Amended Complaint vs. WBD Adds Advance/Newhouse as Defendants

The consolidated amended class action filed Wednesday against Discovery, Warner Bros. Discovery (WBD) and CEO David Zaslav and Chief Financial Officer Gunnar Wiedenfels (see 2302100015) “asserts strict liability and negligence claims” for false and misleading statements made in the run-up to Discovery’s April 8 WarnerMedia buy from AT&T. The false statements Zaslav and Wiedenfels made in earnings calls alone are “actionable” under Section 12(a)(2) of the Securities Act, said the complaint (docket 1:22-cv-08171) in U.S. District Court for Southern New York.

The amended complaint adds as defendants the Advance/Newhouse Partnership and its owners Steven Miron; his father, Robert; and Steven Newhouse -- controllers of about 23% of Discovery’s voting power when the transaction was consummated. The preferred shares they owned gave Advance/Newhouse “special rights,” including the right to veto any merger and to appoint three directors to Discovery’s board at the time of the combination with WarnerMedia, said the complaint.

Advance/Newhouse picked the Mirons and C-SPAN President and co-CEO Susan Swain as its three appointees to Discovery’s board, said the complaint. Steven Miron and Newhouse currently sit on WBD’s board, but not Swain, who wasn't named a defendant in the amended class action. The lead plaintiffs are the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio, two public pension funds based in Columbus.

Like Zaslav and Wiedenfels, Advance/Newhouse “had powerful leverage” during the negotiation of the merger, said the complaint. Advance/Newhouse “received regular updates on the status of the deal,” and thus was “privy to confidential information” about the transaction, it said. Advance/Newhouse representatives also took part in several meetings of Discovery’s board, including on April 30, 2021, when the board approved the economic terms of the transaction “and authorized Discovery’s management to enter into definitive agreements with AT&T based on those terms,” it said.

Advance/Newhouse, the Mirons and Newhouse violated Section 15 of the Securities Act because they're “liable for the materially false and misleading statements and omissions” contained in the offering documents, alleged the complaint. Advance/Newhouse controlled WBD and its predecessor Discovery “by virtue of their control over approximately 23% of Discovery’s aggregate voting power and their ability to singularly prevent the consummation of the Merger,” it said.

Advance/Newhouse and its officers “used their controlling power” to hold the acquisition “hostage” by extracting “a higher payout” from the transaction than other Discovery shareholders received, said the complaint: “Thus, Advance/Newhouse were controlling persons within the meaning of the Securities Act.”

The defendants disclosed in the run-up to the combination WarnerMedia subscriber numbers that were “materially” misleading “because they included 10 million non-paying HBO and HBO Max subscribers who had not activated their accounts,” said the complaint. After the merger closed, WBD downgraded the subscriber numbers previously reported in the transaction’s “offering documents” by 10 million, it said.

The offering documents were false “because they failed to disclose that Discovery’s due diligence of WarnerMedia was flawed,” said the complaint. Statements by Zaslav and Wiedenfels on an Aug. 4 WBD earnings call “reveal that Discovery did not have all the information it needed during due diligence to conduct a proper review of the WarnerMedia business and to evaluate the value of the assets it was acquiring,” it said.

Statements made in Discovery's registration statements were misleading because they failed “to disclose that the information AT&T made available to Discovery was lacking significant data necessary for Discovery to be able to conduct a comprehensive and adequate review of WarnerMedia,” said the complaint. Discovery asked AT&T for specific information during the due diligence process “that was not provided” because it was deemed too competitive to share, it said.

The WarnerMedia information that Discovery was denied included the spending numbers at CNN+, said the complaint. Zaslav pulled the plug on CNN+ about a month after its launch and 13 days after the acquisition closed. The defendants didn’t publicly disclose that Discovery “had explicitly asked for information that it deemed essential to conduct its due diligence of WarnerMedia, and was denied access to that information,” it said.

These “significant deficiencies” in Discovery’s due diligence of WarnerMedia “were material because they would have raised serious questions about the accuracy of Discovery’s valuation of WarnerMedia,” said the complaint. Discovery’s “substantial downgrading of financial projections” only three months after the merger closed “demonstrates why the withheld information was critical to valuing WarnerMedia,” it said.

When the lead plaintiffs and other members of the proposed class acquired WBD’s common stock based on the transaction’s registration statement and second amendment, “they did not know, nor in the exercise of reasonable care could they have known, of the untruths or omissions contained therein,” said the complaint. The lead plaintiffs and class members seek compensatory damages for all injuries sustained as a result of the defendants’ wrongdoing, "in an amount to be proven at trial, including interest." The lead plaintiffs paid $24.47 per share for WBD stock in exchange for Discovery shares when the deal closed in April. WBD shares closed trading Wednesday at $15.35.