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FanDuel’s lawsuit reinstated in New York
The New York State Court of Appeals reinstated a lawsuit filed by FanDuel‘s founders against a powerful group of current stockholders.
In 2018, FanDuel joined with the Anglo-Irish gambling giant Paddy Power Betfair for $465 million. This merger eventually led to the creation of an even bigger company Flutter Entertainment.
FanDuel founders Nigel and Lesley Eccles, along with over 100 other stockholders, believe they were shortchanged in the transaction. Nigel Eccles, one of the founders, had actually left the company just before this big merger in 2017. Around the same time, the U.S. Supreme Court made a decision that opened up opportunities in sports betting across the country, which made FanDuel a lot more valuable.
FanDuel’s stock was eventually divided into two categories: preferred shares and common shares, with the plaintiffs in the dispute owning roughly ten percent of the common stock. The FanDuel board authorized the Paddy Power Betfair merger eight days after the US Supreme Court struck down PASPA, the federal prohibition on sports betting. The purchase paved the way for Flutter’s future dominance of the US sports betting markets. The Eccles lawsuit contends that the transaction was planned to favor preferred shareholders and the leadership team at the expense of common shareholders.
Defendants Shamrock Capital Advisors (SCA) and KKR owned 36% of FanDuel’s preferred shares. According to the lawsuit, these two investment firms significantly undervalued FanDuel prior to the transaction, by $120 million. Then SCA and KKR invoked their drag along right, compelling minority shareholders to accept the sale.
The lawsuit argues:
“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.”
In 2020, the plaintiffs dropped their complaint in Scotland and refiled it in the New York Supreme Court, believing that their claim would be stronger under New York law. However, the court concluded that the matter should be heard in New York under Scots law.
Judge Andrea Masley of the Supreme Court initially supported the plaintiffs, allowing the defendants’ requests to dismiss for three out of the five causes of action. However, the Appellate Division of the New York Supreme Court disagreed in 2022. It decided that directors have fiduciary duties to the corporation but not to shareholders under Scots law. The highest court in the state, the New York Appeals Court, unanimously overturned that ruling on Thursday, finding that the plaintiffs had “sufficiently pleaded causes of action for breach of fiduciary duty under Scots law.”
The Eccles and others are requesting $120 million in damages. The lawsuit does not mention Flutter Entertainment.
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