ArcelorMittal Merger: A Corporate Governance Case Study

Desklib provides solved assignments and past papers to help students succeed.

CORPORATE GOVERNANCE

Contents
Introduction.................................................................................................................................................3
Assessment of post-merger board structure...........................................................................................3
Role of Institutional Investor make a significant contribution to the governance of ArcelorMittal.........5
Mittal Steel Governance Issues as pointed out by the Financial Times article........................................6
Conclusion...................................................................................................................................................7
References...................................................................................................................................................8

Introduction
The corporate governance can be described as the most common type of business organization which
can be formed by a state or an individual and given legal rights separate from its owners. One of the
main characteristics of this type of organization is that it has a limited liability of owners. the process of
becoming a corporation is known as incorporation, this process provides special rights and liability to the
company owners by protecting the owners of the company is going to face any legal issues. Analysis of
the past two decades of business environment there is many examples involving scandals resulted from
the failure of the company governance failure. One of the best examples of this is the acquisition of
Arcelor Steel by Mittal Steel. At the time of acquisition of Arcelor with Mittal Steel, the company was the
second-largest steel manufacturer in the world. In January 2006, the owner of Mittal Steel announced a
bid to acquire the Arcelor Steel, after facing a lot of struggle, finally, the merger of both Arcelor Steel
and Mittal Steel created ArcelorMittal, the biggest steel manufacturer company (Zarin and Yang, 2011).
Post-merger board structure of ArcelorMittal
According to information present on the Arcelor Mittal website, the company has defined its board
structure as an example of the High impact of corporate governance.
Voting Rights of Share Holders: All the shares will have equal voting rights. For example, one share will
attract one vote regardless of hold time.
Initial Board of Directors:
 Kinsch will be Chairman and Mr. Mittal is going to be president.
 After the retirement of Mr. Kinsch's, Mr. Mittal is going to take the charge of chairman
 There will be 18 board of directors, the majority of them will act as independent directors
The board department will include;
 Six members will represent Arcelor
 Six members from Mittal Steel
 Three members of current major shareholders of Arcelor
 Three members of Employee representatives
After the expiration of the three years, the shareholders are going to elect the Board of directors

Committees:
 The audit committee will include independent directors
 The Appointment Committee will include the chairman, president and independent ditectors
Management Board:
 Include seven executive members including 4 current Arcelor executive
 CEO will be appointed by the chairman
 Three executives from Mittal Steel
In 2006, two major steel manufactures of the world merged and the biggest steel company. The six
months of intense battle were finally fruitful for Laxmi N Mittal the owner of the Mittal Steel. The case
study is focused on the complex environment of international merger activities and how corporate
governance policy creates an impact on Merger and Acquisition activities.
Since Mittal Family is a family-owned business, within four months of acquisition Laxmi N Mittal, took
the charge of World biggest steel maker. By doing this Laxmi N Mittal makes sure that the reign of the
new organization remains in his own hands. The replacement of the top man at Arcelor shows that the
Mittal family wants to have full control of the newly formed business. This is the exact opposite of the
fact that the Mittal Steel has announced to keep an Arcelor man as the chief executive after the
successful merger of both companies. By announcing this the main aim of the company was too silent
the political opposition of the deal. ArcelorMittal soon announced that the board of Arcelor Mittal has
taken an important decision to appoint Laxmi Mittal as the new chief of the company and CEO, Ronald
Junck of Arcelor will remain as an important member of the group management board. The company
later clarified that this decision is taken to declare a clear leadership for the company. While taking the
charge the company announced that there was an urgent requirement to change the previous board
structure (Adams et al., 2010).
But according to many analysts, the move can not be seen as surprising as everyone is aware that the de
facto leader of the group is Laxmi Mittal. The assessment of pre-merger strategies and hostile
environment of the acquisition clearly shows that the main aim of the acquisition of Arcelor Steel by
Mittal steel was to remove its competition. But why to wait and make any assumption as the merger
was not going to change the real chief of the company. But this strategy followed by Mittal Steel founder
and the head has created some negative image of him because many believe that Laxmi Mittal should

have disclosed that he is going to be the chief after the merger. One of the most important pros of this
strategy was that it showed that Mittal Steel was going to take full control of the company formed after
the merger and this must be disclosed before the acquisition and merger terms are being discussed.
There are many examples where the Mittal Steel founder is openly criticized for hiding this fact (Giroud
and Mueller, 2010).
Role of Institutional Investor
After studying the shareholder's data of ArcelorMittal, it can be said that the Arcelor group is very
powerful, generally talking about large companies, institutions have the largest shareholders. Insider
usually owns the majority of shares in smaller companies. But in the case of ArcelorMittal, it is
somewhat different. Despite ArcelorMittal is a big company, the majority of its share is owned by the
Mittal family. While the correct definition of an insider can be subjective, but most of the companies
consider the company board members as insiders. The management of the company is responsible for
answering to the board. The board members are responsible for taking care of the interest of
shareholders. sTalking about insider in the case of ArcelorMittal the Mittal family is holding maximum
share and its family members are holding major positions in the company. In general terms, insider
ownership can be beneficial in smaller firms. However, in the case of big organizations such as
ArcelorMittal, it can create very difficult situation institutional investors for holding Mittal family
accountable for the failure of governance at ArcelorMittal (Shukla and Gekara, 2010). It can be said that
institutional investors have a greater role in improving the corporate governance of ArcelorMittal.
Institutional investors can have an inevitable role in attracting better, efficient and positive governance
in ArcelorMittal. They can involve themselves in better monitoring of different affairs of the company.
Here the most important role will be played by ArcelorMittal, then followed by institutional investors.
The institutional investors must ensure that ArcelorMittal discloses its corporate governance policies
and rationale for voting right. They must ensure that effective and transparent practices are followed by
ArcelorMittal board members. This not only ensures that the institutional investors are taking an active
interest in the working of ArcelorMittal. From the analysis of the current situation of ArcelorMittal, the
institutional investors should play active to ensure the best interest of shareholders. Applying an
effective internal scheme of checks and balances is going to ensure that these institutional investors are
not involved in the mismanagement of funds. There has been so much debate about the role of
institutional investors in controlling corporate governance practices. The involvement of them in the
main business can divert the main direction of the company. But some believe that institutional
investors will be playing a major role in corporate governance. But in the case of ArcelorMittal,

institutional investors will not be having much significant role because the majority of share belongs to
the Mittal family and they are the sole power holders (Tricker and Tricker, 2015).
Mittal Steel Governance Issues as pointed out by the Financial Times article
Many issues have been made clear by the article. As studied in the case study the corporate governance
policy presents an unfair policy towards minority shareholders. The majority of the share about 88% is
controlled by the Mittal family. An important factor to look here is that each share of the Mittal family
carries ten votes. Members of Mr. Mittal's family, the chief financial officer of the company is Adity
Mittal, his daughter sits on the nine-member board of the company. This creates the decision making
crises as almost all the board members are controlled by the Mittal family. Many believe that it is very
difficult to establish any measure against Mr. Mittal as many independent board members have close
business ties with the Mittal family. After raising this issue during acquisition Mr. Mittal said that he will
rethink the company structure after the merger. But as seen in the first part soon after getting deal was
completed he removed Arcelor man from the CEO post and took over the company reign in his own
hands. This clearly shows the negative business practices applied by Mittal Steel governance to take full
control of the newly formed organizations. As pointed by the financial time's article that out of 5
independent members about three of them are having business ties with MR Mittal. This news has the
potential for creating huge hurdles for the company which was already going through a hostile bid for
taking over Arcelor steel (Degan, 2012).
Seeing all these negative talks in the business world and his image getting thrashed Mr. Mittal was
forced to do considerable consultation and make significant governance changes in the new company
"Arcelor Mittal".

Conclusion
The acquisition of the Arcelor by Mittal Steel in 2006 was very hostile and there were various stages
where it seemed that the deal is going to fail. Initially, the offer proposed by Mittal Steel was rejected by
Arcelor Steel. The major factor responsible for this hostile situation was the ineffective and negative
corporate governance policy adopted by Mittal Steel. As studied in the first part of the assessment the
board structure of the company was not in support of the majority of shareholders, as the major control
of the company remained in the hands of Mittal family. Key members of the Mittal family were sitting on
important decision-making posts. Due to this, there was no chance of proposing any challenge to the
Mittal family. A high level of control of the business by the Mittal family created a hostile condition for
an institutional investor to make any significant changes to the governance policy of an organization.
Finally, the whole case study was clear after reading the financial times article. From the financial time's
article, it can be said that the pre-merger board structure was very ineffective and created a lot of
hurdles during the acquisition of Arcelor business. Therefore, Mr was forced to change the board
structure after the final merger.

References
 Adams, R.B., Hermalin, B.E. and Weisbach, M.S., 2010. The role of boards of directors in
corporate governance: A conceptual framework and survey. Journal of economic literature, 48(1),
pp.58-107.
 Degan, R.J., 2012. Changes in governance, the market for corporate control, and the
mechanisms for hostile takeovers in Continental Europe: The case of Arcelor’s takeover by Mittal
Steel. International School of Management, Working paper, 87.
 DePamphilis, D., 2010. Mergers and acquisition basics: all you need to know. Academic Press.
 Giroud, X. and Mueller, H.M., 2010. Does corporate governance matter in competitive
industries?. Journal of financial economics, 95(3), pp.312-331.
 Shukla, A. and Gekara, M.G., 2010. Effects of Multinational Mergers and Acquisitions on
Shareholders' Wealth and Corporate Performance. IUP Journal of Accounting Research & Audit
Practices, 9.
 Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices.
Oxford University Press, USA.
 Zarin, S. and Yang, E., 2011. Mergers & Acquisitions: Hostile takeovers and defense strategies
against them. rapport nr.: Management & Organisation 11: 85.