In Eccles v. Shamrock Capital Advisors, LLC, 2024 WL 2331737 (N.Y. Ct. App. May 23, 2024), the New York Court of Appeals resuscitated a case dismissed by the Appellate Division, holding that plaintiffs—a group of over 100 common shareholders and founding members of FanDuel Ltd. (“FanDuel”), a Scottish online sports fantasy company—had sufficiently pled a breach of fiduciary claim under Scottish law against corporate directors. Plaintiffs alleged that defendants had engaged in a scheme to benefit exclusively from the proceeds of a 2018 merger between FanDuel and the Dublin-based sports gambling company Paddy Power Betfair plc, and to eviscerate the interests of the common shareholders and founding members. This case may have huge financial implications in that approximately two years later Flutter Entertainment plc acquired a 37.2% stake in FanDuel for $4.2 billion.
Eccles turned on a conflict-of-laws question: did Scottish or New York law apply to determine whether defendants breached a fiduciary duty to plaintiffs during the merger? Plaintiffs alleged that New York law applied and that a cognizable claim could be brought under New York law; alternatively, plaintiffs asserted that their claims should survive even under Scottish law. Defendants countered that Scottish law reigned and that plaintiffs’ claims must be dismissed under Scottish law. Interestingly, the trial court held that New York law applied and allowed the case to continue, but the Appellate Division reversed, holding that Scottish law applied and dismissed the case on the basis that no cognizable claim existed under Scottish law.
The New York Court of Appeals resolved this quagmire and clarified that the substantive law of a company’s place of incorporation presumptively applies to causes of action arising from the company’s internal affairs, thereby reinforcing the “internal affairs” doctrine of New York choice-of-law principles. Id. at 7. The Court held that a party may overcome this presumption and establish that New York law should apply only by demonstrating both that (1) the interest of the place of incorporation is minimal—that is, the company has “virtually no contact” with the state of incorporation other than the fact of its incorporation there, and that (2) New York has a “dominant interest” in applying its own substantive law. Id. at 7.
Under this analysis, the Court of Appeals held that Scottish law—not New York law—applied to decide the question of whether plaintiffs had sufficiently pled a breach of fiduciary claim as FanDuel was incorporated in Scotland and there were “considerable contacts” with Scotland, including that four of the plaintiffs founded FanDuel in Scotland and registered the company under the country’s Companies Act. Id. at 7. Thus, on this question, the Court upheld the Appellate Division’s decision to apply Scottish law to the breach of fiduciary duty claim. However, the Court reversed the Appellate Division’s dismissal of the claim because, in the Court’s assessment, plaintiffs had sufficiently pled a fiduciary breach claim under Scottish law.
The Appellate Division had relied on, among other evidence produced by defendants, the expert affidavit of a retired Judge of the Supreme Courts of Scotland, who opined that under Scottish law, plaintiffs’ claims against the director defendants were not cognizable because directors owed duties only to the company but not to individual shareholders. Id. at 4. Whereas the retired Scottish judge acknowledged that in special factual circumstances it would be possible for a fiduciary duty to arise between directors and individual shareholders, he concluded that in the instant case, no such special circumstance was established. Id.
In contrast, the Court of Appeals sided with the plaintiffs’ expert on Scottish law, a Scottish corporate attorney, who stated that while directors generally owe a duty only to the corporation as a whole and not to individual shareholders, in this case, the plaintiffs had sufficiently alleged special factual circumstances that created fiduciary obligations between the director defendants and plaintiffs. Id.
So what were these “special factual circumstances” which won the day for plaintiffs? Plaintiffs alleged that the common shareholders of FanDuel suffered “a unique harm” because the director defendants structured the merger in such way as to preclude common shareholders from receiving any benefit from the merger. Id. at 9. The Court emphasized that “[n]otably, plaintiffs do not allege that the merger harmed the company.” Id. Rather, the plaintiffs alleged that the valuation of FanDuel was “manipulated and depressed” in a way that resulted in defendants “receiving a financial windfall of the merger” while plaintiffs received “nothing for their valuable contributions and ownership interests.” Id. The Court concluded that this was not a case of plaintiffs “attempting to impermissibly repackage a derivative claim against the company as a direct one.” Id.
If you have questions about conflict of laws or breach of fiduciary claims, please contact Michael C. Rakower or Sali A. Rakower.
Eccles v Shamrock Decision
