On 7 February 2006, the Luxembourg Government lodged bill number 5540, pertaining to the implementation of the Takeover Directive. Parliament finally voted for the law – the Takeover Act – on 19 May, a day before deadline.
This legislative process might have passed unnoticed: however, an unsolicited takeover bid by Mittal Steel on Arcelor, has made it the centrepiece of an unprecedented political, financial and judicial spectacle.
The cast includes:
# Arcelor, the world’s second-biggest steel manufacturer and regarded as the most prestigious Luxembourg corporate, which is 5 per cent owned by the Luxembourg Government;
# Mittal, also a leading steel manufacturer, with head offices in Amsterdam and controlled by the Indian steel giant, Lakshmi;
# the political lobby of Luxembourg desperately seeking to keep control over a strategic enterprise with a minority participation; and
# the white knight, Severstal, controlled by the Russian steel magnate, Alexey Mordashov.
Other participants have been involved, specifically; the authorities of the stock exchanges where Arcelor is listed; the Luxembourg Commission de Surveillance du Secteur Financier (CSSF). which was designated under the Takeover Act as the official authority to supervise bids; strategic investors; and the public.
While the Government was quietly preparing the Takeover Act, the announcement of the unsolicited public takeover bid by Mittal on Arcelor arrived on 27 January 2006. This prompted the Government to lodge bill number 5540 on 7 February.
The Mittal bid was immediately qualified as “hostile” by the Luxembourg Prime Minister and was rejected by Arcelor’s board of directors. Arguments focused on low pricing, the absence of a cash offer and lack of liquidity of the exchange shares, the absence of synergy, a mismatch of corporate governance policy, the lack of transparency in shareholder structure and, finally, the low quality of products.
During the pending approval of bill number 5540, official takeover legislation did not exist in Luxembourg, nor had a hostile bid ever taken place in the country. Amid much confusion, therefore, all parties sought extensive legal advice and prepared the first lines of a proper defence.
Some assets, known to be of interest to the raider, were put away in a foundation. In addition, an unprecedented high dividend distribution was announced to shareholders, redemption of shares was proposed and a surprisingly high valuation of the company was announced by Arcelor’s board of directors.
The white knight
The best was yet to come: a white knight appeared, announcing that it would merge Severstal into Arcelor, in exchange for a participation of around 32 per cent.
The level of the proposed participation was not a hazard. Article 5(1) and (3) of the Takeover Act specifies that where a person, as a result of acquisitions, holds securities which, added to any existing holdings, gives such person, directly or indirectly, a percentage of voting rights in that company, thus giving him control of that company, such person shall be required to make a bid as a means of protecting the minority shareholders of the company.
The bid must be addressed to all minority shareholders and cover all their securities. The price must also be equitable. The percentage of voting rights giving control over a company with its registered office in Luxembourg has been set at 33.3 per cent.
This percentage shall be determined by taking into consideration all the securities issued by the company, except for those securities carrying voting rights in special circumstances only. The combination of the merger with Severstal in exchange for 32 per cent participation and the proposed buy-back by Arcelor of its own shares could result in Mordashov’s shareholding exceeding the 33.3 per cent threshold. However, the CSSF issued an interpretative press release on 2 June stating that “if a stake/portion of voting rights, initially situated under the threshold, exceeds the latter due to reasons other than the acquisition of shares, the mandatory bid rule contained in Article 5 (1) of the Takeover Act is not triggered”.
Severstal seems to offer Arcelor the necessary protection against any hostile takeover by Mittal. However, a more in-depth analysis shows that this defence line is not without its dangers.
Firstly, the reproach by Arcelor that Mittal’s corporate governance is not in line with its own can also be said of Severstal. Then there is the criticism that Mittal’s offer price is not sufficiently liquid given the relatively small free float of shares offered in exchange, or that Lakshmi Mittal is not sufficiently transparent – such criticisms can also be levelled at Severstal and Mordashov.
Further, the argument that the quality of Arcelor’s business would not be compatible with Mittal’s business or that there are insufficient business synergies has been enervated by institutional investors as well as by the investment banks analysing the case. Again, this latter reproach, if justified, would most probably apply to Severstal. Finally, there is the issue of pricing. The figures put forward by Arcelor do not match the market or offer price.
Providing Arcelor’s shareholders are unsuccessful in blocking the attempt by Arcelor’s management to merge with Severstal, the financial conditions of this merger will be continued #+ continued analysed in greater detail by both Arcelor’s shareholders and Mittal. An over-evaluation of Severstal could trigger liability claims against the members of the board of directors, as well as against the independent auditor. An under-evaluation of Arcelor could trigger the same liability.
Overall, it is worth considering this litigation in greater detail. Before doing so, however, the shareholders’ extraordinary general meeting at the end of this month will be critical. Mittal has appointed Goldman Sachs to collect opposition votes for the meeting.
The CSSF issued a press release on 31 May 2006, announcing the approval of a supplement to the information document, which was approved by the CSSF on 16 May, relating to Mittal’s European mixed cash and exchange offer for Arcelor’s securities. Also the contemplated merger with Severstal has been the object of a press release by the CSSF as indicated above.
On 2 June, copies of the offer package were made available through Mittal’s website. The offer period has also been extended until 5 July.
The information disclosed by Mittal in this package will be completed by a reply document to be published by Arcelor during the offer acceptance period. It will also contain the opinion of Arcelor’s board of directors on Mittal’s offer.
At the time of writing, the reply document has not yet been released. There is no doubt, however, that it will not diminish this hostile climate given the aversion of Arcelor’s board members to Mittal.
The question of whether Arcelor’s board of directors and each of its individual members are acting in line with their fiduciary duties vis-à-vis Arcelor as a company, rather than in the interest of specific shareholders, has not yet been resolved. The question should arise, however.
Most major Luxembourg law firms are involved in this case and it seems that Luxembourg’s first ever hostile takeover bid will not pass unnoticed.
This battle concerns countries beyond Luxembourg and includes the Belgian, French and Spanish governments. We must not forget the Indian authorities, which have also been involved.
This is a showdown that really should be watched for many different reasons. n
Stef Oostvogels is managing partner at Oostvogels Pfister Roemers