Last week, lawyers representing Darcy Lien and other Skillz investors filed a lawsuit against Eagle Equity Partners II, LLC.
The suit, filed in the Delaware Court of Chancery, also names several individuals involved with the company as defendants. These include the former CEO of MGM Studios and the former president of CBS Entertainment.
The litigation involves the path Skillz – a developer of skill-based, real-money online games – took in going public. The highly popular Skillz apps allow iOS and Android users to play and bet against one another.
Skillz launched in 2012 and quickly grew, attracting investments from several high-profile venture capital firms along the way. Eventually, it became one of the targets of Flying Eagle, a special purpose acquisition company (SPAC). In December 2020, at the height of the SPAC boom in the online gambling space, Flying Eagle merged with Skillz Inc., allowing the latter to become publicly traded.
Eagle Equity Partners II, LLC was the parent company of Flying Eagle, as well as other “Eagle” SPACs, around the same time. These included Diamond Eagle, the vehicle by which DraftKings went public.
It’s not the first significant suit involving Skillz. Previously, two players sued the company for fraud and negligence, claiming it had willfully turned a blind eye to cheating. Another lawsuit from investors was dismissed this summer.
The Complaint
The complaint alleges that the merger between Flying Eagle and Skillz “was hastily negotiated through a flawed and unfair process and based on severely misleading disclosures.”
The class of plaintiffs could opt out of the merger before it concluded. However, the complaint alleges that they did not receive the necessary information to make such a decision on an informed basis.
The complaint argues that the defendants stood to profit significantly from the deal even if there was no value in it for other stakeholders. The plaintiffs say that Eagle Equity Partners went through with the merger “even as poor of a deal as it was” out of self-interest.
A Piece of the Pie
The complaint specifies that the Defendants received 17.25 million Class B Founders’ shares for roughly $0.002 per share. When the initial public offering (IPO) took place in March 2020, those shares sold for $10 each. The defendants then purportedly sold 69 million shares, generating $690 million in proceeds.
Like many others, this SPAC deal created the obligation to consummate a deal within 24 months of the IPO. Had it failed to do so, the Founders’ shares and connected warrants would have been worthless.
A Strong Incentive?
The terms of such deals create a powerful incentive for those controlling the SPAC to close a deal. In principle, this is for the good of the investors, who don’t want their money tied up in a SPAC that never buys anything.
In this case, however, the plaintiffs argue that it incentivized the defendants “to convince Class A investors to vote in favor of the merger regardless of how illogical it may be.”
Investors had the choice of accepting the proposed merger or voting against it. They would have received back their $10-per-share investment, plus interest, if they rejected it. The complaint alleges that the defendants withheld or misrepresented information that might have caused the investors to take that route.
In hindsight, $10 plus interest would have been a good deal. The share price for Skillz has been on the decline since it went public and has been hovering around $1 since late September.
Unfinished Technology
The complaint lays out a timeline of events that allegedly shows that the defendants breached their duties to shareholders. Unfortunately, the copy of the complaint that Bonus obtained contains portions that have been redacted. As a result, some details of what allegedly took place are incomplete.
The unredacted portions of the suit include allegations that Skillz’s valuation was partly based on certain critical technology. That was purportedly still in development at the time of the merger rather than fully operational.
The Key Claims
Despite the redactions, the gist of the suit is clear.
The first three counts claim that the defendants have breached their fiduciary duty to the class of plaintiffs. The complaint states:
For their own personal benefit and in breach of their fiduciary duties, the Controller Defendants caused the Company to enter into the Merger. The Controller Defendants breached their fiduciary duties owed to the Company by, inter alia, engaging in an unfair process which resulted in the Controller Defendants receiving unique benefits in the form of Founder Shares.
The claim argues that the shareholders were harmed because they did not receive a fair price at the time of the merger. Furthermore, the defendants allegedly failed to provide shareholders with the information necessary to make an informed decision about the right of redemption.
The fourth count of the complaint claims that the deal has unjustly enriched the defendants. That was due to their redemption of the Founder’s shares. The plaintiffs argue that “[i]t would be unconscionable” to allow the defendants to retain their profits from the merger.
What do the Plaintiffs Want?
The plaintiffs are asking for a list of things. Most importantly, they are seeking findings that the defendants breached their fiduciary duties to stockholders and that the stockholders did not receive the information necessary to make an informed decision.
The complaint does not name specific damages. Instead, it proposes that the court determine an appropriate amount at trial. At the same time, it asks for reasonable costs and any other relief the court deems just.
A Long Road Ahead
Litigation is a slow process. Class action suits like this one are typically even slower than other types. As a result, we’re likely quite a long way from a resolution.
One important thing to remember when considering a complaint is that it only presents the plaintiff’s version of the facts.
The next thing to watch for in this suit is for the defendants to file a response. They will presumably attempt to refute many of the plaintiffs’ claims. While the claims in the complaint are significant, the burden remains on the plaintiffs to prove them in court.
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