A controversial lawsuit
Cofounder and former CEO of FanDuel, Nigel Eccles, and more than 100 former employees have filed a lawsuit in the Supreme Court of New York against private equity investors.
The suit alleges that these private equity investors cheated them out of their rightful share of the company after FanDuel was acquired by Paddy Power Betfair.
It references a previous lawsuit that claimed that the price of FanDuel was artificially lowered during the acquisition by the private equity investors and early investors in the company, KKR & Co. and Shamrock Capital Advisors. The representatives for those filing the suit are Bartlit Beck LLP.
Cheat allegations
According to the Articles of Association of FanDuel, preferred shareholders (such as the private equity groups) were able to benefit from the initial $559m from the sale proceeds. The common shareholders, such as the former workers and founders, then had an entitlement to the remaining sum from the deal.
The preferred shareholders also received a 40% equity stake in the new FanDuel Group. As per the lawsuit, the private equity firms deliberately ensured that the value of the sale was less than $559m to ensure they could retain the 40% stake in the new company.
private equity firms deliberately ensured that the value of the sale was less than $559m
Speaking about these allegations, Eccles said: “Put simply these investors and the board cheated FanDuel employees to give themselves a massive payday.”
He went on to allege that these investors did not get an independent valuation, did not have a vote for shareholders, and that they had certain documents from other investors and workers to try and cover up what they did. Eccles concluded by saying that these investors failed any basis moral or fiduciary standard.
Valuation questioned
The lawsuit alleges that the private equity investors had put a valuation of $1.2bn on FanDuel before the merger. The value of the sale was less than half of this sum.
The lawsuit provides a copy of the information given to the board of directors (mostly made up of Shamrock and KKR) that goes into detail about the valuation of the company and its future potential.
After presenting the calculations behind the estimates, it said: “This suggests a valuation for FanDuel – as a standalone company – of more than $10 billion, a valuation almost 18 times the Subscription Price of FanDuel’s preference shares.”
Demands of the lawsuit
While a specific figure has not been stated in the lawsuit, there are some demands.
The lawsuit concludes by saying that the plaintiffs will prove how the actions of the defendants were in a clear breach of their fiduciary duties. This breach cost the company’s former employees and founders hundreds of millions of dollars worth of FanDuel Group shares.
Defendants respond
After the filing of this lawsuit, there was a joint statement made by the defendants to LSR. This said: “KKR and Shamrock stood by and supported the company during difficult times and we are confident that the facts will demonstrate that the allegations in this lawsuit are completely baseless.”
Previous suit filed in Scotland
The last lawsuit relating to this issue had been filed in Scotland. This case was not a success for the suitors. However, the original lawsuit was brought only by the company’s founders rather than a large number of employees, as is the case with the latest lawsuit.
The reason for the filing of the original lawsuit was an attempt to try and block the merger from going ahead. However, the reason for the dismissal was that it would only be allowable if the founders of FanDuel were still current shareholders. As they were not current shareholders, their bid to block the merger wasa successful.