State Antitrust Lawsuit Threatens Paramount’s Warner Bros. Deal
A previous blog examined the significant M&A battle between Warner Bros. Discovery, Inc. (WBD) and Paramount Skydance Corp. (PSKY). Although WBD shareholders approved PSKY’s $110 billion acquisition of WBD, and the U.S. Department of Justice’s Antitrust Division declined to challenge the transaction, the parties have not yet closed the deal.
The paused acquisition is expensive. Beginning Oct. 1, 2026, PSKY owes WBD shareholders a “ticking fee” of approximately $7 million per day, roughly $650 million per quarter, and more than $1 billion could accrue before the antitrust trial begins on March 2, 2027.
Under specified circumstances, PSKY may also owe WBD a $7 billion regulatory termination fee if the deal never closes.
Those figures, not the merits of the antitrust case, make the allocation of regulatory risk a consequential negotiation in a transaction of this size. The delay demonstrates that regulatory clearance alone does not mean a deal is ready to close.
What Legal Challenges Does the Acquisition Face?
On July 13, a coalition of 12 states led by California Attorney General Rob Bonta filed a lawsuit in federal court challenging the proposed acquisition and asking the court to block the deal.
The states allege that the merger violates federal antitrust law. In a July 13 press release, Bonta said:
“The unlawful merger of these two entertainment behemoths would lead to higher prices, lower quality, and less content for film and television…”
The lawsuit argues this transaction threatens competition by reducing available media alternatives. According to the lawsuit, the acquisition would significantly impact:
- Basic Cable Television – The states allege that the combined company would control over 50 basic cable channels and gain significant bargaining power over distributors, potentially allowing it to impose unfavorable terms or use blackouts to limit competition.
- Theatrical Film Distribution – The states argue that the transaction would further consolidate theatrical film distribution among a few major studios. According to the lawsuit, PSKY, Disney, Universal, and Sony would together distribute more than 86% of wide-release films and 90% of anticipated blockbusters.
- Employment and Production – The states argue that reduced competition and changes to the combined company’s content strategy could threaten thousands of jobs across the production ecosystem. Separately, a Los Angeles County report estimates the merger could eliminate about 4,500 film and TV jobs over the next three years.
Bonta framed the stakes in cultural terms, arguing that film and television are more than commodities because they shape how Americans understand the world and encounter different perspectives.
PSKY responded that the states define the entertainment industry too narrowly, and that the combined company will still compete with major technology companies such as Netflix, Amazon, and Apple.
How Has the Lawsuit Affected the Transaction?
On July 20, a federal judge granted a 14-day temporary restraining order that paused the merger ahead of the parties’ planned July 22 closing. The court found the plaintiff states had raised serious questions, warranting further consideration of their request for a preliminary injunction.
During litigation, PSKY and WBD continue to operate as separate companies.
Rather than litigate a further extension of the restraining order, PSKY agreed to delay closing until the court rules on the states’ claims or until June 1, 2027, whichever occurs first. PSKY has said the delay provides a direct path to an evidentiary trial that it expects will show the transaction benefits competition, consumers, and creators.
The court set a 12-day antitrust trial beginning March 2, 2027, meaning the ticking fee will run for roughly five months before the parties reach the courthouse.
What Allows the States to Stop the Transaction?
Federal regulators heavily scrutinize major corporate acquisitions that could affect national markets. Although federal antitrust authorities did not block this transaction, state attorneys general have independent authority to enforce federal antitrust law in federal courts.
California and 11 co-plaintiff states allege the proposed deal violates Section 7 of the Clayton Act, which prohibits mergers and acquisitions where “…the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”
Section 7 intends to stop anticompetitive harm before it occurs, and Section 16 of the Clayton Act allows states, like other plaintiffs, to seek injunctive relief against a merger in federal court even when the Department of Justice declines to act. The states’ lawsuit shows that federal antitrust clearance does not resolve all potential obstacles to a transaction.
How Is the Industry Responding to the Litigation?
The Writers Guild of America (WGA) filed a separate antitrust lawsuit against PSKY, and the Screen Actors Guild-American Federation of Television and Radio Artists (SAG-AFTRA) also opposes the transaction, insisting the parties cannot complete the acquisition without structural changes.
The WGA argues that eliminating WBD as a key competitor would harm writers and reduce employment opportunities across the industry. SAG-AFTRA claims consolidation could encourage cost-cutting, resulting in job losses, lower wages, and fewer U.S. productions.
The three largest movie theater chains in America – AMC Theatres, Regal Cinemas, and Cinemark – have expressed concern about prolonged litigation. They took that position after PSKY committed, for three years, to release 30 films a year, with each film receiving at least a 45-day exclusive theatrical window.
The theater chains’ CEOs argue a long court fight will bring uncertainty to the industry and disrupt the momentum cinemas have built in 2026.
What Does the Lawsuit Mean for M&A Transactions?
The dispute highlights the importance of allocating regulatory risk and the economic consequences of a delay in an acquisition agreement. The parties now face uncertainty as Bonta says a settlement would require PSKY to adopt significant structural remedies, which brings the efforts covenant into focus.
Nearly every acquisition agreement includes an efforts covenant that obligates the buyer to pursue required approvals. The standard the parties choose decides who absorbs the cost when a regulator objects:
- A “hell or high water” covenant – Requires the buyer to do whatever clearance demands, including divesting assets and litigating to judgment.
- A “reasonable best efforts” standard – Has carve-outs that let the buyer decline remedies that would undermine the reason it agreed to the deal.
Deals of all sizes can trigger the same fight over whether the buyer must sell an overlapping location, release a non-compete, or give up an exclusive territory.
Here, because Bonta has said a settlement would require significant structural remedies, the covenant determines who is in control. A demanding standard would obligate PSKY to defend the case and accept whatever divestitures result, while a permissive standard would allow PSKY to refuse and walk, making the termination fee rather than the trial the likely endgame.
On Aug. 24, Bonta canceled a planned settlement discussion, accusing PSKY of leaking and misrepresenting the substance of an earlier meeting. PSKY denied the allegation.
Parties negotiating a deal should address antitrust exposure at the term sheet stage, including regulatory covenants and efforts standards, outside dates, ticking fees, regulatory termination fees, and the closing conditions that govern who bears the cost of delay.
Most M&A transactions do not face the level of regulatory scrutiny and public attention surrounding the PSKY-WBD merger. However, the principles illustrated by this dispute, such as clear efforts standards, defined outside dates, fair allocation of delay costs, and well-drafted termination provisions, apply to transactions at every price point.
An experienced M&A attorney can help buyers and sellers identify regulatory risk early, tailor covenants to the specific deal, and structure the agreement to allocate that risk before finalizing the definitive documents.
Nicholas J. Vitale is a Corporate and Mergers & Acquisitions Attorney at Lewitt Hackman.