Winshall v. Viacom International Inc.
2013 Del. LEXIS 510
| Del. | 2013Background
- In 2006 Viacom acquired Harmonix under a Merger Agreement providing $175M at closing plus uncapped, performance-based earn-outs for 2007–2008 tied to Gross Profit; $12M of the closing payment was held in escrow for 18 months to secure indemnification obligations.
- Post-closing Harmonix (a Viacom subsidiary) developed and released Rock Band; distribution fees payable to EA are a major component of Gross Profit and thus affect earn-out calculations.
- Viacom negotiated an Amended EA Agreement in 2008 that changed certain payment timings and future fee rates but did not reduce the amount of the 2008 distribution fee or otherwise change the 2008 earn-out calculation.
- Four third-party IP claims were asserted post-closing against Harmonix/Viacom relating to Rock Band; Viacom gave notice to the Sellers’ representative seeking indemnification under the Merger Agreement.
- The Sellers’ representative (Winshall) sued seeking (1) dismissal of an implied-covenant claim (Count I) and (2) declaratory relief and release of escrowed funds (Counts II–III); the Court of Chancery dismissed Count I and granted summary judgment to Winshall on Counts II–III.
- The Delaware Supreme Court affirmed in full: no implied duty to maximize earn-outs; no independent duty to defend or recover defense costs absent a breach; and no proved breach of the indemnity representations covering post-closing IP claims.
Issues
| Issue | Plaintiff's Argument (Winshall) | Defendant's Argument (Viacom/Harmonix) | Held |
|---|---|---|---|
| Whether an implied covenant required Viacom/Harmonix to use post-merger discretion to maximize the 2008 earn-out | The Merger Agreement created a reasonable expectation that defendants would not manipulate costs (distribution fees) to reduce the 2008 earn-out; failing to seek lower 2008 fees breached the implied covenant | No implied duty exists to maximize seller earn-outs; parties could have but did not contract for such an obligation | Dismissal affirmed — no implied covenant to maximize earn-outs or renegotiate EA fees for sellers’ benefit |
| Whether notice of third-party claims under §8.2(d) of the Merger Agreement separately obligates Sellers to pay defense costs (advancement) | Sellers must cover defense costs upon notice because §8.2(d) allows Parent to "request indemnification" and direct defense at sellers' expense | Indemnification is conditioned on an actual breach; §8.2(d) does not create an independent duty to defend or advance fees absent indemnifiable breach | Affirmed — no independent duty to pay defense costs; notice alone does not trigger advancement |
| Whether the IP-related claims alleged breaches of the Merger Agreement representations (§4.15(k) and §4.15(o)(i)) | The representations cover Company Developed Software and activities in development (Rock Band) and thus include post-closing infringement exposures | Representations are tied to the company’s state at closing (present tense / "current use"); claims about Rock Band’s post-closing publication are not covered | Affirmed — defendants failed to show breach; representations did not plainly cover new post-closing uses/publications |
| Whether factual arguments (EA leverage, Original EA Agreement reliance, timing of rights) defeat dismissal/summary judgment | The court improperly relied on the Original EA Agreement and misread facts about EA’s bargaining power and rights, which show conceivable harm to sellers’ earn-out | The Original EA Agreement was incorporated by reference; facts alleged do not show contractual duty or breach and were not supported by evidence | Affirmed — Court of Chancery properly considered the agreement and factual contentions did not create a viable implied-covenant or indemnity claim |
Key Cases Cited
- Winshall v. Viacom Int’l, Inc., 55 A.3d 629 (Del. Ch. 2011) (Chancery opinion underlying the pleading-stage dismissal and analysis of earn-out/implied covenant)
- Central Mortgage Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531 (Del. 2011) (Delaware pleading standard: complaint survives dismissal if facts state a claim under any reasonably conceivable set of circumstances)
- In re Santa Fe Pac. Corp. Shareholder Litig., 669 A.2d 59 (Del. 1995) (appellee may defend judgment without filing a cross-appeal; arguments supported by the record may be advanced)
- Lear Corp. v. Johnson Elec. Holdings Ltd., 353 F.3d 580 (7th Cir. 2003) (construction of indemnify-only clauses: no independent duty to defend or advance defense costs)
- LaPoint v. AmerisourceBergen Corp., 970 A.2d 185 (Del. 2009) (illustrative of stock/merger agreements that expressly require seller to "indemnify, defend and hold harmless")