Viacom has suffered a $300 million loss in a Delaware court tied to its 2006 acquisition of Harmonix, the studio that created the Rock Band video games.
Although Viacom sold Harmonix in 2010, it is still paying for the decision to buy the game studio at the height of a boom. A decision late last week by the Delaware Court of Chancery dismissed Viacom's attempt to escape paying former Harmonix shareholders hundreds of millions of dollars in earn-out payments.
When Viacom bought Harmonix, the parent of MTV and Paramount Pictures had high hopes of replicating the success of Activision Blizzard and its Guitar Hero franchise. Harmonix's Rock Band sold some 10 million units, but equipment costs reportedly were so high that Viacom had trouble making a profit. The conglomerate wrote off losses and sold the company to an investment firm.
But that didn't end matters.
Viacom originally acquired Harmonix for $175 million, but importantly it structured the deal with bonus payments to Harmonix's former owners. These types of incentives, called "earn-outs," are not uncommon, bridging valuation differences and allowing original owners to share in the rewards of strong financial performance post-merger.
In 2007, Viacom paid some $150 million in bonus payments. The following year, the media conglomerate paid nothing and then sought a refund. A big dispute erupted over who owed whom. The former shareholders of Harmonix sought some $700 million, while Viacom wanted to be repaid about $131 million.
In December, Viacom revealed in a regulatory filing that an arbitrator had determined Viacom owed $383 million to the former shareholders of Harmonix. But Viacom also reported at the time that it had filed suit in the Delaware Court of Chancery, seeking to vacate the award and compel the arbitrators to consider arguments and evidence that it alleged was improperly excluded.
Soon after, Viacom agreed to pay $84 million to resolve part of the dispute -- the controversy over the 2007 earn-out payments. That left the two sides fighting over an arbitrator's $299 million award for 2008 earn-out payments.
Now, Richards Layton & Finger, the law firm representing the former owners of Harmonix, has announced that the Delaware Court of Chancery has dismissed Viacom's attempt to set aside what it says is one of the largest arbitration awards ever confirmed in Delaware. That means Viacom soon might have to write a big check.
In a statement to The Hollywood Reporter, Viacom says, "We are disappointed in the court's decision, and are evaluating our options for the next steps of this process."