FanDuel co-founder Nigel Eccles “nearly destroyed” the company before it was sold to Paddy Power Betfair, the defendants claim.
The statements were made in a memorandum filed Sept. 16 supporting a motion to dismiss Eccles’s second amended complaint in the attempt to get original FanDuel shareholders what they believe they should have.
Eccles and his co-plaintiffs are suing a large group headlined by shareholders that controlled the board, Shamrock and KKR, for more than $120 million, the combined stake owed to ordinary shareholders they say was due at the time FanDuel was sold. The two firms held preferred shares, which they say were paid out first based on a plan made by FanDuel.
FanDuel does not comment on pending litigation, according to a spokesperson. Eccles declined to comment as well.
Defendants aligned with shareholders
The new allegations and documents included in the second amended complaint “eviscerate plaintiffs’ claims,” the memorandum says in its preliminary statement.
They show that the defendants were actually aligned with common shareholders since the defendants held more common shares “than all plaintiffs combined.” That means Shamrock and KKR had every incentive to get the highest valuation possible, the memorandum explains.
But Eccles mismanaged the company to the point that the accepted deal was the only choice, according to the filing. The company ended 2017 with year-end losses of $38.8 million, accumulated losses of $232 million and a negative-$21.3 million in EBITDA.
“The reality, as their new documents show, is that after Lead Plaintiff Nigel Eccles mismanaged [FanDuel Limited] into the ground, the Director Defendants were forced to step in, pursue a buy-out that Plaintiffs had facilitated, and accept the highest available offer—indeed, the only lifeline that would save FDL from collapse,” the filing says. “As a result, Plaintiffs’ claims all fail.”
FanDuel sale was ‘best’, ‘only’ lifeline
There was no better option for FanDuel than to make this sale, the defendants claim in asking for the second amended complaint to be dismissed with prejudice.
“Plaintiffs’ new concessions and documents make clear this is not a case about a conflicted Board,” the defendants state in their conclusion. “FDL was in financial ruin; and Defendants undisputedly pursued FDL’s best and only viable lifeline so as to obtain the best result for FDL and all shareholders.
“Plaintiffs may be disappointed, but in reality FDL was on its last legs and had no better option. There was no wrongdoing.”
FanDuel simplified capital structure
The shareholders represented in this case tried to help facilitate a buyout by simplifying the company’s capital structure in February 2017. This meant shares were split into preferred and common shares, with a waterfall negotiated by the plaintiffs to $559.4 million.
To ensure a sale regardless of the PASPA ruling, parties agreed valuations were “not dependent on any expected change” concerning US sports betting, according to the term sheet. The finalized terms led to an equity value of $465.5 million and about $145 million in cash from Paddy Power Betfair “to fund the current and expected requirements of the combined company.”
Shortly after PASPA fell, the deal was completed with ordinary shareholders not receiving compensation. Defendants argue the valuation was fair as FanDuel was “going bankrupt and running out of time.”
Given that the defendants were not acting at the expense of ordinary shareholders, plaintiffs “cannot plead” a failure of fiduciary duties, the filing claims.
Shareholder letters not false
The defendants also argue that the allegations of fraud based on shareholder letters need to be dismissed for two reasons.
There were “no misrepresentations” made and the letter accurately explained ordinary shareholders would likely not receive compensation for shares, they said.
The claims are also outside of the proper time period, defendants allege. The claims were not filed within New York‘s timeline of six years for a civil claim, which expired Aug. 8 of this year.
Claims concerning fraud are also “not adequately pleaded,” they said. There must be a misrepresentation including a course of action that caused the loss, which they said the plaintiffs do not allege.