FanDuel founders launch legal action

15 August 2018

Four of FanDuel’s founders have launched legal action in a Scottish civil court after claiming that the daily fantasy sports operator was undervalued when it was acquired by Paddy Power Betfair.

Paddy Power Betfair acquired FanDuel in May in a deal that valued the firm at $465m (£367m/€411m). The bookmaker has since combined FanDuel with its Betfair US business to create a larger company that now focuses on sports betting, as well as FanDuel’s existing DFS offering.

However, the complainants, led by former FanDuel chief executive Nigel Eccles (pictured), have claimed that the valuation did not take into account the potential impact of sports betting on the company.

In the weeks leading up to the deal, the Supreme Court opted to overturn PASPA, thus allowing all states across the US to pass laws to regulate sports betting.

The lawsuit argues that FanDuel’s stock valuation was not recalculated until the deal was closed, while Paddy Power Betfair’s jumped 28% in the two weeks after the Supreme Court ruling.

The main issue lies within the terms of the deal, under which some of the early investors in FanDuel were guaranteed windfalls, while those who held non-preferred shares – including the complainants – were not.

Alongside Eccles, who stepped down as CEO in November, the petitioners include Lesley Eccles, Tom Griffiths and Rob Jones.

“Having elected to so utilise the ‘waterfall’ provisions, the board was then required to pick a price on which to base the conversion,” the lawsuit stated.

“The board of FanDuel considered whether the US Supreme Court ruling and its impact upon the market value of FanDuel should cause the company to be revalued. It has chosen not to do so. The board of FanDuel elected to use the valuation obtained prior to the US Supreme Court ruling, without seeking any current and sound valuation of the company.”

The petition added: “The board of directors, which is de facto controlled by institutional investors, who stand to benefit from the purported share transaction as a result of their large holdings of preferential shares, has acted unfairly and has caused prejudice to the petitioners.

“The decision of the board (whose interests are aligned with preference shareholders), not to seek and act upon a new market valuation in the face of a material event, which is likely to have significantly increased the market valuation of FanDuel, is a breach of its fiduciary duties.”

A FanDuel spokesperson told Recode that the petition is “simply not rooted in facts or reality”.

The spokesperson added: “In preparation for this deal, an exhaustive process was undertaken with the anticipation of PASPA’s likely repeal. The deal was consummated consistent with the corporate governance rules and cap table established under the former founders’ leadership.

“The facts are that this was a sound business transaction that achieved the highest valuation possible for shareholders and was the right strategic move for the company’s future.”

News of the lawsuit comes after it was revealed that FanDuel was New Jersey’s No.1 sportsbook during the debut month of regulated sports betting in the state.

FanDuel only went live with its bricks-and-mortar sportsbook at Meadowlands Racetrack on July 14, but was the most popular venue, with its $1.36m making up around a third of total $3.8m gaming revenue.