In Winshall v. Viacom Int’l. Inc., the Delaware Supreme Court held that in corporate mergers, a parent company is not guaranteed indemnification from its selling shareholders for all alleged breaches of representations and warranties unless it is explicitly stated within the merger agreement. This decision demonstrates that selling shareholders are obligated to indemnify only in instances where an alleged infringement is current, within the defined scope, and the breach can be proven. Furthermore, this holding shows that Delaware law does not allow a corporate entity to claim it is entitled to indemnification when it broadly interprets a contract’s language.
The parties involved in the merger and subsequent suit are both popular players in their respective industry. Viacom is a well-known global entertainment company comprised of a number of popular television, motion picture, and other media brands including MTV, BET Networks, and Paramount Pictures. Harmonix is a video game developer of music-oriented video games including Guitar Hero and Rock Band. The pending litigation before the Delaware Supreme Court stems from a cross-appeal from a judgment of the Court of Chancery in an action brought by Winshall, the Harmonix shareholder representative. The Chancery Court dismissed Winshall’s complaint for failure to state a claim for relief, declared that Viacom was not entitled to indemnification to the selling shareholders, and ordered payment of the escrowed funds owed by Viacom to the shareholders. The court concluded that the Chancery Court committed no errors in its decision and correctly granted summary judgment on Winshall’s claims.
In 2006, Viacom acquired Harmonix in a merger in which Harmonix became a wholly owned subsidiary of Viacom. Two documents governed this deal: a merger agreement and an escrow agreement. Winshall was acting as a representative for the selling shareholders, who are former owners of Harmonix stock options and warrants. The merger agreement obligated Viacom to pay the shareholders a cash sum of $175,000 due at closing and a contingent right to receive uncapped earning payouts based on Harmonix’s financial performance for two years following the merger. These agreements also provided that the selling shareholders were to indemnify and reimburse Viacom against third-party claims. The escrow agreement provided that for a period of 18 months, $12 million of the initial payment would be held in escrow and made available for those obligations.
Six months later, Harmonix entered into an agreement with Electronic Arts, Inc. (EA) to distribute the Rock Band video game in exchange for distribution fees. This deal later led to an amended licensing agreement that extended the term of the original EA agreement. This amended agreement left the original distribution fee level unchanged, which Winshall later claimed to affect the earn-out payments of the shareholders. The Court dismissed this claim, holding that Viacom had no such obligation to the shareholders under the merger agreement. Additionally, the Court noted that the merger agreement must explicitly state a goal of maximizing the amount of money paid to the shareholders, which the Harmonix agreement did not and thus resulted in a denial of Winshall’s claim.
Viacom argued that it was entitled to indemnification for alleged breaches to third parties and was entitled to retain the $12 million of escrowed funds to fulfill those obligations, as the shareholders were obligated to cover their costs of defending against any third-party claims as stated in the merger agreement. The Court followed the Chancery Court’s analysis of these claims holding that: “(1) [B]ecause the third-party claims alleged infringement after the deal had closed, those claims were not covered by the merger agreement; (2) for a right of indemnification to arise there must be a breach of those representations and warranties and Viacom failed to demonstrate any such breach; and (3) absent a breach, the selling shareholders had no independent contractual duty to pay.” Additionally, Viacom sought indemnification on claims prior to the Harmonix merger. The court held these claims did not fall within the scope of the merger agreement as the language applies only to “business of the company as currently conducted,” which clearly rules out activities that occurred prior to the merger.
Viacom’s interpretation of the contract implied that an obligation to pay legal defense costs depends on the existence of a duty to indemnify. The Court looked to the plain language of the merger agreement to evaluate if it imposed an independent duty to pay legal defense costs in addition to any duty to indemnify as argued by Viacom. It found that if this assertion were true, no limit would exist on potential lawsuits under this obligation. The Court dismissed the interpretation finding that it contradicted the plain meaning of the agreement. Furthermore, this would give Viacom unfettered discretion and once notice was given to the shareholders they would essentially be implicated on a number of frivolous claims.
The Court found Viacom’s interpretation was overly broad in its scope and if the parties intended such an arrangement, they would have explicitly used the appropriate language to accomplish that result. Thus, Viacom was not entitled to indemnification from its selling shareholders for all alleged breaches of representations and warranties in the merger agreement and the court ordered Viacom to turn over the $12 million in escrow to the shareholders.
This opinion will greatly impact the drafting of future indemnity clauses in commercial contracts and will leave practitioners with a better understanding of what is required. Drafters need to be explicit in the language they choose and should not be ambiguous in terms of defining what is and what is not covered under a merger agreement. Any ambiguity involved in the drafting of an indemnity clause presents a risk that the indemnity will not be held to cover all loses which the drafters expected to be covered. Similarly, ambiguity poses a risk to the indemnifier that it will be held to cover losses that were not within their consideration. When practitioners properly draft terms that reflect the intentions of the parties involved and avoid using boilerplate language there is less room for confusion and ambiguity. A proper drafting of an indemnification clause assists commercial entities in avoiding contractual disputes and costly interpretation of the true scope of the clause as seen in Winshall. Thus, the Delaware Supreme Court’s decision leaves practitioners with a better understanding of the required components of an effective indemnification clause.
 2013 WL 5526290 (Del. 2013).
 Id. at *42.
 Id. at *36.
 Id. at *3.
 Id. at *2.
 Id. at *45.
 Id. at *4-5.
 Id. at *20. (finding that Viacom did not act in bad faith by not changing the fee structure, as no such obligation to maximize payouts can be applied under the merger agreement.)
 Id. at *21.
 Id. at *28-29.
 Winshall v. Viacom Int’l. Inc., 55 A.3d 629, 640 (Del. Ch. 2011).
 Winshall, 2013 WL 5526290, at *42.
 Id. at *34-35.
 Id. at *36.
 Id. at *37.
 Simone Selkirk & Garrett Williams, Indemnity in Commercial Contracts: How To Achieve Desired Contractual Risk Allocation, Lexology, (June 7, 2011), https://www.lexology.com/library/detail.aspx?g=db38e8d6-7451-49e1-9e74-531bf32e0d10
 Selkirk & Williams, supra note 18, at 1-2.
 Selkirk & Williams, supra note 18, at 2.
 Selkirk & Williams, supra note 18, at 2-3.