FanDuel founders triumph in New York Court on undervalued assets

Lea Hogg May 27, 2024

SiGMA news

FanDuel founders triumph in New York Court on undervalued assets

The legal dispute involving the founders of FanDuel, a popular daily fantasy sports platform, has taken a significant turn. The New York Appeals Court sided with the founders on 23 May, 2024, in their lawsuit claiming that FanDuel’s 2018 acquisition by Paddy Power Betfair was undervalued.

This lawsuit has been a point of contention for several years, involving FanDuel’s former founders, executives, and early investors. The plaintiffs argued that they lost out on $120 million when FanDuel was acquired by Paddy Power Betfair following the US Supreme Court’s 2018 repeal of the Professional and Amateur Sports Protection Act (PASPA).

The repeal of PASPA led to the state-by-state legalization of sports betting in the US, catapulting FanDuel to the position of the number one operator nationwide by market share. The court ruled that the lawsuit, initially filed in Scotland, could proceed as legitimate breach of contract claims were raised.

The court stated, “The Appellate Division correctly concluded that Scots law applies to plaintiffs’ claims and appropriately took judicial notice of its content in resolving defendants’ motion to dismiss. We conclude, however, that plaintiffs have sufficiently pleaded causes of action for breach of fiduciary duty under Scots law. Accordingly, we reverse the Appellate Division order.”

Claiming $120 million loss in Paddy Power Betfair acquisition

This ruling comes after a 2022 decision by a five-judge panel in the New York Appellate court that dismissed the case, arguing that the FanDuel founders had failed to make a valid claim under Scottish law.

FanDuel’s journey began in Scotland in 2007, with its predecessor Hubdub Ltd, founded by Nigel Eccles, Lesley Eccles, and Tom Griffiths. Initially offering bets on real-world events, the company soon pivoted to daily fantasy sports, launching in the US in 2009.

By 2015, FanDuel was locked in an expensive marketing war with its main competitor, DraftKings. The two companies attempted a $3.3 billion “merger of equals” in 2016, but the deal was blocked by US competition authorities.

Following the collapse of the deal, FanDuel’s board simplified the company’s share structure into two types of stock: “Preferred Shares” and “New Ordinary Shares”. Two FanDuel shareholders, Shamrock Capital Advisors and KKR, held 15 percent and 21 percent respectively of the total Preferred Shares and were collectively designated “dragging shareholders”, giving them the power to compel the remaining shareholders to accept an acquisition or merger offer.

In 2018, FanDuel’s board began exploring financing options and engaged financial advisory firm Moelis & Company to assist. Among the options raised was a merger with Irish betting conglomerate Paddy Power Betfair, which has since rebranded to Flutter Entertainment.

The negotiations ran concurrently with the US Supreme Court case Murphy v. NCAA, which ultimately led to the repeal of PASPA. After initially filing the case in Scotland, FanDuel’s former founders, executives, and over 100 shareholders, collectively representing 10 percent of share capital, filed a challenge to the merger in New York.

The plaintiffs argued that the defendants had engaged in a scheme to ensure that the Preferred Shareholders would exclusively benefit from the merger. This involved, they claimed, a deliberate attempt to undervalue FanDuel’s assets in the negotiations, despite the company being worth considerably more in the aftermath of the Murphy case. This ongoing legal battle underscores the complexities and potential pitfalls of corporate acquisitions, particularly in the rapidly evolving world of online gaming and sports betting. The final outcome of this case could have far-reaching implications for future mergers and acquisitions in the industry.