FanDuel Founders Win Latest Legal Round Over Contentious $465M Merger

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In a pivotal development, the founders of FanDuel have triumphed in the latest round of their legal skirmish. The New York State Court of Appeals breathed life back into a lawsuit brought against an influential coalition of present shareholders by FanDuel’s creators, husband and wife duo, Lesley and Nigel Eccles.

The point of contention traces back to FanDuel’s 2018 merger with Anglo-Irish betting powerhouse, Paddy Power Betfair. A deal that appraised FanDuel at a hefty $465 million. This merger eventually gave birth to gambling giant, Flutter Entertainment.

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The Eccles pair, along with an estimated contingent of 100 shareholders, contend that they were unjustly sidelined in the aforementioned merger. They allege underhanded tactics were deployed to minimize their stakes.

FanDuel, a brainchild of the Eccles, sprouted in Edinburgh, Scotland in 2007 under the moniker of Hubdub. The venture initially offered a platform for wagers on current affairs. In a paradigm shift two years later, it carved a niche in the U.S. market with daily fantasy sports, emerging as FanDuel and shifting its focus chiefly towards American audiences.

When a potential “merger of equals” with DraftKings was impeded by the Federal Trade Commission due to apprehensions over monopolistic dominance, Nigel Eccles parted ways with FanDuel in 2017.

Subsequent to these events, FanDuel’s stocks bifurcated into “preferred shares” and “common shares”. Plaintiffs in the case held a chunk of approximately 10% of the common stock.

The board at FanDuel gave its nod to the merger with Paddy Power Betfair eight days after the U.S. Supreme Court rendered PASPA, the federal ban on sports betting, toothless. This transaction bolstered Flutter’s following stranglehold on the U.S. sports betting market.

The Eccles argue that the merger tilted in favor of preferred shareholders and the executive leadership at the cost of common shareholders.

In stark terms, defendants pocketed shares valuing billions while the plaintiffs were sidelined, as documented in the complaint.

Two defendants, Shamrock Capital Advisors (SCA) and KKR, jointly possessed a 36% of FanDuel’s preferred shares. According to the lawsuit, these investment firms downplayed FanDuel’s valuation by a staggering $120 million before the merger. The two firms then flexed their “drag along right”, compelling minority shareholders into begrudgingly accepting the sale.

The lawsuit contends that FanDuel’s assets were consciously undervalued during the merger deliberations to mellow down the preferred shares’ bloated price. In actuality, FanDuel’s worth was far greater, the plaintiffs argue.

The saga begins a fresh chapter as the Eccles spearheaded a legal offence against the SCA and KKR, initially in Scotland owing to its jurisdiction of incorporation, claiming a breach of fiduciary duties.

However, feeling that New York law would provide stronger grounds to their claim, they withdrew their lawsuit in Scotland and re-approached the New York Supreme Court in 2020. The court concluded that the case would be best argued within its halls under Scots law.

At first, Supreme Court Judge Andrea Masley favored the plaintiffs, allowing three out of five charges to survive dismissal motions by the defendants.

In an unexpected twist in 2022, the New York Supreme Court Appellate Division challenged this decision, concluding that under Scots law, directors owe fiduciary duties to the company, not to shareholders.

Last Thursday, however, the New York Appeals Court, the superior court in the state, overruled this decision, noting that the plaintiffs had “substantiated causes of action for breach of fiduciary duty under Scots law”. The case now rebounds to the Supreme Court.

The Eccles and their co-plaintiffs now aim to secure a compensation amount of $120 million. Flutter Entertainment, despite being a consequential participant, is conspicuously absent from the lawsuit.