- 1. Legal Aspect of Cross Border Mergers & Acquisitions:
Arcelor Mittal Deal
- Amit Bhardwaj, (AA04EMP69)
2. Need for Mergers & Acquisitions
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- Utilisation of surplus funds
3. Need for Mergers & Acquisitions
- Grasping for a company simply because its on the market, or
because a competitor wants to buy it .
- Overpayment or misguided purchase
- Diverse Business; Unmanageable
- Leaping without looking at the value; Win-Win or no deal
- Inability to integrate well.
4. Types of Mergers & Acquisitions
- Exploit market power, economies of scale & scope, and
market inefficiencies
- Same industry/ Different market
5. Considerations: Costs & Benefits
- When firm A acquires firm B, A is making a capital investment
while B is making capital divestment based on NPV method
- Benefit = PV(AB) {PV(A) + PV(B)}
6. Considerations: Legal Procedure
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- The MOA to be scrutinised
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- Intimation to Stock Exchanges
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- Approval of draft amalgamation proposal
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- Notice to shareholders and creditors
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- Transfer of assets and liabilities
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- Issue of shares and debentures
7. Arcelor Mittal Deal 8. Arcelor Mittal Deal
- The deal is noteworthy for its legal aspects as for its
commercial significance;
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- combining cross-border regulatory complexity,
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- innovative bid defence techniques and measures to overcome
them
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- dramatic shareholder revolt.
9. Arcelor Mittal Deal
- Worlds 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
- Guy Dole initially rejected Mittal as a Company of Indians and
two did not share strategic vision;
- 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.
10. Legal Complexities
- Multinational Jurisdiction
11. Multi-jurisdictional offer
- The offer was governed by takeover regulations all the
jurisdictions in which Arcelors securities were listed (Belgium,
France, Luxembourg and Spain).
- The offer terms and documents required the approval of the
relevant securities regulators in each jurisdiction.
- 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.
- 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.
12. EC Directive
- Mittals offer was made before Directive2004/25/EC* on takeover
bids (the Takeovers Directive) had been fullyimplemented in all the
relevant jurisdictions
- Author: European Parliament , Council
- 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.
13. EC Directive: Implementation and impact 14. EC Directive:
Key Issues with all the member states 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. & 2regulators will have juridiction over
different elements of bids. 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. 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. EC
Directive
- 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.
- 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.
19. Multi-jurisdictional offer
- 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.
20. Anti-Competition issues:
- 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
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- Dofasco, Inc (Dofasco), a Canadian steel company, within the
merged group.
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- Arcelor had acquired control of Dofasco in January 2006
following a takeover battle with ThyssenKrupp AG (ThyssenKrupp), a
German steel company.
- Mittals operations in North America were already extensive and
this led to strategic and competition issues.
21. Anti-Competition issues:
- Mittal agreed with ThyssenKrupp that, if Mittal acquired a
controlling interest in Arcelor, it would cause Arcelor to sell
Dofasco to ThyssenKrupp at ThyssenKrupps highest bid price.
- Mittal proposed to compensate Arcelor for the difference
between the price it had paid and the proceeds of the sale to
ThyssenKrupp.
- 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).
- Dutch stichtings have been used in bid defences before,
including in Gucci Group NVs 1999 defence against LVMH Mot Hennessy
Louis Vuitton SAs unsolicited (and ultimately unsuccessful)
takeover bid.
- 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.
22. White knight defense and shareholder revolt
- The most powerful weapon in Arcelors 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%
ofOAO Severstal (Severstal), a Russian steel company .
- 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.
- Arcelor shareholders were, however, able to veto the Severstal
deal, provided that holders of more than 50% of Arcelors share
capital voted against it at a shareholders meeting.
23. White knight defense and shareholder revolt
- 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%.
- The arrangements triggered a shareholder revolt, with between
20 to 30% of Arcelors shareholders signing a letter to Arcelor
demanding the right to choose between the Severstal and Mittal
proposals.
- 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 boards
recommendation of Mittals offer on 25 June 2006.
- On 26 July 2006, Mittal was able to announce that 92% of
Arcelors shares had been tendered in response to its offer. It is
intended that Mittal will formallymerge 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.
24. Comments on deal by leading law firms:
- 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.
- 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.
25.