DraftKings Is Going Public, but With Concerns About Corporate Structure

On Thursday, Diamond Eagle Acquisition Corp. (NASDAQ:DEAC) investors overwhelmingly voted in favor of a previously announced reverse merger with DraftKings and SBTech that sets the stage for the combined entity to take the sportsbook operator’s name and become a public company tomorrow, trading on the NASDAQ Stock Exchange under the ticker “DKNG.”

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

At a virtual meeting held earlier today, owners of 33.64 million DEAC shares voted in favor of the deal while 12,367 voiced opposition to it. Nearly 108,000 shares weren’t voted, according to a filing with the Securities and Exchange Commission (SEC).

The deal, announced last December, values money-losing DraftKings at $3.3 billion, putting the daily fantasy sports (DFS) company in “unicorn” territory, a label reserved for companies going public at valuations of $1 billion or more.

While initial public offering (IPO) activity is waning this year because of the coronavirus pandemic, the combination of the US sports betting boom and DraftKings strong brand recognition is expect to facilitate robust demand for the offering. However, some market observers have concerns about DraftKings’ corporate structure.

Power in the Hands of a Few

DraftKings is becoming a public company with what’s known as a dual share class structure, meaning that of the 2.1 billion shares being floated, there will be two classifications.

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

The dual share class class gambit is popular in Silicon Valley where founders, including those of Google parent Alphabet (NASDAQ:GOOG) and Facebook’s (NASDAQ:FB) Mark Zuckerberg, look to keep iron clad control over their “babies,” but this way of composing a company elicits concerns about corporate governance.

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

Last year, ride-hailing firms Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) went public with multiple share classes, but the increased frequency of the methodology isn’t allaying criticism of it.

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

Another Issue

Already contending with a lack of profitability, DraftKings could face a rough first quarter as a public company on that front because no US sports are taking place at the moment due to COVID-19.

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

DraftKings operates sportsbooks in eight states with Colorado poised to boost that number to nine on May 1.

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