ACC03043 Case Study: Corporate Governance of Arcelor Mittal Merger

This case study analyzes the 2006 merger of Arcelor and Mittal, which created the world's largest steel company. It examines the contrasting corporate governance structures of the two entities: Arcelor's European two-tier board system versus Mittal's unitary board dominated by the Mittal family. The analysis focuses on the implications of Mittal's significant voting rights (43.5%) and the role of institutional investors. The case study discusses the merits and demerits of the unitary board structure, including decision-making efficiency, information flow, and potential conflicts of interest. It further explores the impact of the Mittal family's control on shareholder influence and the governance of the newly formed ArcelorMittal, including the power dynamics and the potential for bias and favoritism. The study also highlights the importance of legislation and legal provisions to protect the interests of institutional investors and maintain a balance in the governing structure.

Running Head: LAW
CORPORATE GOVERNANCE
Name of the Student
Name of the University
Author’s Note

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ANSWER 1:
The study is based on the theme of the amalgamation of two separate entities namely the
Arcelor and the Mittal in the year of 2006 and the same has been described in Zarin and Young
2011. Mr. Lakshmi N Mittal incorporated the business entity Mittal Steel in the year 1976 and it
emerged out as Arcelor Mittal as its heir after the amalgamation. Two separate firms
amalgamated to form a single business unit called the ArcelorMittal and the act of amalgamation
took place in the year 2006. Such amalgamation was a confrontational one yet it emerged to be
world’s biggest steel plant.
Mittal was previously represented by the unitary constitute of Board of Directors. This
form of Board is explained by O’Boyle and Shilbury 2016 as the form of Directorship where the
company is managed by the single body of governance. There is no separate body or agent or
any separation of duties among the Directors and their governance. Thus, the unitary board of
directors is constituted with two elements namely the existence of a board of directors and such
board is constituting preponderance of non-executive representatives as the directors. On the
other hand, Arcelor as a corporation from Luxembourg as a separate entity was represented by
the two-tier sample of governance. This means that the board is constituted of two separate
bodies namely the subsidiary board and the supervisory board. In such an arrangement, each
subsidiary board is represented by two directors on each side forming the dual biard framework
for governance. These two board constituted under the dual board framework are independent of
each other acting as a solo unit and the same has been elaborated in Block and Gerstner 2016.
The amalgamation of Arcelor and Mittal has given rise to a new firm by way of their
fusion called the ArcelorMittal constituted as a Public Limited Corporation governed and

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administered by its Board of Directors for all the decision and judgment making. It is a
constitution of modern sample of the board of directors including 18 members with all of them
being non-executive members. The preponderance of directors constituting such a sample of
board is independent and working in solo. In the freshly constituted company called the
ArcelorMittal, the Mittal family reserved the 43.5% of the total voting rights. According to
McLaughlin 2018, the Board of directors are functional in concordance with the articles of
association of the company. The new team of directors include six leaders from Arcelor, six from
Mittal and three representatives from the existing shareholders from the Arcelor company and
the last three directors from the representatives of employees. However, it can be inferred that
the predominance of Directors in the Board are non-executive forming the constitution of unitary
form of Board of directors.
The Unitary Board of Directors is constituted of a solo governing body in the
management of the company. Therefore, this sample has its own set of merits and demerits when
compared with the two-tier body having dual framework of Board. Owing to the solo nature of
the Directors, it own predominance of independent structure of the governance and
administration without much contrasting opinion. Thus, the flow of decision is unhindered and
easily taken. The flow of decision is singular and hence, ambiguity shall be avoided at all
occasions of decision making plan. The second merit of the unitary form of board of directors is
about the free transmission of the information resulting in easier way of decision making. Thus,
no approval is required to be taken from one board to the other resulting smooth flow of decision
taking and its implementation in the corporate governance and its administration (Saeed and
Saeed 2018). The transmission of information and its efficacy with the decision making leads to
better communication resulting in clarity in the working environment of the corporation and its

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efficiency up on the people. Thirdly, the merits of the unitary form of Board of Directors assists
the directors who are involved in the absolute governance of the corporate management and
administration. Fourthly, the unitary form of Board enhances the personal relationships between
the members and the Directors and hence, the decision making is more informal and the scrutiny
of subject matter is done in a more transparent way ensuring better analysis of business and its
relevant decisions.
However, the unitary form of Board of Directors also confers some drawback as it has
been explained by Malkawi 2018. The CEO of the Organization holds a very vital position in the
governance of the company. It refers to the point where of any affiliation exists between the
CEO and the other members of Board, the profitable interest of the company shall be disputed in
such course of affiliation.
Moreover, the intervention of the non-executive directors may amount to an increased
liability and risks of credit. Thus, the personal relationship between the directors and the
members of the company can affect the management, appointment and monitoring of the
company by creating biasness and favoritism among the directors and the members. And such
drawbacks holds a position of predominant concern in the unitary sample of Board of Directors.
ANSWER 2:
In the given scenario, it can be assessed that the Mittal family had reserved the voting
rights amounting to 43.5%. it ensures that the predominant of the voting rights is accumulated
with the Mittals. Voting rights are the rights exercisable by the shareholders and the directors
depending upon the type of shares being held by them. However, the number or the amount of
shares being held by them does not matter. Such voting rights are exercisable at the time of

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decision making by way of voting on different matters of the company. However, the right to
vote is also extendable to the special matters of the company. The voting rights of the directors
can be exercisable by him or her in person during the meeting or by the way of proxy provided
that the quorum of the meeting has been maintained by the directors of the company or else the
meeting shall be adjourned. Shareholders who are entitled with the voting rights by virtue of the
type of shares being held by them, such voting rights entitle the directors as the owners of the
company by the virtual means. Thus, it can be explained that the Mittal and the family owned the
company by the virtue of the possession of 43.5 % of the shares which demarks their
predominance on their decision making powers of the company and its governance.
Institutional investor is a set of six types of investment modules by way of
institutionalized mode including commercial banks, mutual funds, pensions, insurance, hedge
funds and endowment funds (Rutterford and Hannah 2016). A non-financial organization funds
the investors for the purchase and sale of the securities and the real estate properties to ensure the
money flow in the market. These institutional investors are the screws to every organizations
involving profits and gains like a key to the financial market (Bai, Phillipon and Savov 2016).
They are driving force for the continuity of the security trade market in the financial market. The
six categories of the institutional investors are discussed below.
Mutual Funds are most common type of the institutional investment (Kacpercyzk, Van
and Veldkamp 2016). It is a flexible investment that draws money from the people and invest it
in the funds operated by the manager. Such investments consists of virtual investment modes like
bonds, stocks, currencies and other types of security. Hedge Funds are those which use funds for
investment in order to get the highest market return (Cao et al. 2016). Pensions are funds which
are rewarded to the ex-employees of the companies in exchange of their service contributed to

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the company. Such rewards are payable only at the retirement from the company and it embarks
the savings for the old age of such retired persons. These funds are calculated asma way of
deductions from the employee’s salary along with the contribution made to the fund from the
part of the employer (Anzia and Moe 2016). There are two types of pension funds. One deals
with the benefit funds whereas the other deals with the contribution fund. Endowment funds are
those, which are used by the corporations and other organizations for the purposes of the
upliftment of charitable causes, religious institutions, the educational universities. These funds
are accumulated in the form of donations which are used only for the upliftment of the society.
An insurance is one where the company indemnifies the insurer against the foreseeable risks like
marine, travel, death, fire and so on. Commercial banks are the source to the funding of
assistance to public at large (Alalaya and Al Khattab 2015).
The role of the institutional investors in the governing system of the company has always
been a controversial subject matter. While few scholars infer that the intervention of institutional
investors is vital for the corporate governance while others debate the otherwise arguing that the
institutional investors affect the governance of the company in an adverse way.
In the given scenario, Mittal has reserved 43.5% of the total voting rights of the company.
Hence, the preposition can be assumed that the dominance of the Mittals would always exist in
the governing system of the company. Any proposition forwarded by the employee orr the
member of the company depends upon the sole acceptance and rejection of the Mittals as the
family decision. This decision may be affected by the biasness or the favoritism by the Mittals.
Hence, the institutional investors may not avail the benefits of the company governance due to
such existence of unitary form of board of directors.

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Thus, the enactment and the implementation of the legislation along with its legal
provisions is important for the institutional investors to have a word of say in front of the
predominant shareholders or the directors in the matters of the governance of the company.
Therefore to avoid any coalition between t6he members and the Board of directors of the
company, harmonious balance between the both should be established by regulating the number
of people from both the ends governing the corporation so that the interest of the company is also
preserved.
ANSWER 3:
An in depth study of the article published in the Financial Times on 26April 2006 (Lipton
2006), reflects a very clear viewpoint of the newly constituted framework of the Board of
directors after the amalgamation of the companies in 2006 and hence, the merits and demerits
related to the same are discussed below.
The merits of the newly formed Board framework are firstly, the amalgamation results
into better governance of the company. Before the amalgamation, it was already established that
Mittal was the predominant shareholder of the company. However, after the amalgamation, the
position of the Mittal continued to be the predominant shareholder of the company. Since, the
Mittal has a history of governance with the management and the matters of the company, it shall
be easier for Mittal to recognize the issues and deliver governance within time. Secondly, Mittal
held 98.3% votes which means that they are the predominant shareholders with little or negligent
scope for others to opine in the matters for the decision making. Thirdly, the work of bthe
comoany would continue unhindered due to continuous decisions making efficacy of the Board.

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Fourthly, the transmission of information shall be easy because the predominant members of the
Board are a single unit and hence, the decision making process becomes much easier.
However, the system also suffers certain downsides of which the firstly, the retention of
98.3% voting right by the Mittal ensures that the family members of Mittal shall have complete
and absolute ownership rights for governance over the systems of the company and its matters.
Secondly, the merging may cause the personal interests of the Mittal to overrule the interests of
the company. Thirdly, the decision shall be influenced by the opinion of Mittals and not by any
other director or shareholders of the company. According to Makhlouf et al. 2018, independent
directors has been described as those who do not have any fiscal interest in the company and five
out of six directors of the company hold independent directorship helping only with the matters
related to governance and management. However the core matters are withheld by the Mkittals.
Thus, in spite of both advantages and disadvantages being adhered to by the
amalgamation of Arcelor and Mittal, it emerged out as the largest steel manufacturing industry of
the world.

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