## Facts

- A Delaware supermarket company entered a merger-and-share-repurchase transaction that included a self-tender for roughly half of its outstanding shares.
- Before stockholder approval, the board obtained a solvency analysis from an outside financial advisor using present-value methods and asset revaluation; the analysis indicated invested capital exceeded long-term debt by hundreds of millions of dollars.
- After the transaction, company financial statements prepared using historical-cost accounting reflected negative net worth.
- The board adopted a resolution addressing liabilities, but the recited figure omitted a substantial amount of current liabilities.
- A stockholder filed a purported class action alleging (1) an unlawful repurchase under DGCL § 160 for impairment of capital and (2) disclosure violations in connection with soliciting stockholder approval.
- After full discovery, the Court of Chancery dismissed all claims and entered judgment for defendants.

## Issues

1. Whether the self-tender violated DGCL § 160 because the corporation lacked “surplus” (as defined by DGCL § 154) and the repurchase impaired capital.
2. Whether directors breached the fiduciary duty of candor by failing to disclose material information so as to render the stockholder vote uninformed.

## Decision

- The Delaware Supreme Court affirmed the Court of Chancery’s judgment for defendants.
- The Court held the repurchase did not violate DGCL § 160 because directors may, in good faith, revalue assets and liabilities to determine surplus, and the challenged determination was within a permissible range.
- The Court held there was no actionable disclosure violation because the proxy materials, viewed as a whole, did not contain material misstatements or omissions.

## Legal Principles

- A corporation may not repurchase its shares except out of surplus; a repurchase that impairs capital violates DGCL § 160.
- GAAP or historical-cost balance sheets are not conclusive evidence of the absence of surplus for DGCL § 160 purposes.
- Directors have latitude to depart from balance-sheet figures when calculating surplus if they (a) act in good faith, (b) rely on acceptable data and reasonable valuation methods aimed at present value, and (c) do not reach a result so far off the mark as to amount to actual or constructive fraud.
- When soliciting stockholder action, directors must disclose fully and fairly all material information; materiality turns on whether a reasonable stockholder would view the fact as significantly altering the total mix of available information.
- In assessing disclosure claims, courts evaluate the total mix of information provided, including explanatory financial materials and expert opinions, rather than isolated accounting characterizations.

## Conclusion

The court upheld the challenged self-tender because directors could rely on good-faith asset revaluations and expert solvency work to establish surplus despite a negative net-worth balance sheet, and it rejected the disclosure challenge because the proxy materials did not omit or misstate material information.


Klang v. Smith’s Food & Drug Ctrs., Inc., 702 A.2d 150 (Del. 1997)