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Shareholders Feel Left in the Dark in Paint Merger

(CN) — A Valspar shareholder claims in a class action that the company didn't disclose crucial material information about the fairness of its proposed merger with Sherwin-Williams.

Tom Mitsopoulos brought a class-action lawsuit against Valspar's board of directors for allegedly breaching their fiduciary duties by allowing Sherwin-Williams to acquire the company "without providing stockholders with material information necessary for an informed vote" on the merger.

That information is missing from the company's proxy statement filed with the U.S. Securities and Exchange Commission last month, according to the May 24 lawsuit.

"Intended to solicit stockholder approval of the proposed transaction, the proxy fails to disclose material financial projections prepared by Valspar management and used in the financial analyses of the proposed transaction performed by Valspar's advisors, Merrill Lynch, Pierce, Fenner & Smith Inc. and Goldman Sachs & Co.," the 18-page complaint states.

In a press release dated March 21, Valspar announced that the company was entering into a definitive agreement to merge with Sherwin-Williams, and Valspar stockholders will get $113 per share.

But that price could be adjusted, Mitsopoulos claims, because regulators may require Sherwin-Williams to divest assets to satisfy antitrust concerns.

The merger agreement downplays this scenario.

"In what both companies believe to be the unlikely event that divestitures are required of businesses totaling more than $650 million of Valspar's 2015 revenues, the transaction price would be adjusted to $105 in cash per Valspar share," a joint press release states. "Sherwin-Williams would have the right to terminate the transaction in the event that required divestures exceed $1.5 billion in 2015 revenues."

Ever since the announcement of the merger, Valspar's share price has leveled out at about $107 per share.

Based in Minnesota, paint maker Valspar has been in business since 1806. Both Valspar and Sherwin-Williams are big players in the U.S. house paint market, selling their paints through big-box retailers like Lowe's and Home Depot. According to a Bloomberg report, this may be cause for antitrust scrutiny.

Not only does Sherwin-Williams gain market share in the U.S. do-it-yourself paint market through the merger, but it also boosts the company's presence in the international markets and industrial coatings markets, according to Bloomberg.

The Valspar board considered a merger deal with two other unnamed companies, but by late January the board concluded that "no other company could 'offer greater value and closing certainty' than Sherwin-Williams, [and so] the board determined that it would not contact any additional parties for a potential strategic transaction," Mitsopoulos' lawsuit alleges.

And so on March 19, the Valspar board unanimously approved the merger agreement after reviewing "financial projections as well as the fairness opinions prepared and provided by Merrill Lynch and Goldman Sachs," according to the complaint.

Although Valspar "describes the fairness opinions provided by Merrill Lynch and Goldman Sachs and the various valuation analyses performed in support of these opinions," both financial advisors "relied on certain internal projections for fiscal years 2016-2020 in rendering their fairness opinions," the complaint states.

Mitsopoulos claims the proxy discloses revenue, adjusted earnings before interest and taxes, and adjusted earning per share, but omits some of the internal projections used by Valspar's financial advisors to recommend the merger.

According to the class-action complaint, the omissions include: "future stock prices and dividends per share, 'as reflected in Valspar forecasts,' used in the present value of future stock price and dividends analysis...unlevered free cash flow, 'as reflected in the Valspar Forecasts,' used in the discounted cash flow analysis...terminal year normalized free cash flow for Valspar, 'as reelected in the Valspar forecasts,' used in the discounted cash flow analysis...and the definitions of free cash flow and unlevered free cash flow used by Goldman Sachs and Merrill Lynch."

"Without this information, Valspar's public stockholders are unable to fully understand the analyses and, thus, are unable to determine what weight, if any, to place of the fairness opinion rendered in support of the proposed transaction," the lawsuit states.

As such, Mitsopoulos and the class seek injunctive and other equitable relief for the alleged breaches of fiduciary duty.

Mitsopoulos is represented by Brian Long of Rigrodsky & Long PA in Wilmington, Del., and by Donald Enright of Levi & Korsinsky in Washington, D.C.

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