public offering.  Our old pal Victor Fleischer has written extensively about one of the first of these publicly traded partnerships from the buyout firm industry and the tax manueverings of these PTP IPOs.  Well, Carlyle's IPO rings with a different controversy.

Having first filed for an IPO in September, Carlyle filed its second amendment this month, which contained an interesting new item in its "Risk Factors" section.  The following appears under the heading "Risks Related to Our Organizational Structure":

Our partnership agreement will contain provisions that require individual arbitration of any disputes arising out of or relating in any way to our partnership agreement or the common units, including those under the federal securities laws of the United States. Accordingly, you will not be permitted to bring any such claim in court or as part of any representative or class proceeding and your cost of seeking and obtaining recoveries may be higher than otherwise would be the case.

And, to be specific, this means claims relating to:

the provisions of our partnership agreement (including without limitation the validity, scope or enforceability of the arbitration provisions of our partnership agreement or the arbitrability of any such claim, suit, action or proceeding);

• the duties, obligations or liabilities of us to our common unitholders or our general partner, or of our common unitholders or our general partner to us, or among partners;

• the rights or powers of, or restrictions on, us, our common unitholders or our general partner; • any provision of the Delaware Limited Partnership Act or other similar applicable statutes;

• any other instrument, document, agreement or certificate contemplated either by any provision of the Delaware Limited Partnership Act relating to us or by our partnership agreement; and

• the federal securities laws of the United States or the securities or antifraud laws of any international, national, state, provincial, territorial, local or other governmental or regulatory authority, including, in each case, the applicable rules and regulations promulgated thereunder.

And, just in case you were wondering, readers are told in bold that claims may only be brought to the artbitrator in the investor's individual capacity and arbitrators may not consolidate claims.  copies of the LP agreement have not been filed with the SEC yet, but reports say that arbitration would be held in Wilmington, DE. 

This report quotes a lot of folks, including law prof Don Langevoort, on whether this provision would fly with the SEC, which has to approve its registration for IPO.  This provision actually modifies the affect of the securities acts, which might peeve the SEC.  Apparently, the SEC has said no to this kid of thing before, but not with a PTP and not since 1990, which seems like an entirely different era as far as investor rights go.

As an observer, this kind of provision makes me nervous for investors.  However, as a law professor, I think it would be fascinating if the SEC okayed the provision and the IPO went forward.  Think of the interesting questions that might be answered if one or more (hopefully a lot more) public companies had these kind of waivers:  Would shareholders demand to pay less for no recourse to class-action securities claims?  Would different kinds of shareholders care?  Ironically, small shareholders might not care at all because they rarely follow class actions for their shares anyway, but large shareholders might care a lot.  Would companies with these types of waivers disclose more or less?  More accurately or less accurately?  Could this be similar to dual class common, an evil that shareholders really didn't care about?

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