THE founders of Scottish tech star FanDuel are suing its majority shareholders for $120 million after receiving no return on their investments following its sale to Paddy Power Betfair, claiming the merger undervalued the company.

FanDuel, a fantasy gaming specialist focused on US sports, merged with the gambling giant in a $465m deal announced in May.

But the deal, which has seen Paddy Power Betfair shareholders take 60 per cent of the merged company, and FanDuel investors 40%, resulted in no return for the five founders in the Edinburgh business, as well as around 500 ordinary shareholders.

This was because its majority shareholders, the US private equity houses Shamrock Capital Advisers and Kohlberg Kravis Roberts, which respectively led $70m and $275m funding rounds in FanDuel in 2014 and 2015, excluded ordinary shareholders from the deal by exercising drag-along rights. That effectively meant Shamrock and KKR could force minority shareholders to participate in a sale.

In addition, while dragging shareholders are supposed to offer minority shareholders the same terms as any other seller, Shamrock and KKR said there would not be enough raised from the Paddy Power Betfair deal for them to be paid.

Now four of FanDuel’s five founders, Nigel and Lesley Eccles, Thomas Griffiths and Rob Jones, have turned to the courts to fight for compensation for the loss of their shares.

The four have lodged a petition at the Court of Session in Edinburgh, in which they argue that the $465m merger significantly undervalued the FanDuel business. Their argument hinges on a key ruling by the US Supreme Court in May, which effectively legalised sports betting in all US states, and came shortly after the Paddy Power Betfair deal was outlined. It is claimed the ruling would have resulted in FanDuel – a one-time tech unicorn valued at $1bn – being worth much more than $465m.

Gambling firms with a US presence saw their valuations increase significantly on the back of the ruling. The value of Paddy Power Betfair’s US assets surging by 28 per cent or $2 billion, even though the company only generates around six per cent of its revenues across the Atlantic.

Canadian firm theScore saw its share price rocket 87% on the day the judgement was delivered.

Prior to the ruling, FanDuel faced a severe challenge to its growth prospects in the US because several states ruled that its games were a form of gambling and, as such, illegal.

“This change in market circumstances creates a dramatic increase in FanDuel’s valuation,” the petition states.

However, despite the change brought to the market by the Supreme Court ruling, the petitioners claim the majority shareholders in FanDuel decided to forge ahead with the Paddy Power Betfair deal at the original valuation. They say this effectively meant that ordinary shareholders, including around 500 employees, and early investors have been a denied a share of the proceeds.

It is thought individual employees could have lost out in the region of £5,000 to £10,000, with some long-serving members of staff losing out on potentially hundreds of thousands of pounds. Employees owned around 10% of the equity in the company.

The petition challenges the decision by the FanDuel board, following the Supreme Court judgement, to utilise “waterfall” provisions, which effectively converted the shares in FanDuel to a “single share class upon competition of the purported share transaction”.

The petition states: “Having elected to so utilise the “waterfall” provisions, the board was then required to pick a price on which to base the conversion.

“The board of FanDuel considered whether the US Supreme Court ruling and its impact upon the market value of FanDuel should cause the company to be revalued. It has chosen not do so.

“The board of FanDuel elected to use the valuation obtained prior to the US Supreme Court ruling, without seeking any current and sound valuation of the company.

“The board’s decision to use the “waterfall” provisions and in conjunction with the valuation sought prior to the US Supreme Court ruling, is to the detriment and prejudice of ordinary shareholders.”

Ian Ritchie, one of the earliest investors in FanDuel, said the $465m value put on the company in light of the Supreme Court ruling is “outrageous”.

He declared that the end of the restriction on sports betting in the US has brought a “dramatic change” in the market.

“That move alone made the company worth a lot of money,” Mr Ritchie said. “The best comparator is DraftKings, which is FanDuel’s rival. It is currently raising funding at a valuation of $1.5bn.

"If it is worth $1.5bn, FanDuel is certainly worth over $1bn.”

FanDuel said in a statement: “The petition is simply not rooted in facts or reality.

"In preparation for this deal, an exhaustive process was undertaken with the anticipation of PASPA’s (Professional and Amateur Sports Protection Act) likely repeal. The deal was consummated consistent with the corporate governance rules and cap table established under the former founders’ leadership.

“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.”

Meanwhile, Mr Eccles is currently working on a new eSports venture, Flick, with Mr Jones, and has raised $4m for its development. It is being engineered in Scotland.