Lawsuit by FanDuel Founders against Board Members Gains Traction
The cofounders of FanDuel have intensified their legal battle to reclaim their lost equity following the company's 2018 acquisition by Paddy Power Betfair, now known as Flutter Entertainment. The case involves the alleged falsification of the company's value, leaving the owners short by hundreds of millions of dollars from the sale.
The FanDuel Sportsbook at the Mohegan Sun casino. (Source: Mohegan Sun)
LISTEN TO THIS ARTICLE:The cofounders, Nigel Eccles, Lesley Eccles, Thomas Griffiths, Robat Jones and Chris Stafford, supported by a group of early investors and former employees, have filed an amended complaint in New York state. They allege that the board members, influenced by private equity firms KKR and Shamrock, orchestrated a deal that unfairly favored preferred shareholders, leaving the original stakeholders with nothing.
Related: FanDuel Facing California Lawsuit over Use of TikTok SoftwareThe heart of the dispute lies in the valuation of FanDuel at the time of its sale, where 61% of the company was sold to Paddy Power Betfair for $559 million, a figure that the plaintiffs argue was grossly undervalued. Today, FanDuel's valuation has skyrocketed to over $20 billion, making it the titan of market capitalization in the U.S. sports gambling sector. The plaintiffs contend that the 2018 valuation was deliberately kept low to minimize the payout to the early shareholders, who were instrumental in the company's initial success.
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Violation of Fiduciary Responsibility
According to the plaintiffs, the merger agreement stipulated that early shareholders, including the founders and employees, would retain a 40% ownership interest in the newly formed FanDuel Group. However, they claim that the board, under the influence of KKR and Shamrock, set the valuation at precisely $559 million, the threshold at which, per the company's bylaws, preferred shareholders would be entitled to all equity in the event of a merger or acquisition. This valuation effectively nullified the stakes of the original founders, employees, and investors, leaving them without any compensation or equity in the merged entity.
This legal saga, which began in Scotland, has seen various twists and turns, with the case being dismissed by an appellate court in 2022. However, a recent decision by the New York Court of Appeals in May has breathed new life into the proceedings, allowing the suit to move forward. The outcome of this case could have far-reaching implications for the corporate governance and valuation practices in high-stakes mergers and acquisitions, particularly in the burgeoning field of sports betting.
A recent court decision has determined that the founders may have a basis for asserting their claims, which has brought the case back to the forefront. The plaintiffs are now seeking redress for what they perceive as a grave injustice that stripped them of their rightful gains from the company they helped build.
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