Nigel Eccles and his fellow FanDuel founders are suing the company’s preferred shareholders for more than $120 million, saying that the daily fantasy sports firm was purposely undervalued when Paddy Power Betfair (PPB) acquired it earlier this year.

Nigel Eccles FanDuel lawsuit

FanDuel founder Nigel Eccles says that the daily fantasy sports firm was purposely undervalued when Paddy Power Betfair acquired it earlier this year. (Image: DailyBusinessGroup.co.uk)

Eccles is joined in the lawsuit by his wife Lesley Eccles, Tom Griffiths, and Rob Jones. All four were with FanDuel from its founding in 2009 through late 2017. The petition seeks to force preferred shareholders to purchase the founders’ ordinary shares at market value.

Investment Firms Score Big, Founders Get Nothing

In the lawsuit, which was filed in Scottish court, Eccles and his fellow petitioners say that the $465 million valuation of FanDuel was designed to cut ordinary shareholders – including the founders of the company and most of its employees – out of the cash windfall enjoyed by preferential shareholders.

“The board of directors, which is de facto controlled by institutional investors, who stand to benefit from the purported share transaction as a result of their large holdings of preferential shares, has acted unfairly and has caused prejudice to the Petitioners,” the petition reads.

Based on the $465 million acquisition price, and the use of a “waterfall” financial structure that ensured preferred shareholders – including investment firms KKR and Shamrock Capital – were paid out first, there was nothing left over for those who held ordinary shares, including the company founders.

The petitioners argue that PPB should have reconsidered the valuation of FanDuel following the Supreme Court’s decision to overturn the Professional and Amateur Sports Protection Act (PASPA). That ruling allowed all 50 states to consider regulating sports betting, something that several (including New Jersey, Delaware, and Mississippi) have already begun doing in the months since.

As a result, Paddy Power’s stock rose by about 28 percent in the two weeks after PASPA was struck down. However, FanDuel’s value was never recalculated before the deal was closed in July.

“The decision of the board…not to seek and act upon a new market valuation in the face of a material event, which is likely to have significantly increased the market valuation of FanDuel, is a breach of its fiduciary duties,” the petition reads.

FanDuel Becoming a Major Player in American Sports Betting

While FanDuel itself was not a sports betting firm at the time of the takeover, the fact that they were involved in real money sports games was considered reason for PPB’s interest in the company. FanDuel had an existing database of customers who enjoyed trying to win money on sports contests, a valuable asset as more areas of the United States started to offer legalized wagering.

In fact, the FanDuel brand is now prominently involved in the sports betting industry, becoming the namesake for the sportsbook at the Meadowlands, which became the leading location in the New Jersey market in July.

According to the current management team at FanDuel, however, they got the best deal the company could possible get on the open market. At one time, the DFS site was valued at more than $1 billion, but that valuation crashed after a failed merger with DraftKings, declining market share, and a slew of legal battles over the legality of daily fantasy games in various states.

“The petition is simply not rooted in facts of reality,” a FanDuel spokesperson told Recode by email. “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.”