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

Smith's Food & Drug Centers, Inc. (SFD) (defendant) entered a complex merger and share-repurchase agreement, and before final approval its board retained an investment firm that opined the deal would not endanger solvency, calculating a $346 million surplus based on a revaluation of corporate assets that differed from SFD's standard balance sheets; the board and shareholders approved the deal on that basis. Shortly afterward, SFD released a balance sheet showing negative net worth, and the board passed a resolution understating total liabilities by omitting $372 million in current liabilities that the investment firm's report had actually included in its own calculations; Klang (plaintiff) brought a class action alleging the transaction impaired capital in violation of Delaware corporate law, relying on the balance sheets as conclusive evidence of impairment, and the trial court ruled for SFD.