Winshall v. Viacom International, Inc.

• Court: Supreme Court of Delaware
• Decided: July 6, 2020
• Docket: 520, 2019
• Status: Published

Opinion

IN THE SUPREME COURT OF THE STATE OF DELAWARE

WALTER A. WINSHALL, in his § capacity as the Stockholders’ § No. 520, 2019 Representative for former Harmonix § Stockholders, § Court Below: Superior Court § of the State of Delaware Plaintiff Below, § Appellant, § C.A. No. N15C-06-137 § v. § § VIACOM INTERNATIONAL, INC., § a Delaware Corporation, § § Defendant Below, § Appellee. §

Submitted: May 20, 2020 Decided: July 6, 2020 Before VALIHURA, VAUGHN, and TRAYNOR, Justices.

ORDER

Upon consideration of the parties’ briefs and the record of the case, it appears

that:

(1) Viacom International, Inc. (Viacom) acquired Harmonix Music Systems,

Inc. (Harmonix) pursuant to a merger agreement dated September 20, 2006.

Harmonix was a video game company with successful video games such as Guitar

Hero and Rock Band. The merger consideration payable to the Harmonix

stockholders consisted of an initial consideration of $175 million payable at closing and two post-closing payments, a 2007 Earn-Out Payment and a 2008 Earn-Out

Payment.1 The Earn-Out Payments were to be calculated based on the commercial

success of the Harmonix video games which Viacom acquired. The appellant,

Walter A. Winshall, is the stockholders’ representative for the former Harmonix

stockholders. The position of stockholders’ representative was created in the merger

agreement. The agreement provided for a detailed procedure to resolve any disputes

about the amounts of the 2007 and 2008 Earn-Out Payments. The procedure

included the use of Resolution Accountants who were empowered to resolve any

such disputes.

(2) Disputes about the 2007 and 2008 Earn-Out Payments did arise and

significant litigation ensued. The litigation included three civil actions in the Court

of Chancery, appeals to this Court in two of those cases, and a civil action in the

Superior Court which is the subject of the appeal now before us. A detailed

statement of the procedural history of these cases is not necessary. The result of it

all was that the former Harmonix stockholders prevailed and were adjudged to be

entitled to $234,130,148 for the 2007 Earn-Out Payment and $298,813,905 for the

2008 Earn-Out Payment. Viacom made payment in full of the 2007 Earn-Out

1 The Harmonix stockholders are referred to in the merger agreement as “Merger Consideration Recipients.” The Merger Consideration Recipients also included persons who held warrants and options on Harmonix stock and joined the merger agreement with the plaintiff as their representative. The Merger Consideration Recipients will simply be referred to herein as the former Harmonix stockholders. 2 Payment in June 2012 and payment in full of the 2008 Earn-Out Payment in August

2013, both with pre-judgment interest.

(3) Winshall commenced this Superior Court action on June 14, 2015. The

complaint contains four counts. Count I seeks indemnification pursuant to an

indemnification clause contained in the merger agreement. The damages sought

under Count I include attorneys’ fees and costs arising from the various litigation

proceedings between Winshall and Viacom, and alleged tax losses. The theory of

the tax losses is that Viacom wrongfully delayed payment of the 2007 and 2008

Earn-Out Payments, causing the former Harmonix stockholders to incur increased

income taxes due to expiration of the Bush tax cuts. Count II seeks damages for

breach of the merger agreement related to the Earn-Out Payments. Count III alleges

that Viacom breached the implied covenant of good faith and fair dealing. Count IV

asserts a claim against Viacom for malicious prosecution.

(4) In response to cross-motions for summary judgment, the Superior Court

ruled that the claims for damages under Count I are barred by res judicata and the

statute of limitations, except for the claim for attorneys’ fees and costs. The court

ruled that Counts II and III are barred by res judicata and the statute of limitations.

It ruled that Count IV fails to state a claim upon which relief can be granted. Viacom

filed a motion for reargument. In the proceedings on that motion, the court

reconsidered its ruling that Winshall could proceed with the claim for

3 indemnification for attorneys’ fee and costs under Count I. The court then ruled that

all of the former claims under Count I, including the claim for attorneys’ fees and

costs, fail because the indemnification clause in issue applies only to indemnification

for third-party claims, not direct claims between the parties to the merger agreement.

(5) On appeal, Winshall asserts three claims. First, he claims the contention

that the indemnification clause applies only to third-party claims was raised for the

first time on reargument and new issues may not be raised in a motion for

reargument. Next, he claims that the plain language of the merger agreement entitles

the selling stockholders to indemnity for their adverse tax consequences and

attorneys’ fees and costs. Finally, he claims that the selling stockholders claim for

indemnification for tax consequences is not time-barred.

(6) One of the arguments that Viacom makes in response to Winshall’s

claims, and the one which we believe is dispositive, is an argument that Winshall’s

claim for attorneys’ fees, costs and tax losses is barred by a limitation on

indemnification contained in the merger agreement.2

(7) The merger agreement contains two indemnification clauses. In one, the

former Harmonix stockholders agreed to indemnify Viacom for all losses arising out

of or by reason of the breach of any representation, warranty, covenant or agreement

2 “[T]his Court may affirm on the basis of a different rationale than that which was articulated by the trial court.” Unitrin, Inc. v. American General Corp., 651 A.2d 1361, 1390 (Del. 1995). 4 made by Harmonix.3 The stockholders’ indemnification obligation, however, is

subject to “Certain Limitations.”4 One limitation is that Viacom was limited to

obtaining indemnification only from an Escrow Amount held back from the initial

consideration for that purpose and by set-offs against the 2007 and 2008 Earn–Out

Payments.5 Under the agreement, once the Escrow Amount was exhausted or

released to the former Harmonix stockholders and the 2007 and 2008 Earn-Out

Payments were paid in full, the former Harmonix stockholders had no further

indemnification obligation to Viacom.

(8) The second indemnification provision, the one relevant to this case,

obligates Viacom to indemnify the former Harmonix stockholders for losses arising

out of or by reason of the breach of any representation, warranty, covenant or

agreement made by it.6 Viacom’s obligation to indemnify the former Harmonix

stockholders, however, is also subject to Certain Limitations, which are set forth in

Section 8.6(b):

Certain Limitations. [Viacom] shall not be obligated to indemnify [the former Harmonix stockholders] pursuant to Section 8.6(a) to the extent the aggregate amount of all indemnifiable Losses exceeds the aggregate unpaid amount of the Merger Consideration then payable.

3 Section 8.2(a). 4 Section 8.2(c). 5 The Escrow Amount also served other purposes. 6 Section 8.6(a). 5 (9) When Viacom paid the 2008 Earn-Out Payment in August 2013, with

prejudgment interest, it completed payment of the merger consideration in full.

After that payment was made, there was not, and after that could not be, “an unpaid

amount of the Merger Consideration then payable.” The effect of this unambiguous

limitation on Viacom’s indemnification obligation was to reduce that obligation to

zero once the merger consideration was paid in full. Since the merger consideration

was paid in full before Winshall brought the present action for indemnification, the

claim for indemnification must fail.

(10) It is not necessary for us to address how Section 8.6(b) might have

operated against a claim for indemnification made during the period between closing

and final payment in full of the merger consideration. It is clear, however, that when

payment in full of the merger consideration was completed, Viacom’s

indemnification obligation came to an end.

NOW, THEREFORE, IT IS THE ORDER of the Court that the Judgment of

the Superior Court is AFFIRMED.

BY THE COURT:

/s/ James T. Vaughn, Jr. Justice