Carlyle Group LP’s plan to protect itself from class-action lawsuits may set a precedent that undermines shareholder rights and encourages more companies to follow suit, said lawyers, investors and government officials.
The buyout firm this month amended a regulatory filing to require future shareholders to resolve claims against it through arbitration. The U.S. Securities and Exchange Commission, which blocked an initial public offering with a less-restrictive arbitration clause more than 20 years ago, must decide whether to allow Washington-based Carlyle’s offering to proceed.
Preventing the share sale could lead to a showdown between the agency and the Supreme Court, which has issued a series of pro-arbitration decisions in recent years. Allowing the IPO would rile congressional Democrats and pave the way for other buyout firms, hedge fund managers and traditional corporations to go public with similar restrictions.
“The SEC should reject this effort to circumvent shareholder rights because it will be an extraordinary and enduring precedent,” Sen. Richard Blumenthal, D-Conn., who serves on the judiciary committee, said in telephone interview. “It will open the door to arbitration clauses in all IPOs, and thereby eviscerate shareholder rights.”
Florence Harmon, an SEC spokeswoman in Washington, declined to comment, as did Chris Ullman, a Carlyle spokesman.
Arbitrations differ from court proceedings in several ways: they are generally confidential, permit less discovery by plaintiffs and have fewer avenues for appeal.