Winshall v. Viacom International, Inc.
2011 Del. Ch. LEXIS 168
| Del. Ch. | 2011Background
- Viacom acquired Harmonix in 2006; selling stockholders, led by Walter Winshall, received $175M cash and uncapped earn-outs for 2007–2008 based on Harmonix’s Gross Profit.
- Gross Profit equals product gross profit minus direct variable costs, including distribution fees and royalties; earn-outs uncapped for exceeding thresholds ($32M 2007, $45M 2008).
- Harmonix entered into Original EA Agreement with Electronic Arts (EA) for Rock Band distribution; EA’s “Sequel” rights depended on performance thresholds and renegotiation potential existed.
- In 2007 Rock Band became a hit; negotiations in 2008 led to an Amended EA Agreement broadening EA’s distribution rights and conditions (including The Beatles: Rock Band).
- Winshall argued the Renegotiation was orchestrated to reduce 2008 fees and thus depress 2008 earn-out; the court dismissed Count I for failure to state a claim.
- The court held the implied covenant of good faith and fair dealing does not require Viacom/Harmonix to maximize uncapped earn-outs or to grant post‑earn-out benefits to Selling Stockholders.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the implied covenant requires maximizing uncapped earn-outs. | Winshall asserts implied duty to exploit opportunities to boost 2008 earn-out. | Viacom/Harmonix did not breach; no duty to manipulate post-Merger terms. | No; no duty to maximize earn-outs; not contractually implied. |
| Whether a side agreement (Schedule L) created a termination right that affected the earn-out | Winshall contends missing Schedule L could void EA rights, enabling leverage. | Waived issue; EA continued distribution; no termination right shown. | Waived; not plausibly giving HarmoniX a termination right. |
| Whether the Amended EA Agreement and expanded rights post-earn-out altered plaintiff’s expectations | Amendment expanded future rights benefiting sellers indirectly. | Amendment concerned future products; no impact on 2007–2008 earn-out. | Amendment did not affect 2008 earn-out inputs; no breach. |
Key Cases Cited
- Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434 (Del.2005) (implied covenant analysis requires consideration of fundamental contractual expectations)
- Nemec v. Shrader, 991 A.2d 1120 (Del.2010) (courts must assess reasonable expectations at contracting, not rewrite contracts to fix later deal regrets)
- Central Mortgage Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531 (Del.2011) (pleading standard and respect for Delaware Rule 12(b)(6) framework)
- Price v. E.I. du Pont de Nemours & Co., 26 A.3d 162 (Del.2011) (pleading standards; need for non-conclusory factual allegations)
- In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162 (Del.2006) (implied covenant principles and safeguarding reasonable expectations)