Delaware Court Sides with Viacom in Post-Merger Earn-Out Payments Dispute with Harmonix Shareholders

(CN) – The Delaware Superior Court ruled in favor of media giant Viacom after former shareholders of Harmonix Music Systems, a video game company, filed suit following Viacom’s acquisition of the game developer in 2006.

Lead plaintiff Walter Winshall claimed that Viacom breached the companies’ merger agreement by failing to fully pay additional compensation made to shareholders under the merger based on Harmonix’s performance, typically known as an “earn-out.”

Viacom paid $149.7 million for Harmonix’s 2007 earn-out after the company’s performance exceeded the target performance goal, according to the ruling.

Though Viacom paid the initial earn-out, Harmonix shareholders claim they never received a final report for the 2007 earn-out payments after they were told that “additional payments may be forthcoming,” by the parent company.      

According to the ruling, Winshall made several requests for the earn-out payment calculations, and when those calculations were eventually given by Viacom, Winshall and other shareholders objected. The merger agreement contained a clause for an earn-out dispute, according to the ruling.

“Under the merger agreement, Mr. Winshall could make reasonable requests of Viacom for documents that would allow for an assessment of the accuracy of the earn-out statement,” the ruling states. “The merger agreement further provides that, if Viacom and Harmonix disagreed on the calculations, Viacom and Harmonix could select neutral accountants to determine the 2007 and 2008 earn-out payment amounts.”

The shareholders claimed Viacom intentionally delayed the selection of accountants to resolve the payment dispute. Winshall also asserted that Viacom refused to select a firm for the assessment and later attempted to change the terms of the earn-out payments under the merger.

According to the ruling, Viacom’s alleged delay tactics prompted a complaint in the Delaware Chancery Court to compel Viacom’s retention of a resolution accountant. Shortly after, Viacom agreed to the retention.

After the companies’ resolution accountants came to an agreement, they found the 2007 earn-out payment to be $234.1 million, roughly $84 million more than originally offered for the earn-out.

Winshall claims that Viacom’s tactics were attempts to bully Harmonix shareholders and obstruct the resolution accountants.

Harmonix’s former shareholders made several claims against Viacom, arguing they suffered damages from tax consequences, lost interest and indemnification.   

Delaware Superior Court Judge, Eric M. Davis did not agree with the former shareholders, barring their claims as already settled in previous actions.

“Winshall alleged that Viacom caused ‘more than 18 months of delays’ before delivering the 2007 earn-out statement and created ‘another extended period of delays’ before agreeing to the resolution accountants,” wrote Judge Davis. “The Court finds that Mr. Winshall has already brought claims for Viacom’s delay in issuing the earn-out statements in the Chancery Court action.”

Judge Davis did however find that after Viacom failed to pay attorney’s fees, the shareholders’ claim for indemnification was not time-barred because the time began to count from the filing of the complaint, which was within the three year limit, according to the ruling.

Shareholders also made claims of fraudulent concealment against Viacom stemming from a 2009 litigation, but Judge Davis found that Winshall was properly provided with all relevant information from the litigation.

%d bloggers like this: