Law School Case Brief
Klang v. Smith's Food & Drug Ctrs., Inc. - 702 A.2d 150 (Del. 1997)
No corporation may repurchase or redeem its own shares except out of "surplus," as statutorily defined, or except as expressly authorized by provisions of the statute not relevant here. Balance sheets are not, however, conclusive indicators of surplus or a lack thereof. Corporations may revalue assets to show surplus, but perfection in that process is not required. Directors have reasonable latitude to depart from the balance sheet to calculate surplus, so long as they evaluate assets and liabilities in good faith, on the basis of acceptable data, by methods that they reasonably believe reflect present values, and arrive at a determination of the surplus that is not so far off the mark as to constitute actual or constructive fraud.
Defendant corporation repurchased its shares in a transaction with a third party. Plaintiff class action shareholder contended that the corporation's repurchase of shares violated the statutory prohibition against the impairment of capital set forth in Del. Code Ann. tit. 8, § 160. The shareholder also claimed that the board of directors violated their fiduciary duty of candor by failing to disclose material facts prior to seeking stockholder approval of the transactions in question. The Court of Chancery of the State of Delaware in New Castle County determined that defendant corporation did not violate Del. Code Ann. tit. 8, § 160 by impairing its capital when it repurchased shares in a transaction with a third party, and plaintiff shareholder sought appellate review.
Did the corporation's repurchase of shares violate the statutory prohibition against the impairment of capital?
The court affirmed the judgment of the lower court, holding that the lower court was correct in finding that there was no impairment of capital and there were no disclosure violations. The court noted that the corporation did not dispute that its corporate books showed a negative net worth but argued that the corporations had the presumptive right to revalue its assets. The court agreed and noted that the corporate books did not necessarily reflect the current values of its assets and liabilities. Finally, the court held that the board of directors were not required to make disclosures to shareholders concerning the transaction and did not violate their fiduciary duties.
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