FanDuel Founder Eccles Notches Legal Win as Court Denies PE Motion for Dismissal

FanDuel co-founder Nigel Eccles scored a crucial legal victory last week when the New York Supreme Court denied a motion for dismal brought by the private equity companies he and his colleagues are suing.

Eccles, other co-founders and early-stage staffers of what’s now the largest online sportsbook in the U.S. have been locked in litigation with KKR and Shamrock Capital since 2018, alleging those private equity firms willfully placed a subpar valuation on FanDuel’s stake in Paddy Power prior to selling the combined entity for a significantly higher price.

In a LinkedIn post, Eccles described the court ruling as a small, but important step in the right direction, though there’s likely much more legal haranguing ahead.

Eccles, who founded FanDuel with his wife and friends in Scotland in 2009, stepped down as chief executive officer of the company in 2017.

FanDuel Board Exterminated Common Investors’ Value

In the Eccles/private equity rift, history is highly relevant. The abridged version is that in 2018, the gaming company merged with Flutter’s U.S. unit with FanDuel investors receiving 40% of that combined entity.

From there, by the plaintiffs’ account, FanDuel’s six-member board, which did not include Eccles, valued that 40% at $559 million. As the co-founder puts it, that valuation “wipe(d) out the common shareholders, so that they (the board) alone got all of the upside.” In 2020, the board sold that 40% for $4.2 billion, but none of those economics accrued to Eccles, other co-founders or early-stage employees.

That $559 million was much less than what the plaintiffs believed the 40% was worth and they claimed that price point didn’t adequately capitalize on the company’s leverage to the then nascent but booming U.S. sports wagering industry.

One way of looking at the legal rift is that the plaintiffs believe the FanDuel board had a fiduciary duty to them and that obligation was violated. The court appears to concur.

Prior to the legal spat, KKR and Shamrock were early financial supporters of FanDuel. In 2015, KKR lead a Series E financing round for the gaming company in which $275 million was raised. Two years later, FanDuel and DraftKings nearly merged, but that transaction was scuttled due to regulatory concerns.

What’s Next

As Eccles points out on LinkedIn, in 2024, the plaintiffs expanded their suit to include “details of defendants’ various breaches including fraud, conspiracy and bribery.” That’s one sign there’s plenty more legal maneuvering ahead.

Another is a letter filed Monday with the New York Supreme Court in which KKR and Shamrock accuse Eccles of “flagrantly” violating a 2017 termination accord by pursuing litigation.

What comes next is in the court’s hands, but it’s clear the concept of drag-along rights, also known as dragging rights, will figure prominently in the equation. That’s a stipulation in a shareholder agreement in which majority investors can force their minority counterparts to sell their stakes when another party is attempting to acquire the company.

In its ruling, the New York Supreme Court notes the dragging rights debate isn’t sufficiently settled in a motion to dismiss.

“Whether KKR and Shamrock exercised their Drag-Along Rights in an arbitrary or capricious manner is a question of fact that is not appropriately resolved on a motion to dismiss,” according to the ruling. “Accordingly, defendants’ motion to dismiss the sixth cause of action for breach of the implied duty not to exercise contractual rights in an arbitrary or capricious manner is denied.”