DraftKings goes public, but with concerns over corporate structure

Posted: April 23, 2020, 5:05 a.m.

Last update: April 23, 2020, 7:52 a.m.

On Thursday, investors in Diamond Eagle Acquisition Corp. (NASDAQ:DEAC) voted overwhelmingly in favor of a previously announced reverse merger with DraftKings and SBTech. This sets the stage for the combined entity to take on the name of the sports betting operator and tomorrow become a public company, trading on the NASDAQ stock exchange under the symbol “DKNG”.

DraftKings ready to trade
DraftKings founder Jason Robins is set to get rich from an IPO, but there are concerns about investor voting rights. (Photo: New York Times)

In a virtual meeting held earlier today, owners of 33.64 million DEAC shares voted in favor of the deal, while 12,367 expressed opposition. Nearly 108,000 shares were not voted on, according to a filing with the Securities and Exchange Commission (SEC).

The deal, announced last December, values ​​cash-losing DraftKings at $3.3 billion, putting the Daily Fantasy Sports (DFS) company in “unicorn” territory, a label reserved for companies that go public at valuations of $1 billion or more.

As initial public offering (IPO) activity declines this year due to the coronavirus pandemic, the combination of the U.S. sports betting boom and strong DraftKings brand recognition should facilitate strong demand for the offer. However, some market watchers are concerned about DraftKings’ corporate structure.

Power in the hands of the few

DraftKings is going public with what’s called a dual-class share structure, meaning that of the 2.1 billion shares issued, there will be two classifications.

Investors with DraftKings Class A – the shares that will be most widely available – get one vote per share on corporate matters. However, DraftKings’ Class B common stock carries 10 votes per share, according to the SEC filing. This allows insiders, namely founder Jason Robins, to retain significant control over the entity while preventing outsiders, such as activist investors, from wielding significant influence.

The dual-class share scheme is popular in Silicon Valley, where founders, including those of Google parent Alphabet (NASDAQ:GOOG) and Facebook (NASDAQ:FB) Mark Zuckerberg, seek to maintain control irreproachable on their “babies”. But this way of composing a society raises concerns about corporate governance.

We’ve seen the number of public companies shrink, which has negative effects on capital markets,” said Phil Bak, founder of Detroit-based ETFs Exponential, in an interview with Casino.org. “Seeing the creativity in the way companies join public markets is a good thing. Ultimately, it is up to investors to determine whether corporate governance is sufficient.

Last year, ride-sharing companies Uber Inc (NYSE:UBER) and Lyft Inc Inc (NASDAQ:LYFT) went public with multiple classes of shares. But the increased frequency of the methodology does not dispel criticism of it.

“Many investors and corporate governance experts are sounding the alarm about the growing prevalence of dual-class share structures, given the potential risks such ownership arrangements pose to common shareholders,” according to Harvard. “They argue that the gap between control and economic ownership reduces accountability to the economic owners of the firm, entrenches management, and distorts incentives..”

Another problem

Already struggling with a lack of profitability, DraftKings could face a tough first quarter as a public company on that front, as no US sports are currently taking place due to COVID-19.

Sports betting operators got some relief with the NFL Draft this week. NASCAR is slated to return next month, followed by the PGA Tour in June, both of which could bolster DraftKings revenue in its early days as a public company.

DraftKings operates sportsbooks in eight states, with Colorado set to increase that number to nine on May 1.