The fight over the future direction of ESPN Bet owner Penn Entertainment is headed to federal court, as activist investor HG Vora launched a lawsuit against Penn Wednesday.
In a complaint submitted to the United States District Court for the Eastern District of Pennsylvania, HG Vora accuses Penn’s existing directors of “impermissibly placing their interests over those of PENN and its shareholders,” by shrinking the size of its board from nine seats to eight. The fund manager called for injunctive relief to force Penn to hold elections for all three proposed board members, as well as seeking damages at a jury trial.
In January, HG Vora proposed three new directors — Johnny Hartnett, Carlos Ruisanchez, and William Clifford — to stand for election to Penn’s board, amid dissatisfaction with the operator’s online strategy. In the lawsuit, HG Vora wrote that, in its 16-year history, “this was the first time that HG Vora had ever nominated a director candidate.” HG Vora has been publicly pressuring Penn to make changes since 2023.
As an investment advisor, HG Vora “beneficially owns” 7.25 million shares of Penn common stock. Only Blackrock and Vanguard own more shares.
Penn trying to eliminate shareholders’ voice?
In negotiations with HG Vora, Penn said it would nominate Hartnett and Ruisanchez, but eliminated a third seat that was up for reelection, previously belonging to former Quaker Chemical boss Ron Naples.
HG Vora claims that this action was “a blatant act of entrenchment designed to insulate the current board and management from shareholder influence.” It argues that the move violates directors’ fiduciary duty to shareholders.
“Those actions violated core shareholder rights by enabling defendants to avoid a contested election for the third open seat and entrench their control of the board,” HG Vora wrote in the complaint.
It also warned that, if left unchecked, Penn’s board change could open the door to further efforts to shut out dissatisfied shareholders.
“If Defendants get away with this Board Reduction Scheme, there could be no end to their manipulation of the election process,” Vora wrote, arguing that Penn could simply wait until the 2025 elections pass and then expand its board back to nine members, without shareholder input on the new director.
Underperformance with Snowden in charge
If HG Vora can gain a third seat on the Penn board, it could put further pressure on chief executive Jay Snowden, who oversaw Penn’s failed partnership with Barstool and the subsequent struggles of Barstool Sportsbook. Penn shuttered the brand about three years after launch, after signing a $1.5 billion deal with ESPN to create ESPN Bet, which went live in November 2023. The complaint noted that Penn has underperformed the S&P 500 by 121% during Snowden’s time in charge.
“Despite years of effort and investments totaling more than $3.4 billion, Penn’s foray into the online sports betting world has been a complete failure,” HG Vora wrote in the complaint.
In the filing, HG Vora accuses Snowden of “risky decision-making and mismanagement” and criticized his “grossly disproportionate” pay. In an April letter to shareholders, Penn revealed that Snowden’s $1.8 million salary stayed level from 2023 to 2024, but he was awarded $16.9 million in stock awards as compared to $3.4 million in 2023. His total compensation package last year was $26.7 million compared to $15.5 million in 2023.
Penn to report Q1 earnings Thursday
HG Vora notes that proxy advisor Institutional Shareholder Services gave Snowden the minimum possible score of -100 in its “pay for performance” ratings last year.
The complaint was filed a day before Penn’s first-quarter results, and Wall Street analysts project that company will reveal continued struggles in online sports betting.
Markets Wednesday did not seem concerned by the lawsuit. Penn shares were up as much as 3% to $15.96 on Wednesday. That would value the business at about $2.4 billion.
Penn did not immediately respond to email inquiries Wednesday.
