In a recent court ruling, Warner Bros. Discovery (WBD) and its top executives have been spared from a lawsuit brought by investors alleging that the company concealed unfavorable financial information leading up to its merger with AT&T's WarnerMedia in 2022. U.S. District Judge Valerie Caproni determined that WBD did not exaggerate subscriber numbers and was not obligated to disclose certain details about its business strategy, such as third-party licensing changes and the closure of CNN+. Other allegations concerning WarnerMedia's investment profitability and its shift towards direct-to-streaming content distribution were also dismissed.
The proposed class action, led by Ohio Attorney General Dave Yost, claimed that WBD, CEO David Zaslav, and CFO Gunnar Wiedenfels misled investors by artificially inflating WBD's stock through false statements about the performance of the HBO Max streaming service and other factors. One particular concern was the inclusion of total subscriber figures for HBO, HBO Max, and Discovery, without specifying the number of non-paying or noncore service subscribers. However, the court ruled that this omission did not violate securities law as the offering materials were not misleading when considered as a whole. In fact, the investors themselves acknowledged that the disclosed figures included unactivated subscriptions.
Judge Caproni further stated that merging companies are not obliged to disclose every relevant or interesting fact to investors. While WBD may have made statements that investors deemed partially true, the judge emphasized that this does not mandate disclosure. In her ruling, Caproni clarified that the offering documents accurately reported subscriber numbers for the merging companies, with clear explanations of their respective methodologies. WarnerMedia's decision to reduce third-party licensing deals in favor of bolstering HBO Max's content library did not merit disclosure either, as companies are only required to disclose changes in their business plans if they had previously committed to a specific strategy.
Before the merger, a significant portion of WarnerMedia's revenue derived from licensing content to third parties. However, with the launch of HBO Max in 2020, the company shifted its focus towards creating original content, investing billions of dollars in new productions. A year later, WarnerMedia decided to release movies simultaneously on HBO Max and in theaters. The court ruled that WarnerMedia had no obligation to disclose these changes, as it hadn't committed to an exclusive third-party licensing strategy beforehand.
Additionally, the court found that WBD was not obliged to disclose information about CNN+, which ceased operations shortly after the merger's completion. The judge noted that plaintiffs did not dispute the accuracy of the disclosures in the offering documents. Their argument centered around the alleged obligation of defendants to provide details about CNN+ since it was the only news streaming platform among the merging companies. However, the plaintiffs failed to establish how the alleged pre-merger plan to cancel CNN+ made statements about the broader content strategy of the merged company misleading.
Following the merger's completion, WBD's stock experienced a decline of over 50% in the six months that followed. The lawsuit was filed on behalf of the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio, spearheaded by Ohio Attorney General Dave Yost. As of now, Yost's office has not provided any immediate response or comment on the court's ruling.
While the lawsuit sought to hold WBD and its executives accountable for alleged misconduct, the court's ruling signifies that, in this instance, the company did not violate securities laws or mislead investors regarding its financial prospects. The dismissal of the lawsuit brings clarity to the situation and allows Warner Bros. Discovery to move forward without the burden of legal proceedings.
