FanDuel slams “moving target” Scottish court ruling

FanDuel has reportedly called on a New York appeals court to apply Scottish law to a January 2022 Supreme Court ruling on Paddy Power Betfair’s acquisition of the business, suggesting it faces a “moving target” of fiduciary responsibilities as a result.

The case centres on Paddy Power Betfair taking a 57.8% stake in FanDuel in May 2018, a deal which saw the UK operator (now Flutter) 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%.

As part of this share dealing, 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.

Under the arrangement, 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 with very little to show for their respective stake despite the deal coming in the same month as the US Supreme Court overturned PASPA.

FanDuel founders, including Nigel Eccles as well as a group of more than 100 former shareholders in the business, filed a lawsuit in the Scottish courts in August 2018 concerning the deal.

In the suit, they alleged that private equity investors KKR & Co. and Shamrock Capital Advisors LLC had conspired with members of its the FanDuel board to deprive other shareholders of profits arising from the Paddy Power deal.

The lawsuit was ultimately dismissed, leading to the filing of a secondary lawsuit in the New York courts by US-based shareholders in 2020, which sought to apply US law to the treatment of the case.

In the secondary claim, shareholders were successful, leading to an appeal by FanDuel and representatives of KKR and Shamrock who suggested that it should be thrown out based on the company being incorporated in Scotland and therefore only applicable under Scottish law.

Under 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.

In hearings before the New York Court of Appeals Appellate Division reported by legal news site Law360, lawyers acting on behalf of FanDuel suggested the application of the internal affairs stance “undermined” the entire purpose of it.

“Those who own and manage a corporation must know what body of law guides their conduct and the standards by which that conduct will be judged later,” Mark Kirsch of Gibson Dunn & Crutcher LLP, acting on behalf of FanDuel, told Appeals Court judges.

“This would include to whom one actually owes duties, how those duties should be exercised, and how judgments made in the course of their duties will be evaluated,” he added.

Continuing his argument, Kirsch suggested that if the ruling did not apply to former board members, the firm would face a “moving target” of fiduciary responsibilities, citing the example of prior CEO Matt King.

King was a director of the FanDuel business at the time of the initial defence made by FanDuel but had departed the business by the time of the New York Supreme Court ruling.

“The doctrine’s application shouldn’t turn on such unknowns as the timing of a decision,” Kirsch told justices on the appellate panel.

However, counsel for the plaintiffs, Nevin Gewertz of Bartlit Beck LLP, contended that the internal affairs doctrine only applies to current directors because its goal is to ensure that the litigation does not interfere with a company’s ongoing work in a different jurisdiction.

“This court’s precedent simply states that when former directors are involved in a lawsuit that doesn’t jeopardize the ongoing affairs of the company, then New York law applies,” Gewertz said.

The case continues.