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

The Delaware Court of Chancery ordered Viacom International Inc. (“Viacom”) to release merger consideration held in escrow since 2006 for the benefit of the former stockholders of Harmonix Music Systems (“Harmonix”), a developer of music-based video games.  Following the closing of its acquisition of Harmonix, plaintiff repeatedly requested that Viacom release the escrowed funds for distribution to Harmonix’s stockholders pursuant to the terms of the parties’ merger agreement.  Viacom refused to release the funds on the basis that it had a claim to all of the escrow funds pursuant to a provision in the merger agreement that entitled it to indemnification for legal fees from the escrow funds if Harmonix breached its representations and warranties and the breach caused Viacom to incur legal fees.  According to Viacom, Harmonix breached representations and warranties relating to Rock Band, a video game which Harmonix was still developing at the time of the execution of the merger agreement.  Specifically, Harmonix represented that that it had “adequate [intellectual property] rights” for the “current use” of “any [g]ames in development.”  After Viacom released Rock Band in 2007, several parties sued Viacom and alleged that the final, published version of Rock Band infringed their intellectual property rights.

In December 2010, plaintiff, as the stockholders’ representative under the parties’ merger agreement, initiated this action and sought to force Viacom to release the escrow funds.  Viacom defended this action on the basis that it was entitled to be indemnified out of the escrow funds for its legal fees incurred in defending claims related to Rock Band.  In determining whether Viacom had any entitlement to indemnification from the escrow funds for its defense costs, the Court reviewed the plain terms of the merger agreement.  According to the Court, the merger agreement permitted Viacom to be indemnified for defense costs only if the costs arose from an actual breach of Harmonix’s representation and warranties.  Because the patent infringement actions all related to the final, published version of Rock Band, as to which Harmonix made no representations in the parties’ merger agreement, the Court found that Harmonix had not breached the merger agreement, and Viacom was therefore not entitled to indemnification from the escrow funds.