Viacom ordered to pay up on Harmonix indemnity funds


ViacomViacom must allow $12 million to be paid to former investors in Harmonix Music Systems, maker of the video game “Rock Band,” as part of a buyout, a judge ruled.

Viacom executives should allow the funds, set aside during the media company’s $175 million acquisition of Harmonix, to be turned over to a representative for ex-Harmonix shareholders, Delaware Chancery Court Judge Leo Strine ruled 12/12. Viacom bought Harmonix in 2006 to acquire rights to Rock Band, which features a guitar simulator and came on the market a year after the acquisition.

The media giant had been ordered to pay $383 million to Harmonix in August. In a regulatory filing, Viacom said a private arbitrator ordered it to pay Harmonix’s former shareholders the money on top of a $150 million bonus payment it previously made. The shareholders had been seeking a total of $700 million, or $167 million more than the arbitration accountants determined.

The issue surrounds bonus payments owed to Harmonix’s former owners under the terms of the 2006 acquisition by Viacom, which paid $175 million as a down payment. Viacom then paid a $150 million bonus for sales of Rock Band in 2007 but made no payment in 2008 and then sought a refund of nearly all the money it paid up to that point.

Viacom sought access to the $12 million to indemnify itself for the costs of defending patent- infringement lawsuits over the game, in which players assume the identity of rock stars and perform for crowds. The purchase agreement set aside the funds in case problems with the deal cropped up, Bloomberg reported Strine as saying.

Harmonix officials never agreed to indemnify Viacom “against losses arising out of infringements of intellectual property rights that took place at the time of Rock Band’s publication in 2007,” Strine said in his 21-page decision.

Jeremy Zweig, a spokesman for New York-based Viacom, told Bloomberg there were several disputes over the six-year-old acquisition still outstanding.

In December 2010, Viacom sold the Harmonix unit, which had been losing money, to New York-based investment company Columbus Nova in a deal reportedly valued at $150 million.

As part of the 2006 buyout agreement, Viacom and Harmonix executives agreed to set aside $12 million to indemnify Viacom for “losses arising out of breach of representations and warranties made by Harmonix,” Strine noted in his ruling.

The money was to be held in escrow for 18 months and if Viacom didn’t lodge legitimate indemnification claims, it would be dispersed to Harmonix’s former stockholders, the judge said.

Viacom officials requested indemnification for losses tied to defending patent claims over Rock Band, which was still in development when Harmonix was acquired, Strine said. Company officials said they paid out $28 million in legal fees defending against intellectual-property claims over the game, the judge said.

See the Bloomberg story here