Chancery Rejects Viacom’s Indemnification Claim

Winshall v. Viacom International, Inc., C.A. No. 6074-CS (Del. Ch. Dec. 12, 2012).

Key Issue Addressed: Whether an indemnification clause in the merger agreement covered $28 million in legal fees incurred to defend post-merger claims.  Short Answer:  No.

Brief Factual Background

Viacom bought Harmonix in Sept. 2006 for $175 million in cash and an earn-out payment based on 2007 and 2008 revenues.  $12 million of the $175 million purchase price was placed into escrow and would be used to indemnify Viacom if Viacom suffered losses arising out of breaches of representations and warranties made by Harmonix.  This case arose out of claims made by Viacom for the escrow funds related to lawsuits that arose concerning the use of intellectual property for a video game by the name of Rock Band.

The Court of Chancery granted the motion for summary judgment filed by the shareholders of Harmonix who will now receive the $12 million that was held in escrow.  Prior Chancery decisions in this case were highlighted on these pages here and here.

Summary of Court’s Reasoning

The Court reasoned that all the claims related to alleged infringements of intellectual property made after the deal closed.  In addition, all of the claims were either dismissed or settled and therefore there was no evidence presented that the alleged misrepresentations on which the indemnification claims were based, were ever made.  Nor was there any evidence that any of the senior officers knew of any of the infringements.  Moreover, the Court found that at least some of the claims were time-barred.

Useful principles of Delaware law restated in this opinion include the following:

●          The well-settled elements of Court of Chancery Rule 56 regarding the standard for summary judgment were reviewed.  See footnotes 32 through 37 and accompanying text.

●          Viacom failed to successfully employ the two basic tactics available to defeat a summary judgment motion:  (1) Under Rule 56(e) it is not enough to rely on “mere allegations or denials” but rather one must provide affidavits or other means to establish that there is a genuine issue of material fact for trial; or (2) One may file an affidavit under Rule 56(f) showing why one needs discovery to address the pending summary judgment motion.  Viacom failed to successfully employ either of these two defenses to a summary judgment motion.

●          The Court reiterated that indemnity provisions are construed strictly, rather than expansively, under Delaware law.  See footnote 53.

●          Other useful principles of Delaware contract interpretation were applied, including the need to review the contract as a whole.

Supplement: For an article that discusses the aspect of this opinion dealing with the standard of review for post-closing adjustment decisions made by accountants, see this link.