More details about Paramount’s lawsuit against the Warner Bros. Discovery board of directors emerged Monday as TheWrap has obtained a copy of the legal document.
The lawsuit was reported on Monday morning and is part of Skydance Paramount CEO David Ellison’s plan to launch a proxy battle so his company can acquire Warner Bros. Discovery. The legal document calls the WBD board’s recommendation to take Netflix’s offer over Paramount’s “misleading” multiple times.
The Delaware lawsuit was filed in an effort to force Warner Bros. Discovery to financially disclose why it chose Netflix’s offer over Paramount’s. Though Paramount’s current offer of $30 per share is more than Netflix’s offer of $23.25 per share, Netflix’s offer also includes some Netflix shares as well as stake in Discovery Global, the spinoff company from Warner Bros. Discovery. It’s that last part that Paramount’s case hinges on.
Remember, Paramount wants to acquire all of Warner Bros. Discovery. Netflix just wants to acquire the company’s streaming and studio business, a segment that will be spun out and named Warner Bros. In addition to the aforementioned cash and Netflix shares, Netflix’s offer would also allow current Warner Bros. Discovery shareholders to retain control over Discovery Global, the cable assets of the company that will remain after the spinoff happens. The combination of those three elements — cash, Netflix stock and Discovery Global stock — is a major reason why the WBD board dubbed Netflix’s offer as superior.
But in its lawsuit, Paramount argued this was faulty reasoning. Based on market comparisons to Comcast’s recently launched cable spinoff Versant, Paramount estimated that the stand-alone equity value for Discovery Global would be “as little as $0.00 per share due to the business’s large expected debt load.” This is largely due to the continued decline of the cable market.
The lawsuit calls for the WBD board to disclose the valuation it used to determine Discovery Global’s worth. It also accuses WBD of failing to disclose any summary of valuation it used when determining Paramount’s offer or a potential Netflix merger. In order to make its determination of which offer was best, the Warner Bros. Discovery board performed what it dubbed a “risk adjustment” to the valuation of Paramount’s offer. The specific factors that made up that risk adjustment as well as how the adjustment was calculated were not disclosed.
“The Board further failed to disclose whether it performed any ‘risk adjustments’ to the Netflix transaction, which carries very significant regulatory uncertainty,” the lawsuit reads. “WBD’s stockholders have an immediate need for the material information being withheld in order to make a decision on Paramount’s tender offer to them.”
Paramount also called out the board over the “fiduciary out” clause as part of WBD’s agreement with Netflix. The fiduciary out clause states that the board can compete with a competing bidder if it receives either a superior proposal or “a proposal that could reasonably be expected to result in a superior proposal.” Though the WBD board concluded that Paramount’s offer does not fall into the former category, it has not addressed the more nebulous latter category.
Additionally, Paramount called Netflix’s offer both “financially inferior” to its own and “less likely to secure regulatory clearance and close.” The company also emphasized that its $30 per share offer is not its “best and final offer,” a refrain the company has repeated throughout this process.
Paramount’s lawsuit is part of a larger plan being orchestrated by Ellison. The idea is that the lawsuit will force WBD to make specific financial disclosures about its acquisition offers. While that is happening, Ellison and his company will nominate a slate of directors at WBD’s next annual meeting. If those directors are confirmed, they will engage with Paramount’s offer over Netflix’s. As the Jan. 21 deadline for WBD stockholders to tender their shares approaches, the Delaware suit also asks the judge to expedite the case.
