It started off typically enough. A year ago, as the merger between David Zaslav’s Discovery Communications and AT&T’s WarnerMedia was about to give birth to the corporate entity known as Warner Bros. Discovery, some Delaware lawyers began recruiting clients and making “Section 220 demands”—firm but polite requests under Delaware corporate law to inspect the books of the merging entities. Depositions were taken, and in December, class action complaints were filed, initially under seal, that alleged the media behemoth’s formation gave investors short shrift. A legal challenge will now proceed just as the company begins to make good on Zaz’s promises to Wall Street analysts.
But not every court battle is between plaintiff and defendant. Here, before this case even gets anywhere, the plaintiffs are clawing at each other. Currently, after the formation of Survivor-style alliances, two competing groups are vying in Delaware’s Court of Chancery to take the lead position in the consolidated class action. A judge will now choose between two vastly different visions about where this case should go. That’s because each has a wildly different take on how last year’s marriage of Discovery and WarnerMedia pulled a fast one on shareholders.
And it’s getting nasty. One side argues that the other is pursuing an “inferior,” “sue ‘em all” strategy that rests on proving a nonsensical, “all-encompassing conspiracy.” That’s just “sour grapes,” responds the other group, dumping on its opponents for “fail[ing] to grasp” malfeasance as clear as day. What’s really going on, they claim, is that these other so-called lawyers “take umbrage at the threat to their sense of incumbency.” Like an unruly meeting of a college debate club, they’re viciously picking apart each other’s arguments—and, presumably, handing WBD ammo to defeat whichever side emerges triumphant.
The Monroe Group vs. The Bricklayers
On one side is the “Monroe Group,” so named after a group of Michigan government workers who probably have no idea their pension is now tied to a lawsuit that notes everything from the shelving of Batgirl to Chris Wallace’s salary after the demise of CNN+. The Monroe Group’s 192-page, 339-footnote complaint is absurdly expansive, but it’s the read for completists.
The Cliffs Notes version: Zaslav suggested a merger to AT&T’s John Stankey while commiserating about how Covid canceled a golf tournament where the two were supposed to meet. Liberty Media’s powerful chairman John Malone joined the fun, and things got real, very quickly. The key to making the merger happen was Malone negotiating consent from the Newhouse family, via their entity Advance, who owned preferred stock in Discovery and required a premium for their nod. During negotiations, Zaslav positioned himself to lead the merged company.
Robbins Geller, lead counsel to The Monroe Group, alleges that as merger negotiations progressed, AT&T took advantage of the eagerness by Malone, Zaslav, and the Newhouses to complete a deal that would enrich them. According to the filing, the telecom giant, which acquired Warner Media in a somewhat disastrous $105 billion deal a few years earlier, concealed massive costs, overstated financial projections, withheld key diligence items like distribution and licensing agreements, and refused to answer requests from Discovery’s board. Meanwhile, the Newhouses got their $787 million premium, and Malone got a massive new pay package for his friend and protégé, Zaz.
Indeed, the latter is said to have gone into compensation negotiations with the idea of scoring a payday like Bob Iger upon the Disney-Fox deal and walked away with a total package valued at the time by those involved at $503 million, a $338 million raise from the previous five years. Zaz’ pay last year amounted to the second most among all S&P 500 C.E.O.’s, according to the Wall Street Journal. (The company recently tweaked the formula on performance-related bonuses.) As for Discovery’s shareholders, they took a meager 29 percent stake in the combined company that was saddled with about $50 billion in debt. Not fair, say Robbins Geller and The Monroe Group.
On the other side is the “Bricklayers group,” so named for some Pittsburgh craftworkers who probably have no idea their union’s pension is now tied to a lawsuit over a side hustle in the streaming wars. The Bricklayers’ complaint clocks in at a relatively brisk 75 pages, and it’s the read for financial junkies.
Unlike The Monroe Group, which depicts Discovery as being duped by the AT&T beancounters, the Bricklayers view Discovery as weak and desperate in the new streaming economy. As lead counsel Bernstein Litowitz argues, Discovery didn’t have the scale to compete with content from the likes of Disney, Apple, Netflix, Hulu, and Amazon, and so the Newhouses were in a position to extort the others into a more than 45 percent premium on their preferred shares. As this complaint tells it, the family should have acted as a fiduciary for the benefit of all shareholders and just gotten with the program. Instead, according to Bernstein Litowitz’s logic, this controller held the merger hostage until it extracted what it desired. That’s basically it: the company that owns the Ironman Competition and which publishes Vanity Fair, Vogue, and The New Yorker got greedy. That’ll be the focus of the litigation if Bernstein Litowitz is appointed lead.
Each group is now ridiculing the other’s theories. “Respectfully, the notion that Malone would jeopardize his personal investment by agreeing to a bad deal just to benefit Zaslav (and only if the deal worked out) pushes the bounds of credulity,” stated a Feb. 23 brief by the Bricklayers (unsealed on Friday). “Indeed, as the Monroe Group repeatedly alleged, Malone has placed Zaslav in many roles across the Liberty Media empire of companies. If Malone were so inclined, he could lavish Zaslav with immense compensation without endangering Malone’s over-half-a-billion-dollar personal investment in Discovery.”
In turn, The Monroe Group lays into the Bricklayers as “ignor[ing] most of [the] misconduct, limiting themselves to narrow claims,” conducting a “less thorough investigation,” and now becoming a turncoat. What about AT&T? No discussion about the special relationship between Malone and Zaz? And why no challenge to the fairness of the overall deal? “Bricklayers throw their support behind defendant John Malone and go out of their way to advocate in his interests,” adds the most recent Monroe brief. “Bricklayers’ counsel cannot be expected to vigorously litigate claims on behalf of plaintiffs when they show such fervor for the defense.”
So who wins? Will it be the group with the biggest financial stake in Discovery (the Monroe group) or will it be the lawyers exhibiting the most “vigor” (the Bricklayers claim the mantle because they made their Section 220 demand first)? I can’t say. In this contest, beauty is in the eye of the Delaware Chancellor. But at this rate, WBD may not need to do much besides sit back, enjoy the flying insults, and let their opponents poison each other.
