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Klang v. Smith’s Food & Drug Centers, Inc.

Delaware Supreme Court
702 A.2d 150 (1997)


Facts

In January 1996, Smith’s Food & Drug Centers, Inc. (SFD) (defendant) entered into a complex merger and share repurchase agreement with another supermarket company. Prior to granting final approval of the agreement, SFD’s board retained an investment firm to issue an opinion on the impact the agreement would have on SFD’s solvency. The firm found that the agreement would not endanger the company’s solvency. Specifically, it calculated that after the agreement, SFD’s “Total Invested Capital” would be $1.8 billion, while its long-term debt would be only $1.46 billion. The $346 million difference was far greater than the outstanding par value of SFD’s stock. These figures were based on a revaluation of corporate assets and differed from SFD’s balance sheets. Based on this opinion, the board and later the shareholders voted to approve the merger and repurchase agreement. Shortly after the transaction, SFD released a balance sheet which showed a negative net worth. The board also passed a resolution stating that SFD’s total liabilities were no more than $1.46 billion. This figure erroneously did not include current liabilities totaling $372 million. In the investment firm’s report, current liabilities were factored into the determination of “Total Invested Capital. Klang (plaintiff) brought a class action lawsuit, purportedly on behalf of the holders of SFD common stock. He alleged that the transaction violated Delaware General Corporation Law (DGCL) § 160 because it caused an impairment of capital. Specifically, Klang argued that SFD’s balance sheets were conclusive evidence of impairment, and further that their off-balance-sheet calculations were done improperly. The trial court found in favor of SFD. Klang appealed.

Rule of Law

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Issue

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Holding and Reasoning (Veasey, C. J.)

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  • A "yes" or "no" answer to the question framed in the issue section;
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