United States: Southern District Of New York Dismisses Putative Class Action Against Media Company For Failure To Adequately Allege Misrepresentations

On February 5, 2024, Judge Valerie Caproni of the United States District Court for the Southern District of New York dismissed with prejudice a putative class action asserting claims under the Securities Act of 1933 against a media company and certain of its officers and directors. Ohio Public Emps. Ret. Sys. v. Discovery, Inc., 2024 WL 446466 (S.D.N.Y. Feb. 5, 2024). Plaintiffs alleged that the offering documents in connection with the merger that created the company contained misrepresentations that painted a misleadingly positive image of the strength of the combined company. The Court held that none of the six categories of misrepresentations alleged by plaintiffs was actionable.

First, plaintiffs alleged that the disclosure of the combined company's number of subscribers was misleading because it did not detail how many of those subscribers were either not active users or subscribed only to "non-core offerings." Id. at *7. The Court observed, however, that the disclosed figures were not actually false, and that the offering materials explained how the companies calculated those figures. Id. The Court explained that the securities laws are not violated based on a company's accurate disclosure of historical data and the companies were not required to disclose a fact merely because plaintiffs would have found it useful. Id. at *8.

Second, plaintiffs alleged that it was misleading for the purchased company to have disclosed that it licensed content to third parties and that changes in those agreements could impact that company's revenue without also disclosing the company had already "largely halted" entering into new licensing arrangements. Id. at *9. But the Court noted that plaintiffs did not dispute that the company had accurately disclosed its "then-existing strategy to license content to third parties." Id. The Court emphasized that a company is not required to disclose changes to its business plans unless it has previously stated its intention to adhere exclusively to a particular strategy. Id. at *9-10.

Third, plaintiffs alleged that a statement that the purchased company had invested substantial funds in content development was misleading because it failed to disclose that the company had not analyzed whether that investment was likely to be profitable. Id. at *11. The Court held plaintiffs did not adequately allege that the purchased company had, in fact, failed to analyze that the investment would not be profitable. Id. While plaintiffs pointed to the combined company's acknowledgment that these investments had not met investment "hurdles" that it "would like to see for major investments" and that the investment case was "inadequate," the Court concluded that did not amount to a concession that no such analysis was performed at all. Id.

Fourth, plaintiffs contended the offering materials were misleading because they disclosed the purchased company's revenues from content "consist[ed] primarily" of licensing feature films for initial theatrical exhibition and licensing television programs for initial television broadcast without disclosing that the company had "shifted away" from licensing feature films for theatrical distribution and shifted toward a purportedly less profitable direct-to-streaming model. Id. at *12. The Court held, however, that plaintiffs had not alleged facts showing the purchased company had moved away from a strategy of licensing films for theatrical distribution. Id. The Court also concluded that plaintiffs failed to demonstrate that any of the individual defendants knew or had access to data suggesting a direct-to-streaming strategy would not be economically sound at the time the statements were made. Id. at *13.

Fifth, plaintiffs alleged that the statement that the companies' "robust portfolios of entertainment, kids, news and sports content" was "expected to position [the combined company] as a stronger global competitor in streaming and digital entertainment," and "[would] need to invest substantial amounts in the production or acquisition and marketing of its entertainment, sports and news before it [could] learn[] whether such content [would] reach anticipated levels of popularity with consumers," was misleading because the company did not disclose it had invested over $300 million in a direct-to-streaming news platform and allegedly determined before the merger not to proceed with that venture. Id. But the Court held that plaintiffs did not dispute that what was disclosed in the offering materials was accurate, and that plaintiffs did not explain how the statements about the combined companies' strategy were rendered misleading by the fact that the streaming news platform was discontinued. Id. at *14.

Finally, plaintiffs contended the offering materials failed to disclose limitations in the acquiring company's due diligence—for example, with respect to the purchased company's spending on content, financial and streaming data, and the fact that certain data was not made available. Id. The Court held that the offering materials did not tout a particular level of due diligence, but merely noted that "as is typical leading up to a merger, the parties had engaged in due diligence." Id. The Court also noted that the company was not required to accuse itself of performing inadequate due diligence. Id. at *15.

The Court held that dismissal with prejudice was appropriate because plaintiffs had already amended the complaint and had not explained how further amendment would cure the identified deficiencies. Id. at *16 & n.32.

• Ohio Public Emps. Ret. Sys. v. Discovery, Inc.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.