Last week, Nigel Eccles, a co-founder of FanDuel, achieved a significant legal milestone as the New York Supreme Court dismissed a motion to dismiss the lawsuit he and his partners have filed against private equity firms.
Since 2018, Eccles and other founding members of FanDuel, which is now recognized as the largest online sportsbook in the United States, have been embroiled in a legal battle against KKR and Shamrock Capital. They allege that these private equity firms intentionally undervalued FanDuel’s stake in Paddy Power before selling the merged entity at a much higher valuation.
In a post on LinkedIn, Eccles referred to the court’s decision as a vital, albeit preliminary, advancement, anticipating further legal challenges ahead.
“The defendants attempted to dismiss the case. However, just last week, the New York Supreme Court overwhelmingly rejected their motion. All claims related to fiduciary breaches, fraud, conspiracy, and bribery continue,” Eccles stated. “This is a critical interim achievement as we gear up to present our full evidence in court.”
Eccles, who began FanDuel with his wife and friends in Scotland in 2009, resigned as CEO of the company in 2017.
Impact of the FanDuel Board on Common Investors
The ongoing dispute between Eccles and the private equity firms is steeped in historical context. In 2018, FanDuel merged with Flutter’s U.S. division, allowing FanDuel investors to receive 40% of the newly formed entity.
According to the plaintiffs, FanDuel’s board of directors, consisting of six members not including Eccles, appraised that 40% stake at $559 million. Eccles argues that this evaluation “eliminated the common shareholders’ interests, granting the board the entire upside.” Subsequently, in 2020, the board sold that same 40% stake for $4.2 billion, with none of the benefits trickling down to Eccles, co-founders, or early-stage employees.
The plaintiffs contend that the $559 million valuation did not accurately reflect the 40% stake’s true worth, especially in light of the burgeoning U.S. sports betting market.
In essence, the legal conflict centers on the plaintiffs’ belief that FanDuel’s board breached its fiduciary duties to them, a notion the court seems to support.
“As highlighted by the Court of Appeals, the central issue in this matter is ‘whether the director defendants owed plaintiffs any fiduciary duties,’” as stated in the New York Supreme Court ruling. “The Court found that ‘the director defendants at the very least owed limited fiduciary duties to plaintiffs’ because ‘by being empowered to negotiate a merger agreement and evaluate intangible considerations, [the director defendants] assumed a duty not to undermine the interests of common shareholders, particularly not for personal gain.’”
Before this legal confrontation, KKR and Shamrock were among the initial financial backers of FanDuel. In 2015, KKR led a Series E funding round that successfully raised $275 million for the gaming enterprise. Two years later, an attempted merger with DraftKings was aborted due to regulatory issues.
Future Developments
As Eccles mentions on LinkedIn, the plaintiffs plan to amend their complaint in 2024 to include specifics on the defendants’ various breaches related to fraud, conspiracy, and bribery. This suggests that extensive legal proceedings are still forthcoming.
Additionally, a recent letter submitted to the New York Supreme Court accuses Eccles of “blatantly” breaching a 2017 termination agreement by continuing his legal fight.
The next steps will depend heavily on the court’s decisions, but the idea of drag-along rights—where majority investors can compel minority shareholders to sell their stakes during acquisition attempts—will undoubtedly play a critical role.
The New York Supreme Court’s ruling signifies that the debate surrounding drag-along rights has not yet been conclusively resolved during the motion to dismiss stage.
“Whether KKR and Shamrock executed their Drag-Along Rights in an arbitrary or capricious manner remains a factual question that is not suitable for resolution via a motion to dismiss,” the ruling clarifies. “Thus, the defendants’ motion to dismiss the sixth cause of action for breaching the implied duty not to exercise contractual rights in an arbitrary or capricious manner is denied.”