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FanDuel has emerged victorious in a court case brought against it by former founders, early investors and employees, who claimed profits from the firm’s 2018 merger with Paddy Power Betfair were illegally kept from them.

A New York state appeals court ruled last week that the case failed to make a valid legal claim against FanDuel under the law of Scotland, where FanDuel was founded and incorporated.

The case was filed in 2020, led by FanDuel founder Nigel Eccles, against defendants led by Shamrock Capital, a private equity firm and investor in FanDuel since 2014.

The complaint states that in 2017, FanDuel had been valued at $1.2bn, but that the business’ value was intentionally understated at the time of the Paddy Power merger in order to prevent its founders and early investors from making away with any of the spoils of the deal.

According to the claimants, the company’s board kept the value at a “sham” price below $559m in order to avoid paying out the early investors.

Indeed, the low valuation impacted the result of the merger due to rules surrounding the deal.

Under FanDuel’s operative bylaws, preferred shareholders were due to receive all of the first $559m from any merger. Common shareholders, including FanDuel’s founders, employees and early investors, were only entitled to a pro rata share of proceeds above $559m.

Eccles and the others who filed the complaint therefore claimed that: “Defendants walked away with shares worth billions and plaintiffs were left with nothing.”

While the plaintiffs considered the price to be an undervaluation at the time of the merger, the situation was exacerbated by the fact that just eight days later, the US Supreme Court invalidated PASPA, paving the way for legalised online sports betting to spread across the country.

This significantly increased the potential value of the business almost immediately after the merger took effect, plaintiffs argued.

FanDuel claimed in response that the low valuation was a result of the company’s poor financial condition at the time of the deal, with negative working capital while saddled with some $60m worth of debt.

The defeat of FanDuel’s founders and early investors follows on from an initial complaint filed in Scotland in 2018, by Eccles and three other founders, which was subsequently dropped.

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