Posted on: May 26, 2024, 12:59h.
Last updated on: May 26, 2024, 01:05h.
The New York State Court of Appeals has revived a lawsuit brought by FanDuel’s founders against a powerful group of current shareholders.
In 2018, FanDuel merged with the Anglo-Irish gambling group Paddy Power Betfair in a deal that valued the former at $465 million. The enlarged group later became Flutter Entertainment.
FanDuel founders, husband and wife Nigel and Lesley Eccles, along with around 100 other shareholders, claim they were stiffed in the deal.
The Eccles established FanDuel in Edinburgh, Scotland in 2007 as Hubdub. Initially, the business enabled users to place bets on current events. But in 2009, it pivoted to daily fantasy sports, which it pioneered in the US as FanDuel. From that point, it was almost completely US-facing.
Nigel Eccles left FanDuel in 2017, shortly after a proposed “merger of equals” between FanDuel and DraftKings was nixed by the Federal Trade Commission because of antitrust concerns.
Post-PASPA Goliath
FanDuel’s stock was subsequently restructured into two categories: preferred shares and common shares, with the plaintiffs in the lawsuit holding about 10% of common stock.
The FanDuel board approved the Paddy Power Betfair merger eight days after the US Supreme Court defanged PASPA, the federal prohibition on sports betting. The deal proved to be a springboard for Flutter’s subsequent domination of the US sports betting markets.
The Eccles’ lawsuit claims the merger was structured to benefit the preferred shareholders and executive team so that common shareholders were cut out of the deal.
Defendants walked away with shares worth billions and plaintiffs were left with nothing,” they said in their complaint.
Defendants Shamrock Capital Advisors (SCA) and KKR together held 36% of the preferred shares in FanDuel. These two investment firms massively undervalued FanDuel before the deal, by $120 million, according to the lawsuit.
Then SCA and KKR exercised their “drag along right,” which forced minority shareholders to accept the sale.
“To effectuate the scheme … defendants deliberately undervalued FanDuel’s assets during the merger negotiations to be equivalent to the value of the preferred shares, when in reality FanDuel was worth significantly more…” the lawsuit argues.
Scots Law in New York
The Eccles et al sued SCA and KKR, initially in Scotland, the jurisdiction of incorporation, claiming the firms had breached fiduciary duties.
In 2020, the plaintiffs dropped the lawsuit in Scotland and refiled it in the New York Supreme Court, because they felt their claim would be stronger under New York law. But the court determined that the case should proceed in New York under Scots law.
Supreme Court Judge Andrea Masley initially sided with the plaintiffs, allowing three of five causes of action to survive the defendants’ motions to dismiss.
But in 2022, the New York Supreme Court Appellate Division disagreed. It ruled that under Scots law, directors have fiduciary duties to the company but not to shareholders.
Last Thursday, the New York Appeals Court – the highest in the state – unanimously reversed that decision, determining that the plaintiffs had “sufficiently pleaded causes of action for breach of fiduciary duty under Scots law.” The panel batted it back to the Supreme Court.
The Eccles et al are seeking $120 million in compensation. Flutter Entertainment is not named in the lawsuit.
