Corporate Governance: ArcelorMittal Merger

This case study analyzes the acquisition and merging of Arcelor and Mittal in 2006, resulting in the formation of ArcelorMittal. It examines the board structure and the role of institutional investors in company governance.

Running head: CORPORATE GOVERNANCE
CORPORATE GOVERNANCE
Name of the Student
Name of the University
Author Note
1.

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1.
The present case study focusses on the acquisition as well as merging of two
companies Arcelor and Mittal that took place in 2006 (Kumar 2019). ArcelorMittal is the
subsidiary of the Mittal Steel Corporation which Mr Laxmi Mittal established in 1976. The
incorporation of ArcelorMittal was done in 2006 when both the Arcelor merged with Mittal.
Here both the companies before merging have separate legal entities. The takeover done by
the Mittals although was regarded as a hostile one but it resulted into the largest steel industry
of the world (Kumar 2019). The Mittal Company prior to amalgamation followed a unitary
model of board of directors. This type of board structure denotes that the total company
governance was managed by a unitary body without any separation of powers (Ali 2016).
There is only a single body and no different supervisory body or management. The unitary
type of board of directors is generally of four kinds; a board with only executive directors, a
board with executive directors that forms the majority, a board with non-executive directors
which form the majority and a board of nonexecutive directors only. Arcelor on the other
hand followed the two tier board structure which had a separation of powers between the
management and the supervisory board which are independent of one another (Yasser,
Mamun and Rodrigs 2017).
After Arcelor and Mittal merged together, the new company ArcelorMittal consisted
of the new board of directors having 18 members who are all non- executive directors and
mostly are independent directors (Kumar 2019). The newly formed company had its majority
of the voting rights of about 43.5% were retained by the Mittal family members. The new
company as a public limited liability and the new board was controlled by the articles of
association of the company. The new board consisted of 6 directors coming from Arcelor, 6
directors coming from Mittal, the representatives of employees and 3 representatives from the

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current shareholders of Arcelor. As said above, as all the directors were non executive, the
only executive director present in the board was Laxmi Mittal.
As discussed above about the board structure, it can be argued that the new board
structure denotes a unitary model of board of directors with mainly nonexecutive directors
(Kumar 2019). Further it showed that the Mittal family had major control and supremacy in
the company governance.
The unitary model of board structure possesses some advantages over the two tier
model (Yasser, Mamun and Rodrigs 2017). The former one has only one body that governs
the functioning of the company. Due to this, there is less chance of conflict in taking
opinions. Thus faster and unanimous decision can be taken.
Again, in the unitary model, the communication can be made easily. This is because
both the management and the supervisory boards work as a single unit. Thus there lies
question of taking approval. Easy communication flow helps to seek better management and
also unity.
Another advantage possessed by the unitary structure is that while taking decisions,
all the directors can take active part in it. The nonexecutive directors can also share their
opinions with the executive directors.
Since the unitary board acts as a single entity, the company members have the option
to interact and deal with the executive directors that indirectly helps in the betterment of the
relationship and good understanding.
On the other hand, the unitary model possesses some disadvantages too which will be
discussed below. Due to the non- separation of powers, in case of any conflict or
misunderstanding of the CEO with the other board members, the company interest will be at
stake. Further, participation of the non- executive directors has a chance of increasing the risk
of liabilities. Lastly, personal relation among the members can negatively affect the

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appointment, management, monitoring and control of the company. Personal biasness can be
considered to be the main disadvantage of the unitary board structure (Yasser, Mamun and
Rodrigs 2017).
Answer 2:
The present case of ArcelorMittal shows that Mittal had retained 43.5% of the voting
rights after the merging of Arcelor with Mittal. This voting right denote the right held by the
company shareholders to cast their vote on policy related matters of the policy making
including decision required to be taken to form a new board of directors and even to make
change in the company operation. Such voting right is exclusively available to the
shareholders who can vote in various issues. The shareholders have only vote without
considering the number of shares they have which they can cast in various conditions. They
can vote in the company general meeting. They have the option to cast vote either in their
personal capacities or by proxy. Shareholders are often regarded as the company members as
they can control and own the company indirectly due to the possession of shares.
In this case, the Mittal family can actually control the management and decision
making of the company as they have majority of 43.5 percent shares.
Institutional investor as suggested by the nomenclature does not denote any individual
or a single investor but it actually denotes 6 investors kinds which are mainly mutual funds,
endowment funds, hedge funds, insurance companies, commercial banks and pension funds
(Mees 2018). Institutional investor is a nonbank financial institution that withdraws money to
purchase as well as sell real estate properties, securities and various other assets of
investments (Muniandy, Tanewski and Johl 2016). A very significant role was played by
these institutional investors in the financial zones. They form the biggest driving force in the
field of security trading. These six types of institutional investors have been focused in the
following part of the write up.

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Mutual funds form the most general and well known institutional investor type
(Vidal-García et al. 2018). It is mainly concerned with drawing money from people to be
converted into a fund controlled by a manager. Mutual funds include stocks, bonds, and
currencies together with other categories of virtual form of security.
Endowment funds those types of funds are collected in the form of donations and used
by the various religious centers, educational institutions and other non- profit gaining
organizations to continue and perform their work (Dahiya and Yermack 2018).
Hedge funds form alternative methods of investments that use funds to be withdrawn
for promoting high returns in the market (Satchell 2016). An insurance fund is one that
mainly concerned with insuring the property, cars and even health of an individual in case of
any damages, losses or injuries.
Commercial banks are banks that supply investment, lending as well as banking
services to the public at large. Pension funds on the other hand consist of funds that are paid
to the employees by the employer after they retire from their work (Mees 2018). Pension
funds are actually deducted every month from the individual salary of every employee and
then added with the sum of money provided by the employer in this regard. The sum of
money collected every month is given at the end of the service with some additional benefits.
It is very complex issue to decide whether any prominent role is played by any
institutional investor for governing an organization. While some of the scholars consider that
they interfere with the company management and governance in the positive way while
according to some they must not interfere as they are provided with other functions apart
from interfering with the company affairs (Ali 2016).
From the facts of the case, it has been observed that 43.5 percent of the voting rights
have been held by the Mittal family. It indirectly reveals that the institutional shareholders
form a minor category of share holders. Thereby due to their presence, they have an impact

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on the company management and maintenance. The ownership structure of a company is
many times connected with its performance of shares in both short term and long term. The
impact of an active type of institutional investor having a similar ownership as a passive form
of pension fund can be highly different on the corporate governance of the company together
with its accountability to the shareholders (Du Plessis, Hargovan and Harris 2018). Although
it can be interesting and profitable for the long term investor, it can be beneficial to the short
term investor too if they pay attention. Further due to the presence of the family members in
the board of directors they can also have conflict with the interest of the investors. The voting
influence of the investors can be affected too. The proposals or suggestions made by the
majority shareholders can be implemented as the institutional investors being less in number
hardly can oppose them.
Hence in order to permit the institutional investors to play an active part, there must
be legislation or direction in the company’s article of association by which they can be
empowered. Hence a balance is required as in presence of conflict, the company’s interest
will be affected the most.
Answer 3:
A close perusal of the article published on 26t April of 2006 in the Financial Times
reveals a very clear scenario of the recently formed board structure of the ArcelorMittal after
the merging of Mittal with Arcelor in 2006 (Kumar 2019). In this respect, both the pros as
well as cons of the board structure will be analyzed.
The board structure at present will be having the following benefits; firstly, this
merger leads to the better control and administration of the company governance and
management. Prior to this amalgamation, Mittal was the tycoon in the steel industry. After it,
the majority of the power in the board of directors are retained and held by the Mittals. Since

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they have being the king in the steel industry, their experience is worth mentioning. They can
ideally manage and govern the company affairs.
Secondly, as 98.3% votes were held by the Mittals, there is little chance of ambiguity
and conflict in the board decision which can be taken unanimously and without coalition.
Thirdly, decisions can be taken effectively which will help in the efficient and effective
running of the business of the company. Unnecessary delay and miscommunication can be
avoided. Finally, flow of information will be easy and transparency can be maintained among
the members of the company.
On the other hand, apart from the advantages, there lie some cons also of the newly
formed structure of board. The disadvantages that can be imposed by the board structure will
be analyzed in this part of the write up. Firstly, two different types of company have been
merged with Mittals having the majority of the controlling power. It is revealed that about
majority of the voting rights (more than 90%) have been in the hands of them which disclose
that everything is under their control and power. This can be a cause of dissatisfaction to the
other members who are not from the Mittal family as their opinions will not be considered.
Secondly, the merger has caused much worry to the investors as their interests can be
affected. Thirdly, the company management and governance will be performed at the desire
of the Mittals (Du Plessis, Hargovan and Harris 2018). Coalition can occur with the other
company members and also outsider share- holders. But it is seen that majority of the
shareholders have a good relation with the Mittal family who can impose their ideas and
thoughts on the shareholders.
Fourthly, any proposal or opinion not in the favour or according to the Mittals can be
rejected because of the small number of non-Mittal voters. Thus the opinions of the minor
shareholders have no effect. Fifthly, shareholders belonging to the Arcelor may feel insecure
as the pivotal role in the company management and governance is played by the Mittals.

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Sixthly, a serious question may appear regarding the protection available to the
outsider shareholders of the holding company. There are 3 classes of shareholders like A, B
and C. Group B has no members because the last operating officer has died one year before.
Thus the chance of securing information for nonexecutive type of directors is not available
anymore. Again, major power is held by the directors of group A as it has got Laxmi Mittal
and his daughter and son. There are 6 nonexecutive directors are present in Group C and they
have restrictive rights. The directors belonging to Group C are elected for a period of 1 year
only whereas the directors belonging to group A are elected for a period of 4 years. Hence the
directors belonging to Group C work at the Mittal’s will. Among the 6 nonexecutive
directors, five are independent directors having close association with Mr Mittal. These
independent directors are actually outside directors having no monetary interest in the
company. They have the duty to help in the company management and governance (Ali
2016).

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