New York appeal court reverses decision dismissing action based on Scots company law

Nigel Eccles and other appellants, including the founders of the predecessor company to FanDuel Ltd and others who owned common shares in the company, raised an action against Shamrock Capital Advisors LLC and others that held preferred shares in FanDuel. They alleged that the defendants, including the company directors, had engaged in a scheme designed to ensure that only preferred shareholders would benefit from a merger between FanDuel and the American arm of Paddy Power in 2018.

The opinion of the court was written by Judge Madeline Singas of the New York Court of Appeals. Chief Judge Wilson and Judges Rivera, Cannataro, Troutman, Reynolds Fitzgerald, and Iannacci concurred, with the remaining two Court of Appeal judges not taking part in the case.

Undervalued assets

In 2007, the plaintiffs founded Hubdub Ltd in Scotland as a betting company, but it later turned its focus to the fantasy sports industry and became FanDuel. FanDuel entered the American market in 2009 and established a New York headquarters in 2011. In 2018, FanDuel merged with the US assets of Paddy Power Betfair plc, after an unsuccessful attempt to merge with its principal competitor, DraftKings, in 2015 due to antitrust and other regulatory challenges.

Following the failed merger, FanDuel’s shareholders sought to simplify the company’s ownership structure, resulting in stock being put into two classes of preferred and common shares. Preferred shareholders were to be compensated first in the event of the winding down of the company to the value of the original subscription price of their shares. The defendants held a combined 36% of the preferred shares, and a “drag-along” power allowing them to compel other shareholders to submit to a proposed merger offer.

Under the terms of the Paddy Power merger, FanDuel’s shareholders would be entitled to an approximate 40% share in the new company to be created by the merger. However, the merger closed below the total $559 million subscription price of the preferred shares, meaning that common shareholders received nothing.

The plaintiffs asserted that the defendants had deliberately undervalued FanDuel’s assets during the merger, especially in the context of the US Supreme Court’s ruling on 14 May 2018 that Congress could not preclude states from legalising sports gambling. Non-binding terms of the merger had been agreed before this ruling, but at a meeting of directors on May 22 it was agreed that the merger would proceed on those terms without an independent valuation of the consideration.

No special circumstances

At first instance before the New York Supreme Court, the defendants argued that Scots law applied to the plaintiffs’ claims due to FanDuel being incorporated in Scotland. They submitted an affirmation from retired Court of Session judge Lord Drummond Young in which he opined that the plaintiffs’ claims were not cognizable because directors owed duties to the company as a whole rather than the shareholders specifically, and no special factual circumstances arose between the director defendants and the plaintiffs to create such an obligation.

The NYSC held that the plaintiffs had adequately stated their claims for breach of fiduciary duty under New York law. The defendants appealed, and the Appellate Division held that the claim was governed by Scots law, the defendants having submitted ample evidence to prove that there were no circumstances to establish fiduciary duties to the shareholders. The plaintiffs then appealed to the Court of Appeal.

A possible inference

In her opinion, Singas J said of the applicable law: “FanDuel maintains offices in Scotland and a plurality of the plaintiffs live in Scotland. Moreover, New York does not have a dominant interest in applying its own law. Though FanDuel has its principal office in New York, held board meetings in this state, and negotiated the merger here, only 10-15% of FanDuel’s total revenue was derived from New York customers. This is simply not a situation where New York has an overriding interest in applying its own law to plaintiffs’ breach of fiduciary duty claims.”

On whether the plaintiffs had a valid Scots law case, Singas J noted: “Plaintiffs’ allegations—viewed in their most favourable light and according them every possible favourable inference—are sufficient to state a claim that the director defendants at least owed limited fiduciary duties to plaintiffs. Most relevant to this conclusion is the interaction between the waterfall provision and Shamrock’s drag-along rights, which left the common shareholders in an especially vulnerable position.”

She added: “Taken together, this arrangement could give rise to an inference that the directors, in being vested with the power to negotiate a merger agreement and subsequently value intangible merger consideration, undertook a duty not to undermine the common shareholders’ interests in those transactions, much less to do so for their own self-interest.”

Singas J concluded: “We do not think a Scottish court, accepting the factual allegations as true and affording plaintiffs the benefit of every possible inference, would determine that plaintiffs had failed to state a cause of action. Rather we conclude, based on the unique circumstances of this case, that plaintiffs’ allegations at least give rise to a possible inference that special circumstances are present, and defendant’s documentary evidence does not utterly refute these allegations.”

The order of the Appellate Division dismissing the relevant causes of action in the case was therefore reversed.