Sunday, June 2, 2013

The Carlyle Group, Gambling & Delaware Courts

The Carlyle Group successfully defeated Kuwait's National Industries Group over the proper jurisdiction for a lawsuit on NIG's failed $25 million investment in Carlyle Capital Corporation (CCC).  The judgement referred to a prior suit by Michael Huffington over a similar loss in CCC.  Page 30 of the Court's opinion states:

The recent decision of our Superior Court in Huffington v. T.C. Group is instructive here.  As described above, the plaintiff in that dispute, seeking to recover his investment in the collapsed Carlyle Capital Corporation, had filed suit in Massachusetts asserting claims under a Massachusetts blue sky law, despite the existence of a forum selection clause in favor of litigation in Delaware. After the U.S.Court of Appeals for the First Circuit had dismissed his suit, he brought his claims to the Superior Court–but at a point when they had become untimely. The Superior Court refused to waive the operation of the Delaware borrowing statute, which would allow the plaintiff to make his claims, because the plaintiff “tried to avoid the clear and unambiguous forum selection clause by filing in [the foreign forum].  He clearly sought to avoid litigating his claims here.  Sometimes when you gamble, you lose.”

Here, National deliberately chose not to sue in the contractually proper forum, and failed to take repeated chances to raise its claims in a timely manner in Delaware despite knowing that Carlyle intended to enforce the forum selection clause. National gambled and lost. There is nothing unreasonable about enforcing the forum selection clause against National, because any harm it has suffered is entirely self-inflicted.
Oddly, while searching the Delaware Court for decisions I noted a lawsuit by investors of China Agritech, a fertilizer company and Carlyle Group affiliate.  The Delaware lawsuit opens with the plaintiff's assertions:

China Agritech, Inc. ("China Agritech" or the "Company") purportedly operates a fertilizer manufacturing business in China. According to lead plaintiff Albert Rish, China Agritech is a fraud that serves only to enrich its co-founders, defendants Yu Chang and Xiao Rong Teng. Rish has sued derivatively to recover damages resulting from (i) the Company‘s purchase of stock from a corporation owned by Chang and Teng, (ii) the suspected misuse of $23 million raised by the Company in a secondary offering, (iii) the mismanagement that occurred during a remarkable twenty-four month period that witnessed the terminations of two outside auditing firms and the resignations of six outside directors and two senior officers, and (iv) the Company‘s failure to make any federal securities filings since November 2010 and concomitant delisting by NASDAQ. Before filing suit, Rish used Section 220 of the General Corporation Law, 8 Del. C. § 220, to obtain books and records, and his complaint relies both on materials that the Company produced and on the glaring absence from the production of books and records that the Company should have readily possessed and provided.
The Delaware Court's Kuwait opinion repeatedly cited how Carlyle and National Industries are large, sophisticated international organizations.  While The Carlyle Group isn't mentioned in the China Agritech shareholder suit, here's what their initial press release said:

China Agritech Co., Ltd specializes in R&D, production and marketing, as well as technical consulting services for high-tech green agricultural products in China. China Agritech is focused on improving productivity and the quality of life for farmers in China. They provide farmers with innovative, value-added and cost-effective products and services to help farmers achieve sustained growth in their income. The company has established five production bases in Harbin, Hebei, Anhui, Chongqing and Xinjiang. With tens of thousands of agricultural marketing professionals, their sales network spanning the whole country is continuously growing.

“We are fully leveraging the global resources of The Carlyle Group to back our partner companies with both capital and management expertise. Most importantly, we will continue to seek opportunities to help Chinese enterprises with unique business models and strong growth strategies to expand in an increasingly globalized economy."
Carlyle invested in China Agritech in October 2009 and had the right to appoint one board member.  Carlyle appointed Zheng "Anne" Wang.  China Agritech filed to issue 100 million additional shares in February 2010.  That dropoed to 3.1 million shares at nearly $30 each by April 2010.  Did China Agritech's shareholders count on The Carlyle Group's promise of added managerial expertise?

Here's how Carlyle's full leverage turned out (from the SEC's delisting document October 2012):

China Agritech last filed a periodic report on November 10, 2010, when it filed a quarterly report on Form 10-Q for the quarter ended September 30, 2010. Since that time, China Agritech has failed to file annual reports on Form 10-K for the fiscal years ended December 31, 2010 and December 31, 2011, and has failed to file quarterly reports on Form 10-Q for the quarters ended March 31, 2011; June 30, 2011; September 30,2011; March 31, 2012; and June 30, 2012. 
Recall these are large, sophisticated international organizations who gamble and lose, with any harm self-inflicted.   At least that's one opinion from a Delaware Court.