Arcelaor & Mittal, Legal aspects of merger


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legal issues that prevalied during the merger of Arcelor and Mittal

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Arcelaor & Mittal, Legal aspects of merger

  1. 1. Legal Aspect of Cross Border Mergers & Acquisitions: Arcelor – Mittal Deal <ul><li>Debasish Das, ( 15) </li></ul><ul><li>Amit Bhardwaj, (AA04EMP69) </li></ul><ul><li>Ankur Jindal ( 08) </li></ul><ul><li>Aman Vig (04) </li></ul><ul><li>Mukesh Gupta (30) </li></ul><ul><li>Mayank Mohan ( 29) </li></ul><ul><li>Sandeep Randhawa ( 47 ) </li></ul>
  2. 2. Need for Mergers & Acquisitions <ul><li>Opportunities: </li></ul><ul><ul><ul><li>Gain market share </li></ul></ul></ul><ul><ul><ul><li>Economies of scale </li></ul></ul></ul><ul><ul><ul><li>Enter new markets </li></ul></ul></ul><ul><ul><ul><li>Acquire technologies </li></ul></ul></ul><ul><ul><ul><li>Strategic Benefit </li></ul></ul></ul><ul><ul><ul><li>Complementary resource </li></ul></ul></ul><ul><ul><ul><li>Tax shields </li></ul></ul></ul><ul><ul><ul><li>Utilisation of surplus funds </li></ul></ul></ul><ul><ul><ul><li>Managerial Effectiveness </li></ul></ul></ul><ul><ul><ul><li>Integrate vertically </li></ul></ul></ul>
  3. 3. Need for Mergers & Acquisitions <ul><li>Threats: </li></ul><ul><li>Grasping for a company simply because it’s on the market, or because a competitor wants to buy it . </li></ul><ul><li>Overpayment or misguided purchase </li></ul><ul><li>Reduce cost of debt. </li></ul><ul><li>Diverse Business; Unmanageable </li></ul><ul><li>Leaping without looking at the value; Win-Win or no deal </li></ul><ul><li>Inability to integrate well. </li></ul>
  4. 4. Types of Mergers & Acquisitions <ul><li>Strategies used: </li></ul><ul><li>Exploit market power, economies of scale & scope, and market inefficiencies </li></ul><ul><li>Same industry/ </li></ul><ul><li>Same market </li></ul><ul><li>Consolidation </li></ul><ul><li>Related industries </li></ul><ul><li>Horizontal </li></ul><ul><li>Jet-Sahara </li></ul><ul><li>Same industry/ Different market </li></ul><ul><li>(Conglomerate) </li></ul><ul><li>LIC-UTI Bank </li></ul><ul><li>Suppliers </li></ul><ul><li>Vertical </li></ul><ul><li>ITC </li></ul>
  5. 5. Considerations: Costs & Benefits <ul><li>When firm A acquires firm B, A is making a capital investment while B is making capital divestment based on NPV method </li></ul><ul><li>Benefit = PV(AB) – {PV(A) + PV(B)} </li></ul><ul><li>Cost = Cash – PV(B) </li></ul><ul><li>NPV to A= Benefit – Cost </li></ul><ul><li>NPV to B= Cash – PV(B) </li></ul>
  6. 6. Considerations: Legal Procedure <ul><ul><ul><li>The MOA to be scrutinised </li></ul></ul></ul><ul><ul><ul><li>Intimation to Stock Exchanges </li></ul></ul></ul><ul><ul><ul><li>Approval of draft amalgamation proposal </li></ul></ul></ul><ul><ul><ul><li>Application to the Court </li></ul></ul></ul><ul><ul><ul><li>Notice to shareholders and creditors </li></ul></ul></ul><ul><ul><ul><li>Filing the order </li></ul></ul></ul><ul><ul><ul><li>Transfer of assets and liabilities </li></ul></ul></ul><ul><ul><ul><li>Issue of shares and debentures </li></ul></ul></ul>
  7. 7. Arcelor Mittal Deal
  8. 8. Arcelor Mittal Deal <ul><li>The deal is noteworthy for its legal aspects as for its commercial significance; </li></ul><ul><ul><li>combining cross-border regulatory complexity, </li></ul></ul><ul><ul><li>innovative bid defence techniques and measures to overcome them </li></ul></ul><ul><ul><li>dramatic shareholder revolt. </li></ul></ul>
  9. 9. Arcelor Mittal Deal <ul><li>World’s two largest steel makers merge: new entity will be three times larger than the rivals individually , and the new company will account for 10% of global production </li></ul><ul><li>Guy Dole initially rejected Mittal as a “Company of Indians” and two did not share strategic vision; </li></ul><ul><li>EU approved it on June 6; but on June 20 , SeverStal revised merger terms by lowering equity to 25% and raised the offer to 2billion euros. But, on June 23, Arcelor shareholders rejected SeverStal and ratified the Arcelor Mittal deal. </li></ul>
  10. 10. Legal Complexities <ul><li>Multinational Jurisdiction </li></ul><ul><li>EC Directive </li></ul><ul><li>Anti competition Laws </li></ul><ul><li>Shareholder resolutions </li></ul>
  11. 11. Multi-jurisdictional offer <ul><li>The offer was governed by takeover regulations all the jurisdictions in which Arcelor’s securities were listed (Belgium, France, Luxembourg and Spain). </li></ul><ul><li>The offer terms and documents required the approval of the relevant securities regulators in each jurisdiction. </li></ul><ul><li>Mittal is a Dutch NV and its shares, which were part of the consideration offered, are listed on the New York Stock Exchange (the primary listing pre-offer) and on Euronext Amsterdam. </li></ul><ul><li>Thus, the offer also had to comply with US Securities and Exchange Commission (SEC) rules and regulations, and the offer document (share listing prospectus) required the approval of the SEC and the Dutch securities regulator. </li></ul>
  12. 12. EC Directive <ul><li>Mittal’s offer was made before Directive 2004/25/EC* on takeover bids (the Takeovers Directive) had been fully implemented in all the relevant jurisdictions </li></ul><ul><li>* 2004/25/EC </li></ul><ul><li>Author: European Parliament , Council </li></ul><ul><li>In accordance with Article 44(2)(g) of the Treaty, it is necessary to coordinate certain safeguards which, for the protection of the interests of members and others, Member States require of companies governed by the law of a Member State the securities of which are admitted to trading on a regulated market in a Member State, with a view to making such safeguards equivalent throughout the Community. </li></ul>
  13. 13. EC Directive: Implementation and impact
  14. 14. EC Directive: Key Issues with all the member states
  15. 15. Shared Jurisdiction If bidder company is not registered in the country where its making bid for target company, then such bids need to comply with 2 sets of compliancess. & 2 regulators will have juridiction over different elements of bids.
  16. 16. Pre-bid Defenses and frustrating action: opting in or out Restriction on frustation action by shareholders Breakthrough provision: bidder can over ride target shareholders blocking rights
  17. 17. Squeeze-outs and information If bidder acquire 90-95% shares of firm, but rest 5% are resisting. Hence left rest members to fix there own threshold and time period. Restriction on share transfer needs to disclosed
  18. 18. EC Directive <ul><li>Arcelor was the first Luxembourg-resident target of a hostile takeover offer and this meant that politicians considering draft legislation implementing the Takeovers Directive watched the deal closely. </li></ul><ul><li>As part of its bid defence, Arcelor lobbied for amendments that would have assisted hostile targets, including provisions that would have required shares offered in an exchange or partial exchange offer to satisfy minimum liquidity requirements. </li></ul>
  19. 19. Multi-jurisdictional offer <ul><li>To complicate matters further, the deadline for implementation of the Takeovers Directive fell during the acceptance period and the implementation arrangements differed in each of the jurisdictions. </li></ul>
  20. 20. Anti-Competition issues: <ul><li>Competition/anti-trust filings were required in the EU, the US, Canada and elsewhere. One area of particular interest was the potential impact of including </li></ul><ul><ul><li>Dofasco, Inc (Dofasco), a Canadian steel company, within the merged group. </li></ul></ul><ul><ul><li>Arcelor had acquired control of Dofasco in January 2006 following a takeover battle with ThyssenKrupp AG (ThyssenKrupp), a German steel company. </li></ul></ul><ul><li>Mittal’s operations in North America were already extensive and this led to strategic and competition issues. </li></ul>
  21. 21. Anti-Competition issues: <ul><li>Mittal agreed with ThyssenKrupp that, if Mittal acquired a controlling interest in Arcelor, it would cause Arcelor to sell Dofasco to ThyssenKrupp at ThyssenKrupp’s highest bid price. </li></ul><ul><li>Mittal proposed to compensate Arcelor for the difference between the price it had paid and the proceeds of the sale to ThyssenKrupp. </li></ul><ul><li>However, as part of its bid defence, Arcelor transferred Dofasco to Strategic Steel Stichting, a Dutch foundation ( stichting ) created for the purpose, to prevent any sale of Dofasco for five years (unless the stichting board decides to dissolve the stichting sooner). </li></ul><ul><li>Dutch stichtings have been used in bid defences before, including in Gucci Group NV’s 1999 defence against LVMH Moët Hennessy Louis Vuitton SA’s unsolicited (and ultimately unsuccessful) takeover bid. </li></ul><ul><li>In response, Mittal entered into a “pocket consent decree” with the US Department of Justice, one of only a handful of such decrees in the past decade, under which it was agreed that any antitrust issue could be resolved through the disposal of an alternative asset if Mittal was unable to sell Dofasco as a result of the stichting. </li></ul>
  22. 22. White knight defense and shareholder revolt <ul><li>The most powerful weapon in Arcelor’s arsenal was fired on 26 May 2006, when the company announced that it had agreed to acquire the mining and steel assets of Alexey Mordashov, including 89.6% of OAO Severstal (Severstal), a Russian steel company . </li></ul><ul><li>Instead of being structured as a competing bid, the deal was structured as a contribution of assets by Mr Mordashov in return for shares in Arcelor. This meant that the consideration shares could be issued under existing delegations to the Arcelor board of directors, and without the need to seek approval from Arcelor shareholders. </li></ul><ul><li>Arcelor shareholders were, however, able to veto the Severstal deal, provided that holders of more than 50% of Arcelor’s share capital voted against it at a shareholders’ meeting. </li></ul>
  23. 23. White knight defense and shareholder revolt <ul><li>This was a much higher threshold than is usual for shareholder approval (typically, two-thirds of shareholders present and voting) and, in practice, a veto seemed unlikely, as attendance at past meetings had never been above 35%. </li></ul><ul><li>The arrangements triggered a shareholder revolt, with between 20 to 30% of Arcelor’s shareholders signing a letter to Arcelor demanding the right to choose between the Severstal and Mittal proposals. </li></ul><ul><li>An intense period of negotiations with Mittal followed, culminating in the announcement of the agreed memorandum of understanding between Arcelor and Mittal and the Arcelor board’s recommendation of Mittal’s offer on 25 June 2006. </li></ul><ul><li>On 26 July 2006, Mittal was able to announce that 92% of Arcelor’s shares had been tendered in response to its offer. It is intended that Mittal will formally merge into Arcelor later in 2007. On 30 June 2006, Arcelor shareholders holding about 58% of the outstanding share capital voted against the proposed Severstal merger at a rescheduled meeting. It is perhaps in this regard that the practical legacy of the deal in Europe will be most notable. </li></ul>
  24. 24. Comments on deal by leading law firms: <ul><li>“ It was a ground-breaking transaction, particularly in terms of shareholder democracy in Europe, with target shareholders organising and acting in the face of entrenchment measures,” says John Brinitzer, a partner at Cleary Gottlieb Steen & Hamilton, who advised on the deal. </li></ul><ul><li>Pierre Servan-Schreiber, a partner at Skadden Arps Slate Meagher & Flom agrees: “The deal illustrates very clearly the rise of the professional shareholder activist in Europe. In hostile situations, companies must now consider how best to balance the interests of that specific, and very vocal, population of shareholders with those of other stakeholders.” </li></ul>