Viacom is considering its next steps after the Delaware Supreme Court upheld an arbitor’s award of almost $300 million that the company must pay to stockholders in connection with its 2006 acquisition of Harmonix, the music video company that developed “Rock Band” and “Guitar Hero.”
Viacom eventually sold the company in 2010, but its agreement to purchase the company included provisions in which it would pay $175 million and then make additional “earn-out” payments based on the company’s financial performance in 2007 and 2008.
A dispute arose over how Viacom calculated the 2008 “earn-out,” and, as was spelled out in their merger agreement, the disagreement went to arbitration. The selected “resolution accountants,” BDO USA, determined that the 2008 “earn-out” sum was $298,813,095.
But Viacom challenged the arbitration ruling, claiming that BDO refused to hear “pertinent and material” evidence. They pointed to evidence that the 2008 sum should reflect an inventory write-down to reflect the diminished value of unsold goods, something that would have had a $200 million impact on the calculation. Viacom said that they arbitrator asked for permission to address this issue, but that the representative for the Harmonix stockholders, Walter Winshall, refused.
The Delaware Supreme Court, however, rejected Viacom’s contention that the refusal to consider the write-down was “misconduct,” or enough to warrant a court negating an arbitration decision.
“BDO did not ignore any relevant evidence,” the Delaware high court said in an opinion issued on Tuesday. “Rather, it decided that evidence concerning an inventory write-down could not be considered, absent consent of the parties, because that was not identified in the original documents governing the scope of the arbitration. There was no misconduct, even if BDO’s decision on that issue was incorrect.”
The Delaware Supreme Court also rejected Viacom’s contention that the trial court, and not the arbitrator, should have decided whether the dispute over the write-down should have been before BDO.
In a statement, Viacom said. “Regrettably, the Delaware Supreme Court refused to review the obviously incorrect decision of the accountants in this manner. We are considering our next steps.”
A team led by Sidley & Austin partner David Schiffman represented the stockholders. The firm said that they secured a total of $533 million in “earn out” payments for the Harmonix stockholders.