Corporate Governance: A Case Study on Mittal Family Merger

The report primarily focusses on the positive and negative effects of merging of the board structure of the Mittal family as well as evaluate the post-merger board structure. The report further discusses on the contribution of corporate governance on the voting equity of the Mittal family which was retained to be 43.5%.

Running head: CORPORATE GOVERNANCE
SOUTHERN CROSS UNIVERSITY
WORD COUNT - 2000
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Student Name: Muddasani Rahul
Student ID No.: 23201284
Unit Name: Corporate Governance
Unit Code: Acc03043
Tutor’s name: Shagun khemka
Assignment No.: 2
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Table of Contents
Introduction....................................................................................................................2
Discussion......................................................................................................................2
Answer to Question 1.....................................................................................................2
Post-merger board structure...........................................................................................2
Pros and cons of the board structure..............................................................................3
Answer to Question 2.....................................................................................................3
Contribution of the institutional investor to the governance of the company................3
Answer to Question 3.....................................................................................................5
Positive and negative impacts of the pre-merger Mittal steel board and its
effectiveness with the post-merger board......................................................................5
Conclusion......................................................................................................................8

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Introduction
The objective of this report is to bring about the discussion of corporate
governance which is relating to a case study about a merging activity of a certain
family known as Mittal family. The report primarily focusses on the positive and
negative effects of merging of the board structure of the Mittal family as well as
evaluate the post-merger board structure. The report further discusses on the
contribution of corporate governance on the voting equity of the Mittal family which
was retained to be 43.5%.The end section of the discussion states about the
effectiveness of pre-merger board structure on Mittal family and also highlights
whether the change had been successful.
Discussion
Answer to Question 1
Post-merger board structure
Due to the merger formed between Arcelor and Mittal, the company flourished
a lot and it gradually came to be popularly known as the world’s largest and greatest
steel company. The sales of the company was huge and it had the forecasted earning
of $15.6 billion. The traditions of two companies were different before the merging
activity. Arcelor had a governance structure which was European in nature (Sroka,
Cygler and Gajdzik 2014). The board included supervisors, employee representatives
and a management board. In Mittal family the tradition had been completely different.
Mittal company, being a family company had the tradition of distributing the power
unequally. In Mittal company, the founder was given the maximum power.
Due to formation of the merger, the structure of the board changed. The new
board that was formed had the Chairman named Joseph Kinsch. Previously, Joseph
Kinsch was the Chairman of Arcelor. The other representatives of the board were

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President Lakshmi Mittal, other independent directors and a group of directors who
would represent the employees and another separate group of directors for focussing
on the needs and demands of the shareholders (Arcelor Mittal CEO - Interview’
2010).
Pros and cons of the board structure
The board structure committee proved to be advantageous for the company as
it paved way for the separation of powers between the higher authorities. The two
important stakeholders of the company, shareholders and employees, are also taken
care of and specific representatives were allotted to take care of their needs and
demands. There were representatives from both the merging companies, that is,
Arcelor as well as Mittal so that there is no biasness in the architecture (Arcelor Mittal
Announces Management Board and Board of Directors’ 2006). It was reported that
the merger had other added advantages. These benefits included diversification of
steel products across the globe, enhancement of the supply chain in order to meet the
requirements. Due to good relationships with the customers across the globe, the
merged company fetched many long-term contracts which ensured the survival of the
company in the long term.
Generally, during merger one company got the entire benefit while the other
was suppressed. But in the case of Arcelor and Mittal, the interests and
responsibilities of both the companies were taken into account in order to meet
sustainable growth and achievement. None of the board members were seemed to be
incompetent and the entire board functioned properly in order to facilitate the
forecasted earning. Due to the merger, the market share of both the companies got
increased to an enormous level.

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Answer to Question 2
Contribution of the institutional investor to the governance of the company
The Mittal company retained 43.5% voting equity after the merging activity.
There were questions raised regarding the corporate governance of the Mittal
company before the merger took place. An article of the Economist outlined certain
issues regarding the corporate governance of Mittal steel on April 27, 2006. One good
argument proposed regarding this was that the corporate governance of Mittal steel
was not favourable to the investors, especially the minority shareholders (Schuler,
Khilji and Ruël 2015). This was because of the carrying rights of shares by the
members of the Mittal company which was predominant before the merger. The
family controlled about 88% of the company’s shares with the presence of ten votes in
each share. It was stated by Mr. Mittal that he would try to implement multiple voting
rights after the merger. Another question raised by financial times was the
independence of the outside directors of Mittal steel in knowing about these facts.
Due to these questions and issues raised, the company was forced to cut down
its holding of market shares in the newly merged company. The ownership right
reduced from 88% to 43.5%. Some of the investors as well as influential people were
in support with the merger and were ready to invest in the merged company, while
some of them were against the merger and rejected to invest in the merged company.
The key politicians of France and Luxemburg were against the activity. They thought
that the two companies had approached to merge but did not reveal the possible
details of their action in the future. Another concern was raised about the workers who
worked in Arcelor and who were French. The state of France did not hold much
shares in Arcelor and hence it could influence Arcelor very negligibly.

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The investment banks supported the hostile takeover. They even provided
supportive services to the company. They provided advice, financing and other
services such as political lobbying to the Arcelar Mittal group (Arcelor/Mittal’ 2006)
The French investment bank in turn tried to convince the French government to
support this hostile takeover. A French society named “Societe Generale” also
committed to support the two companies. This society had a good relationship with
Arcelor from the past days and hence it concluded that the takeover had been a better
deal for all the investors. It was concluded by some people that this society might be
favouring Arcelor due to the motivation of obtaining million dollar fees in investment
banking. It became evident that the merger in all forms helped in increasing the
shareholder’s wealth.
In case of Arcelor and Mittal, the Arcelor’s management was not as strong as
compared to the management of Mittal. Some analysts and investor reported that due
to the combination, there was formation of synergies where Arcelor would get the
benefit of Mittal’s management and as a result the combined firm would reach the P/E
ratio height of 8 to 9. This would be great windfall for the shareholders of Arcelor
who would receive a 43% of price increase in the shares due to the activation of the
deal. The other factors which led the investors, especially the investment bankers to
promote as well as support this hostile takeover could be the potential of the
combined firm, the boom of the combine firm in the financial market, the presence of
low cost financing and substantial generation of fees.

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Answer to Question 3
Positive and negative impacts of the pre-merger Mittal steel board and its
effectiveness with the post-merger board.
Due to the merging activity formed between Arcelar and Mittal steel, the
company would have both positive and negative effects on itself as well as on its
stakeholders (Arcelor Board of Directors unanimously rejects Mittal’s hostile
proposal’ 2006). One of the important segment which would get affected due to this
activity would be corporate governance. The article of the financial times clearly
states about the facts related to the documents of the Mittal steel. The article reported
certain facts about the existing governance arrangements which might lead to worry
for the investors. The documents of the company that proved this statements are
filings with US securities and exchange commission, governance disclosures, articles
of association and others.
Firstly, these documents suggested that Mr Mittal of Mittal steel himself was
considered to be the prominent shareholder of the company and hold the maximum
number of shares unless there was a fall in the percentage below 50%. Though there
was an assurance from the side of the Mittal company that the ratio of the voting to
non-voting shares would decrease and the power would get divided (Healy and
Rossano 2014). The ratio would fall from 10:1 to 2:1 (Arcelor Mittal Steel - Flat
Americas CEO Interview’ 2007). The continuation of voting rights as was current
situation of that time, could be detrimental to the vital interests of the company
(Alvarez et al. 2012). There should also be presence of proper protection of law and
company’s governance rules in order to prevent the inside people from exercising
supreme power that is outside of shareholder’s expense. Another topic that was
questionable was the integrity and transparency of accounts, arrangements for

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government across all the subsidiaries and protection of the conflict of interests that
might occur among all the non-executive directors.
The first impression of the picture of the merger seemed acceptable. It was
reported that the accounts were prepared using proper accounting principles which
were generally accepted by US. This method got upgraded and after the merger they
had been prepared by abiding the rules of Sarbanes-Oxley Act. (Domgin et al. 2015).
This act had ensured effective internal control by giving the power to management for
assessing and reporting the efficiency of internal control. This would automatically
boost up the reassurance of the business of the developing countries (Ghani, Shamsul
2011). Though it was stated in the filings of Mittal steel company that there would not
be any significant change in the governance practices, still a closer investigation had
shown a less comforting picture.
The disclosures on corporate governance did not put much emphasis on the
application of the subsidiaries as well as their enforcement in the parent’s governance
rules, disclosure of information to the board by the operating companies and about the
rights of the non-executive directors (Jumbo re-financing for Arcelor Mittal’ 2006).
The investors does not have complete access to the information about the company’s
governance on the operating companies.
Another negative point quoted was about the protection of the outside
shareholders. This was reported to be not conducted efficiently. Concerning the
conflicts of interests, the board of the company offered detailed definitions and
information regarding the requirements and processes to be adopted (Poole and
Anthony 2006). It had been seen that these details do not fall under the legal
regulations. In some cases, due to failure in providing a valid legal regulation, the
chairman could not decide upon the nature of conflict of interest and whether it should

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be published in the annual report. Due to this there is a question about the
independence of the non-executives of the business.
Another disadvantage that had been highlighted was regarding the consent of
the audit committee. The legal agreement which had been entered by the company in
2004 had not referred to any consent of the audit committee (Poole, Anthony 2006).
Mittal steel further stated that they had no plans for performing any other changes
apart from the ones already mentioned above. He stated that there would be a change
of board where majority of independent directors would be included.
The governance structure that existed in the pre-merger period had many
shortfalls regarding many segments. Due to the new directors being efficient and
competent in their activities, the company could reach a certain great height (Poole
and Anthony 2006). Though there had been many positive outcomes for the company
due to this merger activity, still the governance structure is still at question. It could
only be hoped that these governance risks could be outweighed by the remarkable
business record of Mittal steel and his proposed strategy
Conclusion
From the above report it could be stated that the two steel giants Mittal steel
and Arcelor had inefficient corporate governances prior to their activities of merging.
After the merger these negative implications could be mitigated up to a certain extent
that has led to the remarkable performance of the merged firm in recent years. Though
there had been significant changes in the board, still some of the rules and regulations
of corporate governance are needed to be highly focussed by the company in order to
achieve great heights in the business.

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References
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‘Arcelor Mittal CEO - Interview’ 2010, CEO Wire, accessed from .
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‘Arcelor/Mittal’ 2006, International Financial Law Review, p. 1, accessed from .
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