Paramount, Warner Bros. shares rally on report of merger settlement agreement

What happened: Warner Bros. Discovery ( WBD ) and Paramount Skydance ( PSKY ) stock rallied 7% and 5%, respectively, on Monday.

What's behind the move: Paramount has reportedly reached a settlement with California officials , who had sought to block the company's $111 billion acquisition of Warner Bros. on antitrust grounds.

Under the agreement, the combined company would face financial penalties if it fails to release at least 30 films in theaters each year.

According to two people familiar with the discussions cited by Bloomber g, Paramount would pay $30 million for each movie short of that target. The report also said Paramount could be forced to sell its 49% stake in Miramax if it does not meet the target.

What else you need to know: Twelve Democratic state attorneys general, along with the Writers Guild of America, sued to block Paramount Skydance's acquisition of Warner Bros. Discovery on antitrust grounds.

The states argued that the deal would give Paramount too much control over the film and cable television industries. Settlement talks between Paramount and California Attorney General Rob Bonta have accelerated in recent days, although no final agreement has been reached.

Paramount's takeover followed a bidding battle with Netflix, which had previously made an offer for Warner Bros. Discovery. Warner shareholders approved Paramount's revised bid in April, valuing the deal at approximately $111 billion, including debt.

The acquisition would expand the entertainment assets controlled by Paramount chief executive David Ellison, son of Oracle ( ORCL ) co-founder Larry Ellison.

Ines Ferre is a senior business reporter for Yahoo Finance.