FanDuel founders sue private equity firms for fraud
Add Axios as your preferred source to
see more of our stories on Google.
Illustration: Maura Losch/Axios
It's been more than six years since FanDuel merged with European gaming company Paddy Power Betfair, a seminal moment in forging the U.S. sports betting market.
- But a legal fight over that deal is just ramping up.
What to know: FanDuel's founders — plus dozens of early employees and investors — are suing the company's two largest investors before the merger, KKR and Shamrock Capital.
- The case has gone through several travails, including being dismissed and having that dismissal successfully appealed.
- Plaintiffs refiled their 216-page complaint this week in New York's Supreme Court, under a legal framework terms set by the state's top appeals court.
What they're saying: All of the plaintiffs were common shareholders in FanDuel before the merger with Paddy Power (now called Flutter), but claim that they were completely wiped out by the deal — which was signed just days after the U.S. Supreme Court struck down a federal ban on sports betting.
- FanDuel's cap table was structured whereby preferred shareholders, led by KKR and Shamrock, would receive the first $559 million of value in any realization event. Anything above that amount would go to holders of common stock, which included both the plaintiffs and the two private equity firms.
- The plaintiffs allege that KKR and Shamrock structured the merger so that the value of FanDuel was exactly at that $559 million mark, thus effectively removing common shareholders from what was about to become a new entity.
- They don't claim that KKR or Shamrock received any cash from the merger, which was an all-stock transaction. Instead, they say that FanDuel's preferred shareholders got the full 40% stake in a combined business that is now worth over $30 billion.
- Moreover, they believe that documents obtained during an initial round of discovery prove that KKR and Shamrock were aware that FanDuel was likely to become much more valuable (even creating a separate spreadsheet that modeled sports betting). And they claim that the firms bribed other FanDuel board members to go along with the plan while instructing FanDuel's bankers to not conduct either a valuation analysis or a fairness opinion.
The other side: KKR and Shamrock haven't yet filed their reply, and declined to comment for this story, but are likely to argue that FanDuel was in dire straits when the merger was negotiated.
- At the time, it was still just a fantasy sports site that had been blocked by antitrust regulators from merging with rival DraftKings.
- The federal sports betting ban was still in place, and there was no guarantee that more than a few states would legalize it. FanDuel also didn't have any of its own sports betting infrastructure, thus would need either major investment or partnership with an existing player like Flutter.
- In short, KKR and Shamrock may argue something similar to VCs in pay-to-play deals — all future value is being created by new money, so the old money deserves to be crammed down.
Look ahead: Nevin Gewertz, an attorney for the plaintiffs, says that discovery and witness depositions could take up to a year, at which point the court would decide if a trial is appropriate.
Read the full complaint:
