In this memorandum opinion, the Court of Chancery held that stockholders of an acquired video game developer were not required to indemnify the acquirer for losses it incurred defending claims based on intellectual property used in a video game that was under development at the time of the acquisition. In granting plaintiff’s motion for summary judgment, the Court held that the acquired company did not breach its representations and warranties because the alleged infringements occurred after the sale closed and the acquirer failed to adequately challenge evidence plaintiff introduced to show that the acquired company’s officers did not know of pending claims or infringements at closing.
In 2006, defendant Viacom International Inc. entered into an agreement (the “Merger Agreement”) to buy Harmonix Music Systems, a developer of music-themed video games, including Rock Band. The selling stockholders of Harmonix agreed to indemnify Viacom against losses arising out of the breach of representations and warranties in the Merger Agreement. Under a separate agreement, the parties agreed to deposit $12 million of the purchase price into escrow to be used, among other things, to indemnify Viacom. Under the Merger Agreement, claims for nonfraudulent breaches of representations as to Harmonix’s use of intellectual property, which included the alleged breaches Viacom asserted, had to be brought within 18 months of the October 27, 2006 closing.
On April 24, 2008, three days before the 18-month deadline, Viacom gave Walter Winshall, the selling stockholders’ representative, notice that it might seek indemnification for three claims against it for violations of intellectual property related to Rock Band. On July 21, 2008, almost three months after the 18-month deadline, Viacom gave Winshall notice of a fourth claim. In December 2010, Winshall filed a complaint seeking declaratory relief that Viacom was not entitled to indemnification and an order requiring Viacom to release the escrow funds to the selling stockholders.
Winshall moved for summary judgment. The Court first rejected Viacom’s argument that the selling stockholders were responsible for paying Viacom’s defense costs, even if there was no breach of a representation or warranty, if the allegations of the claims were within the scope of a representation or warranty. The Court held that the provisions that required the selling stockholders to pay defense costs were expressly limited to claims as to which Viacom was entitled to indemnification under other sections of the Merger Agreement, and Viacom’s only ground for seeking indemnification required that it show that there was a breach of a representation or warranty. The Court noted that it would be odd, in the absence of an express provision, to hold the selling stockholders responsible for claims that did not arise out of a breach, that they could not have predicted, and that had nothing to do with the state of Harmonix at the time of the sale to Viacom.
The Court next held that there was no triable issue of fact that there had been a breach of the representations and warranties. In the Merger Agreement, Harmonix made representations regarding the state and conduct of its business, including that it “ha[d] adequate rights . . . as is necessary for the current use” of software it had developed and that, with certain exceptions, “neither the operation of the Business, nor any activity of the Company, nor any manufacture, use, importation, offer for sale and/or sale of any Current Game” constituted a violation of a third party’s intellectual property rights. The Court held that Harmonix had not breached these representations because they covered only use of intellectual property in October 2006, when Viacom purchased Harmonix. At that time, Harmonix was still developing Rock Band. The final game was produced in November 2007, and the claims for which Viacom sought indemnification focused on parts of Rock Band added after the sale.
Viacom’s remaining indemnification claims related to representations that Harmonix’s officers were not aware of claims against the company. In support of summary judgment, Winshall submitted affidavits stating that Harmonix’s officers were not aware of any of the claims that would later be brought against Viacom. Viacom submitted no evidence to challenge these affidavits, and only pointed to evidence that the Harmonix officers knew of the existence of certain patents. The Court held that this was not sufficient for Viacom to show that there was an issue for trial.
As an alternative ruling, the Court held that Viacom’s claim for indemnification brought after the Merger Agreement’s 18-month deadline was time barred. The Court rejected Viacom’s argument that before the deadline it sent a letter that reserved its right to seek indemnification for additional claims. The Court held that such a reservation would be an impermissible, unilateral rewriting of the Merger Agreement’s requirement that Viacom notify Winshall of claims for which it sought indemnification within 18 months of the closing date.
The full opinion is available here.