The Deal Prof looks at The Carlyle Group's proposed IPO and
figures it's a corporate governance dud. I agree. Carlyle's Amended and
Restated Limited Partnership Agreement (Appendix A to the S-1A) has a dispute resolution provision
that is reprinted in relevant part below (it's lengthy, sorry). It does
two things. First, it requires that limited partners in Carlyle's soon to
be publicly traded firm resolve all their dispute only in private arbitration
and not in any court. Second, it prohibits any arbitration be brought in
a representative capacity.
Now, I'm the first one to admit that there is plenty of
abuse of shareholder litigation. These days, one can't imagine a merger
announcement not being accompanied by shareholder litigation. But still,
the correct answer can't be to eliminate representative shareholder litigation
altogether. The way this arbitration provision is written, it's pretty
clear that no one should ever bring any litigation against management at all
... ever. That can't be the correct result. For all its warts, in a
world where shareholding is increasingly dominated by institutional
shareholders who don't have incentives to provide intense monitoring and are
not permitted to perform the "Wall Street walk", shareholder
litigation is one of the few governance arrows left in the corporate governance
quiver.
Sure, there are plenty of suits that aren't worth more
than their nuisance value. (Steven Davidoff highlights the sheer volume
of these transaction related lawsuits in his
new paper examining the "Great Game" and the rise of
transaction-related litigation). But, at the same time, there are other
valuable cases like Delmonte or Southern Peru. If Carlyle's approach becomes the norm as
firms go public there are real downsides to firms opting out of the formal
legal regime.
First, there's a threat to the development and
maintainence of the corporate law. This arbitration provision goes
further than Delaware's optional arbitration system that I've blogged about
before. If parties are required to bring all corporate litigation to
private arbitrators, then corporate law litigation will quickly disappear from
the courts and the law will begin to atrophy. Rather than having a deep
and rich common law, the corporate law will become nothing more than an inside
game with only a small number of litigators and professionals being in the
"know" as to the current state of the private law.
Second, even if one accepts that a private law system is
acceptable, and I don't think that's correct, then there are still important
incentive effects associated with the elimination of representative litigation.
If arbitration may not be pursued in a representative capacity, then the
incentives for any plaintiff's counsel to be in this business quickly fall
away. The result is, effectively, that shareholder arbitration for a publicly
traded issuer would disappear.
Now, I guess if you are incumbent management eliminating
pesky shareholders is a good thing. On the other hand, if you are an
investor, you have less reason to be sanguine about managers taking away one
more tool for you to monitor their behavior.
I've previously recommended
exclusive forum provisions as a middle ground to reduce incentives to
engage in nuisance-like shareholder litigation while leaving open avenues for
litigants to bring claims before courts. That middle-ground strikes me as
a better result than the more extreme route taken by Carlyle. Of course,
Carlyle's managers have different incentives and care about different things
than do the courts in Delaware or investors. The Deal Prof doesn't think that
the SEC will permit Carlyle to go public with this provision intact. I
hope he's right. In that event, Carlyle's Section 16.9(c) provides for an
exclusive forum provision to govern disputes should the arbitration provision
be voided by a court or otherwise be found to be as unenforceable.
_________________________________________________________
Carlyle Amended & Restated Limited Partnership
Agreement
Section 16.9. Dispute Resolution.
(a) The Partnership, each Partner, each Record
Holder, each other Person who acquires an interest in a Partnership Security
and each other Person who is bound by this Agreement (collectively,
the "Consenting Parties" and each a "Consenting Party")
(i) irrevocably agrees that, unless the General Partner shall otherwise agree
in writing, any claims, suits, actions or proceedings arising out of or
relating in any way to this Agreement or any Partnership Interest (including,
without limitation, any claims, suits or actions under or to interpret, apply
or enforce (A) the provisions of this Agreement, including without
limitation the validity, scope or enforceability of this Section 16.9(a)
or the arbitrability of any Dispute (as defined below), (B) the duties,
obligations or liabilities of the Partnership to the Limited Partners or the General
Partner, or of Limited Partners or the General Partner to the Partnership, or
among Partners, (C) the rights or powers of, or restrictions on, the
Partnership, the Limited Partners or the General Partner, (D) any
provision of the Delaware Limited Partnership Act or other similar applicable
statutes, (E) any other instrument, document, agreement or certificate
contemplated either by any provision of the Delaware Limited Partnership Act
relating to the Partnership or by this Agreement or (F) 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 (regardless of whether such
Disputes (x) sound in contract, tort, fraud or otherwise, (y) are
based on common law, statutory, equitable, legal or other grounds, or
(z) are derivative or direct claims)) (a "Dispute"), shall be finally settled
by arbitration conducted by three arbitrators (or, in the event the amount of
quantified claims and/or estimated monetary value of other claims contained in
the applicable request for arbitration is less than $3.0 million, by a sole
arbitrator) in Wilmington, Delaware in accordance with the Rules of Arbitration
of the International Chamber of Commerce (including the rules relating to costs
and fees) existing on the date of this Agreement except to the extent those
rules are inconsistent with the terms of this Section 16.9, and that such
arbitration shall be the exclusive manner pursuant to which any Dispute shall
be resolved; (ii) agrees that this Agreement involves commerce and is
governed by the Federal Arbitration Act, 9 U.S.C. Section 1, et seq.,
and any applicable treaties governing the recognition and enforcement of
international arbitration agreements and awards; (iii) agrees to take all
steps necessary or advisable, including the execution of documents to be filed
with the International Court of Arbitration or the International Centre for ADR
in order to properly submit any Dispute for arbitration pursuant to this
Section 16.9; (iv) irrevocably waives, to the fullest extent
permitted by law, any objection it may have or hereafter have to the submission
of any Dispute for arbitration pursuant to this Section 16.9 and any right
to lay claim to jurisdiction in any venue; (v) agrees that (A) the
arbitrator(s) shall be U.S. lawyers. U.S. law
professors and/or retired U.S. judges and all arbitrators, including
the president of the arbitral tribunal, may be U.S. nationals and
(B) the arbitrator(s) shall conduct the proceedings in the English
language; (vi) agrees that except as required by law (including any
disclosure requirement to which the Partnership may be subject under any
securities law, rule or regulation or applicable securities exchange rule or
requirement) or as may be reasonably required in connection with ancillary
judicial proceedings to compel arbitration, to obtain temporary or preliminary
judicial relief in aid of arbitration, or to confirm or challenge an
arbitration award, the arbitration proceedings, including any hearings, shall
be confidential, and the parties shall not disclose any awards, any materials
in the proceedings created for the purpose of the arbitration, or any documents
produced by another party in the proceedings not otherwise in the public
domain; (vii) irrevocably agrees that, unless the General Partner and the
relevant named party or parties shall otherwise mutually agree in writing,
(A) the arbitrator(s) may award declaratory or injunctive relief only in
favor of the individual party seeking relief and only to the extent necessary
to provide relief warranted by that party's individual claim, (B) SUCH
CONSENTING PARTY MAY BRING CLAIMS ONLY IN ITS INDIVIDUAL CAPACITY, AND NOT AS A
PLAINTIFF, CLASS REPRESENTATIVE OR CLASS MEMBER, OR AS A PRIVATE
ATTORNEY GENERAL, IN ANY PURPORTED CLASS OR REPRESENTATIVE PROCEEDING,
and (C) the arbitrator(s) may not consolidate more than one person's
claims, and may not otherwise preside over any form of a representative or
class or consolidated proceeding; and (viii) agrees that if a Dispute that
would be arbitrable under this Agreement if brought against a Consenting Party
is brought against an employee, officer, director or agent of such Consenting
Party or its affiliates (other than Disputes brought by the employer or
principal of any such employee, officer, director or agent) for alleged actions
or omissions of such employee, officer, director or agent undertaken as an
employee, officer, director or agent of such Consenting Party or its
affiliates, such employee, officer, director or agent shall be entitled to
invoke this arbitration agreement. Notwithstanding Section 16.10, each
provision of this Section 16.9(a) shall be deemed material, and shall not
be severable and this Section 16.9(a) shall be enforced only in its
entirety.
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