Warner Bros. Discovery Beats Investor Suit Over Inflated Subscriber Figures

THR, Esq

The lawsuit accused WBD and key executives of making false statements about the health of HBO Max and its subscriber numbers to clear the way for a merger.

David Zaslav

Warner Bros. Discovery CEO David Zaslav

Ethan Miller/Getty Images

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Warner Bros. Discovery and its top brass will not have to face a lawsuit from investors accusing them of hiding adverse financial information about the company’s prospects leading up to the 2022 merger of Discovery and AT&T’s WarnerMedia.

U.S. District Judge Valierie Caproni on Monday found that WBD didn’t overstate subscriber figures and was not required to disclose information about broader changes to its business strategy as it related to third-party licensing and the likely shuttering of CNN+. Other allegations over the profitability of WarnerMedia’s investment in content to fuel its burgeoning streaming platform and the company’s shift away from licensing movies for theatrical distribution in favor of a direct-to-streaming model were similarly dismissed. WBD declined comment for this story.

The proposed class action, led by Ohio Attorney General Dave Yost, alleged Discovery, as well as WBD chief executive David Zaslav and CFO Gunnar Wiedenfels, artificially inflated WBD’s stock by misleading investors about the health of the HBO Max streaming service, among other things. The allegedly false statements involved the number of subscribers the merged company would have; WarnerMedia’s content licensing strategy; plans for CNN+; and the extent to which WarnerMedia had shifted its focus to growing its streaming platform.

According to offering documents for the merger, HBO, HBO Max and Discovery in 2021 had 95.8 million subscribers. The suit alleged that the information was misleading because it included the total number of subscribers for all three services without specifying how many of them were nonpaying or subscribed to noncore services (think Eurosports Player, Motortrend, and Discovery Kids).

But the court concluded that the omission does not rise to a violation of securities law because the offering materials, as a whole, were not misleading. In the complaint, investors did not argue that the reported figures were inaccurate and, furthermore, conceded that the documents disclosed that the figures included unactivated subscriptions.

And while WBD may have reported what investors called “half-truths,” Caproni said that merging companies are “not required to disclose a fact simply because it may be relevant or of interest to a reasonable investor.” The judge explained, “The Offering Documents reported subscriber numbers of the to-be-merged companies that were accurate and were accompanied by the companies’ methodologies; the methodologies clearly disclosed that WarnerMedia included unactivated accounts and that Discovery included subscribers to all of its direct-to-consumer services.”

The investors’ claims over WarnerMedia’s failure to disclose that the company largely halted licensing agreements with third parties in favor of directly channeling content to HBO Max, which they allege caused a decline in WBD’s revenue, didn’t fare any better. Specifically, the suit took issue with a statement from Discovery in Feb. 2022 in which it said that WarnerMedia is licensing content to “over 20 platforms and outlets” and is “a content maker and content owner generating significant revenue, free cash flow and most importantly, optionality.”

The court said that WarnerMedia had no duty to reveal that it was winding down reaching as many licensing deals. A company is only required to disclose changes in its business plans, it found, when it previously stated intentions to exclusively adhere to that particular strategy and pivoted without informing investors.

Before the merger, a significant portion of WarnerMedia’s revenue came from licensing its content to third parties. But when it launched HBO Max in 2020, the company pivoted to spending billions of dollars to develop new content and, a year later, decided to simultaneously release new movies on its streaming platform and in theaters.

Additionally, Caproni concluded that WBD similarly had no obligation to disclose information about CNN+, which shuttered a few days after the merger closed.

“Plaintiffs do not dispute that the disclosures in the Offering Documents were accurate,” the judge wrote. “They argue instead that Defendants were obligated to provide details about CNN+ because it was the only news streaming platform of either of the merging companies. Plaintiffs do not explain, however, how Defendants’ alleged pre-Merger plan to cancel CNN+ made statements about the broader content strategy of the planned Merged Company misleading.”

In the six months after the merger was completed, WBD stock fell be more than 50 percent.

Yost brought the proposed class action on behalf of the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio. His office did not immediately respond to requests for comment.

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