FanDuel claims victory in $1bn legal battle with founders and former directors
New York appeals court reverses prior ruling over breach of fiduciary duty claims relating to Paddy Power Betfair acquisition of FanDuel
Lawyers for FanDuel have hailed a “sweeping victory” after New York’s court of appeals dismissed a $1bn lawsuit brought by its founders and former directors over breach of fiduciary duty claims.
In a hearing taking place late last week, a five-member panel at the state’s appellate division ruled in favour of the US betting giant, which concerns Paddy Power Betfair’s acquisition of a 57.8% stake in FanDuel in May 2018.
The deal saw the UK operator (now Flutter Entertainment) pay $158m upfront with a further $458m of the total $612m purchase price settled via share dealing. Flutter has since increased its stake to 95%.
Under the share arrangement, existing shares were split between common shares held by FanDuel founders, former employees and early investors in the business, and so-called ‘preferred shares’ issued to later-stage investors.
Preferred shareholders could sell their shares in a deal valued at an agreed total of $555m, with any amount paid by Paddy Power Betfair over this amount split among common shareholders.
However, the company was only valued at $559m, leaving the firm’s common shareholders without much for their respective stake.
Founders of the business, including former CEO and co-founder Nigel Eccles and a group of over a 100 former shareholders, filed a lawsuit in Scotland in August 2018 over the deal.
Allegations made by the group include that private equity investors KKR & Co. and Shamrock Capital Advisors LLC had conspired with members of the FanDuel board to deprive other shareholders of profits arising from the Paddy Power deal.
This lawsuit was ultimately dismissed, with a secondary challenge being made in the New York courts by US-based shareholders in 2020, which sought to apply US law to the treatment of the case.
In respect of the US-based case, the group was successful.
However, FanDuel and representatives of KKR and Shamrock launched an appeal over the ruling, suggesting it should be thrown out on the grounds the company is incorporated in Scotland and therefore comes under Scottish law.
In Scottish law, directors owe a fiduciary duty to their companies rather than investors. However, in hearings before the New York Supreme Court, justices applied the so-called ‘internal affairs’ doctrine to the case.
This legal precedent, which subjects a company to laws based on where it is incorporated, applies only to current and not former board members.
Considering the case, the panel asserted that Scottish law, not New York law, governed the claim, further asserting that company directors owed fiduciary duties to their corporation and not to shareholders, effectively voiding the claim.
Appeals panel members also dismissed the internal affairs doctrine claims concerning which law should be applied to only those defendant directors of the business who were at FanDuel when the lawsuit was launched in 2018.
In its ruling, the panel said the doctrine instead applied to all defendant directors of the business when the lawsuit was started.
“Contrary to plaintiff’s argument otherwise, defendants did not consent to New York law,” the panel wrote in its summary judgment.
“For one thing, the record shows that at the May 2018 FanDuel board meeting, it was made clear to the directors that they were bound by their duties under the United Kingdom Companies Act of 2006.
“As to the merits, plaintiffs have failed to state a claim for breach of fiduciary duty under Scots law, as Scots law states that directors generally owe fiduciary duties only to their company, not to its shareholders.
“While a director may owe a fiduciary duty to a shareholder in special circumstances, such circumstances are not present here.”
The panel’s judgement continued: “Scots law does not apply to the aiding and abetting cause of action, as the internal affairs doctrine does not apply to aiding and abetting claims.
“Nevertheless, the cause of action alleging aiding and abetting a breach of fiduciary nonetheless fails because there is no underlying breach of fiduciary duty,” it added.
In comments reported by the New York Law Journal FanDuel representative, King & Spalding partner Mark Kirsch lauded the judgement.
“This is a sweeping victory for our client which confirms that the transaction was fundamentally fair and the proceeds [from the 2018 merger] were appropriately distributed,” Kirsch said.
Bartlit Beck LLP partner Andrew MacNally, whose firm acted on behalf of the plaintiffs in the case, suggested the firm was “evaluating” its options and could launch a further challenge in the future.
“While we are disappointed in the Appellate Division’s decision, we remain committed to vindicating the rights of the founders, early investors, and employees whose interests in FanDuel were wiped out by the defendants’ scheme,” MacNally said.
“Our confidence in the merits of our claims has only grown through discovery as the documentary evidence makes plain the defendants deliberately ignored their fiduciary obligations to fairly distribute the proceeds from FanDuel’s merger with Flutter Entertainment in order to enrich themselves,” he added.