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Warner Bros. Discovery Prevails as Judge Dismisses Investor Lawsuit Over Merger Disclosures

Warner Bros. Discovery (WBD) and its leadership have successfully avoided a lawsuit brought by investors alleging the concealment of adverse financial information leading up to the 2022 merger of Discovery and AT&T's WarnerMedia. U.S. District Judge Valerie Caproni, in a decision dated February 2024, ruled that WBD did not overstate subscriber figures and was not obligated to disclose broader changes to its business strategy, including third-party licensing and the eventual closure of CNN+.

The proposed class action, led by Ohio Attorney General Dave Yost, targeted Discovery, WBD CEO David Zaslav, and CFO Gunnar Wiedenfels. The lawsuit claimed that they artificially inflated WBD's stock by providing misleading information about HBO Max's health and other aspects. Allegations included misrepresentations regarding subscriber numbers, WarnerMedia's content licensing strategy, plans for CNN+, and the shift in focus towards growing the streaming platform.

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Judge Caproni dismissed claims related to subscriber figures, stating that the offering materials were not misleading when viewed as a whole. Investors did not contest the accuracy of the reported figures but argued that the information was misleading as it did not specify the number of non paying or non core service subscribers.

The court concluded that the omission did not violate securities law, emphasizing that merging companies are not obligated to disclose every relevant detail. The judge stated, "Merging companies are not required to disclose a fact simply because it may be relevant or of interest to a reasonable investor."

Claims about WarnerMedia's failure to disclose changes in its business strategy, particularly the shift away from licensing content to third parties, were also dismissed. The court ruled that companies are only obligated to disclose changes when they deviate from previously stated intentions.

Before the merger, WarnerMedia generated a significant portion of its revenue from licensing content to third parties. However, the launch of HBO Max in 2020 marked a strategic shift, with the company investing billions in developing new content and simultaneously releasing movies on its streaming platform and in theaters.

Furthermore, the court determined that WBD had no obligation to disclose information about CNN+, which closed shortly after the merger. The judge noted that plaintiffs did not dispute the accuracy of disclosures in the offering documents.

In the six months following the merger's completion, WBD's stock experienced a significant decline of over 50 percent. Ohio Attorney General Dave Yost, who brought the proposed class action on behalf of the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio, has not provided immediate comments on the court's decision.