FanDuel Founder Nigel Eccles Keeps Lawsuit Against PE Backers Alive as Court Denies Dismissal

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

Eccles, alongside other co-founders and early-stage employees of what is now the largest U.S. online sportsbook, have been locked in litigation with KKR and Shamrock Capital since 2018. The plaintiffs allege the private equity firms willfully undervalued FanDuel during its 2018 merger with Paddy Power Betfair, exploiting a ‘waterfall’ payout structure to wipe out common shareholders before the business surged in value.”

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, FanDuel merged with Flutter’s U.S. unit, with FanDuel investors receiving a 40% stake in the combined entity.

From there, by the plaintiffs’ account, FanDuel’s board—which did not include Eccles—valued that 40% stake at just $465.5 million. Because this fell below a negotiated $559 million “waterfall” threshold, preferred shareholders took 100% of the equity.

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.” Just two years later, in 2020, Flutter bought out those private equity backers’ share of the business for $4.2 billion—a massive windfall in which Eccles and over 100 early-stage employees did not share.

That initial valuation was far below what the plaintiffs believed the 40% stake was worth. They claim the price point failed to factor in the massive, immediate impact of the Supreme Court striking down the federal sports betting ban just weeks prior.

One way of looking at the legal rift is that the plaintiffs believe the FanDuel board breached its fiduciary duty to them. By denying the motions to dismiss, the court has ruled that this central argument has enough legal merit to proceed toward a trial.

Prior to the legal spat, KKR and Shamrock were early financial supporters of FanDuel. In 2015, KKR led 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 recently highlighted on LinkedIn, the plaintiffs expanded their suit to include “details of defendants’ various breaches including fraud, conspiracy and bribery.” That’s a clear sign there’s plenty more legal maneuvering ahead.

Another indicator is a court letter in which KKR and Shamrock accuse Eccles of “flagrantly” violating a 2017 termination accord by actively assisting and recruiting other plaintiffs in the litigation.

What comes next is in the court’s hands, but it’s clear the concept of drag-along rights (which allow majority investors to force minority counterparts to sell their stakes) will figure prominently in the equation.

In its recent ruling, the New York Supreme Court noted that the dragging rights debate isn’t something that can be easily 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,” the court ruled. “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.”