Cold Steel: Learn to Love Corporate Law and A Takeover Defence called Stichting

This is being republished from A First Taste of Law.

Cold Steel: Learn to Love Corporate Law and A Takeover Defence called Stichting

As promised in our previous post introducing this series on books that will change the way you think about a corporate lawyer, this is the first post of the star-studded lawyer series on ‘Cold Steel’, a book on the high-profile merger between Mittal Steel and Arcelor. This book has much to teach about the corporate world if one is looking for the right sort of information, and it efficiently describes the drama that goes behind the scenes, and give a glimpse of the ecstatic career highlights of the corporate lawyers who move and shake things in the financial world. We believe that before excelling yourself, you need to know the existing excellence first. We picked ‘Cold Steel’ for the first post on this series because it deals with a fabulous story, and can be very inspiring for a law student or a greenhorn lawyer. Irrespective of whether you have read the book or not, you will enjoy and gain from this post if you are an aspiring corporate lawyer, or will identify with what we are writing if you are already working as one. We also hope that we shall be able to give you enough reasons to read the book itself at some point.

Read this post 1) for a preview, and to learn what a corporate lawyer or an aspiring one should look out for while reading, if you plan to read the book eventually, or 2) if you don’t plan to read the book in foreseeable future, just to learn about the corporate maneuvers involved in this titan of a deal, and to get a basic lesson on takeover lawyering.

If you ever read the book, don’t get put off by lack of a contents page to guide you at the beginning of the book, or the fact that each chapter begins with the date and the venue of the discussion, giving no clue as to what its contents are. The book is, in any case, a page turner, as soon as you begin reading. It also embeds amazing takeover methods and law related to them, and therefore, is a great and entertaining resource for learning actual practices. As we write, we shall take care to not compromise the suspense and surprise that readers deserve when they read the book.

Rendezvous with the titans

Cold Steel is one of the most recent books on high-value transactions. It begins in the second half of 2005 – a time when the world steel industry was experiencing a great boom. The participants in this are well-known steel makers – Mittal Steel and Arcelor, the two biggest steelmakers in the world. L.N. Mittal, even before the merger, has been called the Andrew Carnegie of Steel.

Both of the tycoons who are involved in this drama, Mittal and Arcelor chief Guy Dolle were present at the auction for a Ukrainian steel company around the Orange Revolution period. Dolle had a hunch that Mittal may want to acquire his company. This set up a background for a long drawn battle of wits and corporate strategy, which takes a central role in the book right from the beginning. While both companies wanted the Ukrainian company badly enough, Arcelor had a dual agenda – if it could not win, it wanted to bid up the price to such a high level that even if Mittal Steel won the auction, it would leave a significant dent in Mittal’s coffers, thereby disabling it from going after Arcelor.

Mittal’s Reasons for the Acquisition

On the other side of the board, Arcelor’s strategy gave Mittal a strong reason to take over Arcelor, as he needed to prevent repetitions of what happened in Ukraine. If he could buy Arcelor, its presence in bids would not increase his costs of buying companies like it had in the past. This was very important to Mittal as his modus operandi was to buy loss-making companies cheap, turning them around, and making sky-high profits in the process. This is a unique strategy in the corporate world; turning sinking ships into cash cows is not everybody’s ballgame. Thus, Mittal’s meteoric rise as a billionaire did not surprise anyone.

The most important reason that Mittal wanted the two companies to merge is that together they could control 10 percent of the world’s steel output, and thus enjoy increased bargaining power with suppliers. He, therefore, took the initiative to acquire Arcelor.

Dolle and his lawyers

Dolle was concerned just about everything about Mittal – he was not sure about whether the companies from two vastly different cultures such as Arcelor and Mittal Steel could work together. His concern on this front was legitimate, as statistically more than half of all mergers are known to have failed. Often, the differences in culture and work ethics are the key factors which result in the success or failure of a merger. Dolle coined a somewhat derogatory term for Mittal’s monetary prowess – monkey money, which backfired and resulted in adverse publicity for Arcelor’s management.

Apprehensive of Mittal’s intentions, and desperate to prevent a takeover, Arcelor instructed one of America’s largest and a very profitable law firm – Skadden, Arps, Slate, Meagher and Flom (generally referred to as Skadden), which has 24 offices worldwide, and whose specialization in takeovers is sometimes considered unparalleled.

Height of Corporate Secrecy

Yoel Zaoui of Goldman Sachs, the world’s biggest investment bank, asserted that the transaction is going to be ‘the battle of the century’ and emphasised on security, giving all the participants codenames – borrowed from mythology or planets the solar system, to maintain secrecy. Mittal Steel hired a specialist communications team to deal with the media and the public. Considerable attempts were made by both sides to influence the media to favour their side of the deal, and several restrictions were imposed by Arcelor to prevent information leaks from its boardrooms. It was important to move fast – if a whiff of what went on in one board room reached the other, it could prove to be fatal to all efforts.

Arcelor’s Corporate Ammunition: Takeover Defences

In the corporate world, hostile takeovers are the nightmares of every manager and entrepreneur. No one likes to be at the wrong end of such a takeover and lose control over a profitable company. Naturally, over time lawyers have come up with strategies to prevent a hostile takeover, which is basically a takeover without the consent of the management. These strategies are called takeover defences.

While the management of Arcelor could prevent the onslaught by Mittal in a host of ways, it had to be careful in its choice of a takeover defence, as Arcelor was a listed company – and any overprotective tactics could have made shareholders and other potential investors of the company believe that the management was not acting in the best interests of the company, and thereby drive its share price down.

Let us take a quick look at the available defences:

  • The poison pill

The poison pill defense was first created and deployed by an American lawyer Martin Lipton (of Wachtell, Lipton, Rosen and Katz) when he was advising the company which manufactured the famous Jack Daniel’s whiskey. The defense was quickly adopted by other firms later. It is a powerful and frequently used in takeovers, although today most jurisdictions heavily regulate it. India and the United Kingdom do not allow it to be used.

This is a potent but dangerous defence weapon, as it cuts two ways, and the wielder of the weapon loses much of its value. In this case Arcelor had a power to issue additional shares to the Luxembourg government, and could do that in such a way that no matter how much control Mittal tried to acquire by buying shares in a hostile bid, the government would have the ability to block major decisions. Thus, Arcelor would make itself unattractive to potential investors, and would lose some of its autonomy so that Mittal lost interest in the company.

  • White Knights and Buy-backs: The search for saviours

The management of a company which faces a takeover always fears that it will lose its office and associated perquisites. In its eagerness to protect its position, it often looks for what is known as a ‘white knight’, an entity which is friendly to the management and hence will not replace the management even after taking over the company.

Arcelor’s search for a white knight pretty much sent it globetrotting. It involved Severstal, a Russian steel company headed by Alexey Mordashov, and Thyssen Krupp of Germany. However, Arcelor’s merger with Thyssen Krupp would be difficult to complete as there were significant competition law issues in the European Union on account of overlap of operations. That move was discarded for this reason.

The next step Arcelor was mulling was issue of shares to Russian industrialist Alexey Mordashov of Severstal, which would severely increase the number of shares Mittal required to gain control of Arcelor. At the same time, Arcelor wanted to have a buy-back of some of its shares, so that it could ensure that shareholders who wanted to sell their shares for a profit, could sell them back to the company, instead of selling them to Mittal and giving him control of Arcelor. However, unfortunately for Guy Dolle, shareholders saw through the plan as being not in the interest of the company, and did not approve of the move.

This was not all. Severstal was eager to seal a merger with Arcelor, and advised by investment bank ABN Amro and the international law firm Allen & Overy, tried its best to prevent any progress from Mittal. Negotiations between Severstal and Arcelor made it to a fairly advanced stage, and preliminary agreements of an arrangement between the two were concluded.

The Stichting : The stichting was by far, the most potent defence used by Arcelor. Scott Simpson, who is amongst some of the best andhighest earning corporate lawyers in Europe, is said to have used this defence successfully in a prior instance, while defending Gucci from Louis Vuitton (our readers may recall the fabulous watches, handbags, purses and jewellery manufactured by these high-end luxury brands).

The defence is every bit as exotic as it sounds. It involves regulatory arbitrage, where one uses one legal system to gain benefits in another, at its creative best. In this case, Arcelor had acquired a Canadian Steel Company by the name of Dofasco. Scott Simpson’s stichting involved transferring Dofasco to a Dutch ‘trust’, necessitating that Dutch law will now govern how the Canadian property is dealt with. Transfer to the Dutch ‘trust’ made it impossible for Mittal to dispose it off as under Dutch law Mittal can no longer control the operations of this entity, even if he took over Arcelor.

The rationale behind this is simple – Mittal is interested only in Arcelor, and no other unwanted goodies. Mittal will borrow some money from outside sources to acquire Arcelor. If Mittal acquires Arcelor, he would be interested in selling Dofasco off so that he is able to generate some money to pay his debts back, and for getting rid of Competition issues in North America – the stichting will create trouble with Competition authorities because both Mittal Steel and Dofasco have operations there. Competition regulators are very circumspect while sanctioning a merger of two big operators in the same sector, because they believe that the two can then abuse their position and adversely affect other competitors.

Fortunately for Mittal, the stichting too did not prove to be fatal – he still managed to get clearance from competition authorities in North America. But the defence was successful in two big ways – Mittal Steel could no longer sell Dofasco to pay off the debt it incurred in buying Arcelor, and it helped in generally increasing the price that Mittal paid for acquiring Arcelor shares, in addition to all other measures designed to achieve that goal. Skadden had played its part.

  • Diplomats and Law Professors

A major international deal is likely to have serious political and regulatory implications. It is important for corporate lawyers to forewarn their clients of the issues that lie ahead. In this case, there was the issue of convincing the Luxembourg government, which was in the process of passing a new takeover law, that the new law which was made was not particularly unfriendly for Mittal’s bid. He had been advised on this by a famous American law firm – Cleary, Gottlieb, Steen and Hamilton. The Skadden duo – Scott Simpson and Servan-Schreiber, who were acting against him for Arcelor, engaged law professors to make recommendations towards enacting a law which would look neutral on the face of it, but in effect, be unfavourable for Mittal. To prevent this, Mittal had to ensure a series of meetings with Luxembourg politicians.

Competition law issues are a cause of concern in all international mergers. Competition law has often been used internationally to delay or completely block merger deals. Therefore, it was important for Mittal to convince competition authorities from the EU, the US as well as Canada. He managed to get clearance from Neelie Kroes, the dreaded EU Competition Commissioner, infamous for blocking the merger of General Electric with Honeywell Corporation, another high-value amounting to USD 45 billion.

Readers may note that India does not have an elaborate pre-merger law yet – the merger provisions of the Competition Act in India are yet to come into force, but once they do, corporate lawyers planning M&A will have to take them into account as well.

  • Curious Christening Quibbles

An interesting achievement in the negotiations is the settlement of the name of the merged entity – Arcelor Mittal. Mittal wanted it to be Mittal Arcelor, and Arcelor wanted it to be Arcelor Mittal. Negotiations seemingly stymied when the Arcelor side broke the ice by pointing out that the name Arcelor Mittal would have the same initials as Mittal’s son, Aditya Mittal, who would in future successor to Lakshmi Nivas Mittal.

  • Closing the deal

Despite the famous and dramatic telephonic threat issued by Mittal to Dolle (which also features on the back cover of the book) that he would be going directly to the shareholders with the offer, the takeover was ultimately not hostile. In fact, it was the one recommended one by the Board of Directors.

  • Impact on Shareholder Value

Shareholder value at the end of the deal had definitely increased as the price Mittal was willing to offer for one share increased from 28 Euros to 40 Euros per share. Michael Zaoui, the Morgan Stanley investment banker hired by Arcelor, himself advised Arcelor that they could be more favourable in their consideration of Mittal’s offer. The Skadden team had been successful in ensuring best value for shareholders.

  • Fast forward

Enter 2008, and the world witnessed a terrible recession – one of the earliest issues of the newly launched business magazine Forbes India in 2009 carries Mr. Mittal on the cover page with an article ( on him, seriously questioning as to what was going to happen to his company. He had amassed around 27 billion in debt, a lot of which was in order to acquire Arcelor. The second half of last year, however, has seen the company’s financial results improve significantly on account of recovery in the world markets.

  • Afterthoughts

Several questions arise at the end of this drama. Apart from the strategies involved, one might think – why did Mittal win? Pure strategy is not the only reason for his victory. He made a lot of compromises on the way – he increased his bid amount drastically, radically transformed the corporate governance of his own company – his family and he had disproportionately higher voting rights, as compared to the other shareholders of Mittal Steel, which was reformed by him. The circumstances and way in which these changes were made is exciting to say the least.

One last word before this long post is to end. The above account is by no means exhaustive, and a lot of more exciting material awaits you, should you decide to read the book, as it is infinitely more thrilling than this account. I hope that this helps in getting you initiated. Do come back next week, for a write up on the next book in the series – highly acclaimed Barbarians at the Gate.



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