DE Supreme Ct. Rules on <i>Viacom</i> and <i>Harmonix</i> Merger

When disputes arise, parties calculate the likelihood of success in surviving a motion to dismiss for which the court's standard of review is critical. In the recent case of Winshall v. Viacom International, 39, 2013, the Delaware Supreme Court addressed the standard on a motion to dismiss and also contractual provisions in a merger agreement regarding earn-out and indemnification provisions. Its opinion provides guidance to entertainment and media practitioners concerning how to draft provisions that carry out their intent on these points.

The case arose out of Viacom International's 2006 acquisition by merger of Harmonix Music Systems Inc., a company whose business was to develop music-oriented video games. In addition to $175 million in cash payable at closing, the parties' merger agreement provided that the selling stockholders would receive a contingent right to incremental uncapped earn-out payments during 2007 and 2008 based on financial performance. The merger agreement entitled the selling stockholders to three-and-a-half times the amount by which Harmonix's gross profits (as defined in the merger agreement) exceeded specified targets in 2007 and 2008. The merger agreement, which did not require Harmonix to conduct its business so as to maximize the earn-out payments, also contained an indemnification provision requiring the selling stockholders to hold harmless Viacom and Harmonix, as the surviving corporation, and their affiliates from and against any losses arising out of or by reason of the breach of any representation or warranty of the company in the merger agreement.