(CN) – The founders of fantasy sports company FanDuel claim in a Tuesday complaint that its board of directors and private equity firms undervalued the company ahead of a merger and intentionally deprived employees and investors of their common shares without compensation.
The FanDuel founders and other plaintiffs who owned common shares or options, including more than 100 former employees and several of the company’s early investors, are asking Manhattan Supreme Court for a jury trial to recover “hundreds of millions of dollars for their interests” in the company that were “misappropriated” by the defendants’ alleged breach of fiduciary duties.
FanDuel rose to prominence as an early adopter of the “Daily Fantasy” model of online fantasy sports games. Founded in 2007 by plaintiffs Nigel Eccles, Lesley Eccles, Gordon Griffiths, Robat Jones and Chris Stafford, it began as a site where users could place wagers on the news before pivoting to the already popular fantasy sports market.
The company developed programs by which where players could participate without having to organize a “league” of their friends, and it developed mobile apps for its games. By 2017, FanDuel was making $125 million in revenue annually.
In 2017, when FanDuel was preparing for a possible merger with DraftKings, one of its main competitors in the online fantasy sports market, FanDuel was valued at $1.2 billion.
Less than a year later, when FanDuel was looking into a merger with Ireland-based betting operator Paddy Power – later renamed Flutter Entertainment – Nigel Eccles had left his position with the company but still held almost 283,000 shares.
The board, the complaint alleges, was packed with former employees of KKR & Co. Inc., a private equity company that had invested in FanDuel in 2014 and 2015.
Those board members, Eccles and his fellow former shareholders claim, sought to take advantage of a “waterfall” provision in the company’s articles of association. The provision requires any winding-down action of the company to pay out to shareholders progressively, starting by paying those who hold preference shares the equivalent of their subscription fee for those shares and progressing to smaller shareholders from there.
In the process, the shareholders would effectively be bought out. That provision would start at any sale of the company totaling over $559 million — but FanDuel was ultimately sold for less than that price.
The plaintiffs cried foul. While FanDuel and Paddy Power were preparing for the merger, they had discussed the possible impacts of a favorable ruling in Murphy v. National Collegiate Athletic Association on FanDuel’s prospects. In that case, the U.S. Supreme Court declared the Professional and Amateur Sports Protection Act was unconstitutional. The 1992 law had prevented states from individually legalizing sports betting, as Nevada did in 1949.
With the law overturned, financial reports and ESPN were speculating that FanDuel could top $3 billion but the deal was swiftly sealed at a lower price “without a shareholder vote and without considering the impact of the nascent sports gambling market,” according to the lawsuit.
The company created from the merger was originally called PandaCo and is no doing business as FanDuel Group.
“In essence, Defendants sold FanDuel to themselves at an artificially low price,” the complaint states. “In so doing, Defendants maximized their own shares in PandaCo by eliminating the common shareholders’ interests in the newly merged company.”
Representatives for FanDuel and attorneys for Eccles and his fellow shareholders did not immediately reply to requests for comment Tuesday.