Legal Committee: Penn ‘Acted In Good Faith’ When It Cut Board Size

A report from a legal committee created by Penn Entertainment’s board has found that the operator of theScore Bet “acted in good faith” when it cut the number of directors on its board amid a proxy fight with an activist investor.

The committee report added that former Penn Chairman Peter Carlino claimed Parag Vora, the founder of activist investment fund HG Vora, told Carlino that he planned to sell Penn for parts.

HG Vora against Penn entering sports betting

The report, published last week, comes in a lawsuit in the U.S. District Court for the Eastern District of Pennsylvania about Penn’s actions in a dispute with shareholder HG Vora over the future of the company.

In particular, the lawsuit concerns Penn’s decision to shrink its board from nine members to eight after HG Vora had nominated three directors to the board. The change in size meant that only two directors could be elected, and the third — William Clifford — was not.

HG Vora said the reduction was specifically designed to limit its ability to have a say in how the company was run and therefore a breach of the Penn board’s fiduciary duty to shareholders. It sued on those grounds, noting that Penn could continue to make changes to the size of its board to prevent activist investors from exerting influence.

Broadly, the dispute between HG Vora and Penn has concerned the company’s steps into sports betting, which HG Vora sees as misjudged. HG Vora has hoped to see Penn focus more on its casino business and to return more money to shareholders.

As a result of the lawsuit, Penn’s board created a “special litigation committee” to examine whether Penn’s actions were justified. The committee was made up of two independent lawyers — Marc Sonnenfeld and Richard Bazelon — who had worked on corporate governance and fiduciary duty cases.

The committee looked at board minutes, documents about board candidates, legal opinions, and communications between the board and HG Vora in order to make its report. It interviewed 13 people, mostly Penn executives and directors, and claims it attempted to interview Clifford and HG Vora representatives, but “could not secure participation from the requested individuals.”

The committee’s report maintains that Penn’s board took the correct decision in cutting the size of the board.

Pennsylvania corporate law a factor

“The Committee determined that the Board acted in good faith within its business judgment and in furtherance of what it believed was the best interests of PENN in its decision to eliminate the Board seat and reduce the overall size of the Board from nine to eight,” it said.

“A major consideration in the Board’s decision was the Board’s belief that, under the circumstances, it was necessary to avoid the Company’s exposure to potential regulatory risk, which could jeopardize its gaming licenses, its most important assets. 

“At all times, the Board acted with the advice of legal and gaming experts.”

The committee noted that if the case was based on the corporate laws of Delaware – where many companies are incorporated – the board’s actions may not have been justified, as it would have had to provide a “compelling reason” to make board changes amid a proxy fight.

“Pennsylvania corporate law is, however, different from Delaware law on this point,” the committee wrote. “Pennsylvania supports the application of the business judgment standard to a decision such as the one the Board made in these circumstances.”

Penn’s decision-making process

The report then shone some light on the meetings that led to the elimination of the seat. On April 25, the board held a meeting to discuss Vora’s three nominees, where Chief Compliance Officer Christopher Soriano warned that electing Clifford could create regulatory risks. 

This, the report said, was because the company had already vetted him and determined that he was unsuitable, and so his election would have been a direct action by HG Vora to influence the company against the board’s wishes. Penn argued that Clifford’s views on the gaming industry were “antiquated” and his skillset was “redundant.”

HG Vora holds most of its shares in Penn indirectly, a move that allows it to retain a large financial interest in Penn without the licensing requirements that would usually be expected of a large shareholder. In Soriano’s view, making a key decision based on the wishes of a company that did not hold these licenses — and against the wishes of the board itself — opened the company up to regulatory risk.

Soriano, the report said, added that regulators would expect Penn to take steps to avoid these risks.

The report claims that Penn’s board was also concerned about HG Vora’s plans for the company. 

“Notably, HG Vora’s founder and principal, Parag Vora, told Peter Carlino that he intended to take control of PENN, remove management and, in Mr. Carlino’s words, ‘sell PENN for parts,’ ” it said.

An HG Vora spokesperson did not respond to a request for comment on the claims in the report.

HG Vora hits back

However, HG Vora hit out at the report in a response to the court, arguing the committee “did not conduct a reasonable investigation and lacked a rational basis for its decision.”

It said the report was “biased” and failed to identify an “objective factual basis” for the claim that electing Clifford to the board would create a regulatory risk for the operator. It pointed out that, given his past role as Penn’s CFO, Clifford was already licensed in several states, and that his appointment would have to ultimately be approved by a majority of shareholders if he was put up for election.

“The Draft Report makes clear that there was nothing “independent” about the SLC or its process, including its formation and approach,” HG Vora wrote.

The court granted HG Vora’s motion for a status meeting to discuss the report further.

Penn shutters ESPN Bet

Penn took recent steps that appear to be in line with some of HG Vora’s demands. The operator ended its partnership with ESPN last month, earlier than the date of a break clause in the agreement between the two, and rebranded its ESPN Bet app to theScore Bet, which started Monday. It said it plans to focus more on online casino rather than sports betting, which would be in line with HG Vora’s goals for the company.

Alongside ending the ESPN deal, Penn also announced a $750 million share buyback — aligning with another HG Vora demand. Penn will buy back the shares between 2026 and 2028, returning more money to shareholders.