When start-up founders sell their companies, they often draw large payouts for their hard work and effort in building a successful business. Unfortunately, due to an unusual financial arrangement, the FanDuel founders saw no benefit from the company’s sale to casino giant PPB.
Eccles and founders Lesley Eccles, Tom Griffiths and Rob Jones left FanDuel in late 2017. The July 2018 sale paid only big investors, like investment firms KKR and Shamrock Capital, and preferred stockholders, which include many current FanDuel executives.
The FanDuel and Paddy Power Betfair lawsuit isn’t just sour grapes
At first glance, the lawsuit seems like the natural result of poor business decisions on the founders’ part. PPB’s valuation and accepted sale price for the company, $465 million, left no money to pay out common shareholders.
However, PPB reached that valuation prior to the US Supreme Court’s dismissal of PASPA. In other words, Paddy Power Betfair purchased FanDuel as a daily fantasy sports provider, rather than a company moving into the sports betting industry.
Since the deal closed two months after PASPA’s demise, Paddy Power Betfair‘s use of the old valuation is a dubious choice. Eccles and the rest of the founders are claiming FanDuel’s value increased a lot in the wake of the Supreme Court decision.
The lawsuit alleges that the board breached its fiduciary duty to common shareholders.
Rank-and-file took it on the chin, too
The human cost of the deal goes beyond Eccles and the other founders. Many lower-tiered employees bought into the company at its early stages and received nothing for their shares.
The institutional investors forced common stockholders to approve the deal. The preferred shareholders, namely KKR and Shamrock Capital, used so-called “drag along” provisions to compel the minority shareholders to accept the sale at its $465 million valuation.
Incidentally, new FanDuel CEO Matt King is a former KKR employee. The deal netted King more than $11 million.
Since the deal, he has retained his position to oversee FanDuel’s expansion into the multi-billion dollar sports betting market.
Still, the valuation may not be low
It’s possible that the court action has less standing than it seems. FanDuel had lost quite a bit of value in recent times due to an aborted merger with rival DraftKings and its second-place standing in the DFS landscape. It also wasn’t ready to get into the sports betting business on its own.
“The petition is simply not rooted in facts or reality. 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.”
For their part, the petitioners in the suit are demanding to see the minutes and communications regarding the company’s valuation leading up to the sale. It’s possible they hope to find a smoking gun by virtue of the power of discovery.
It is unknown if the suit will ever make it to court. It may not even stand for five minutes in front of a judge, or it may be settled out of court. Now we’ll wait and see.