PENN Entertainment’s annual shareholder meeting on Tuesday saw the expected election of two new board members, Johnny Hartnett and Carlos Ruisanchez, additions sought by major shareholder HG Vora Capital Management. However, the meeting notably failed to resolve a key sticking point in the contentious dispute over the future composition of the board: the nomination of a third independent director proposed by HG Vora, William Clifford.

The brief 10-minute, 30-second meeting concluded with PENN CEO Jay Snowden announcing the election of Hartnett and Ruisanchez based on preliminary vote results. Yet, without a resolution to Clifford’s nomination, the meeting ended on an anti-climactic note. With a court hearing in HG Vora’s lawsuit against PENN over board seats approaching next month, the meeting reportedly generated more questions than answers.

PENN Deems Clifford’s Nomination ‘Out of Order’

Representing New York-headquartered hedge fund HG Vora, Mandy Lamb formally put forth Clifford’s nomination at Tuesday’s meeting. William Clifford has extensive experience with PENN, having served as the company’s chief financial officer for nearly 13 years before his departure in November 2013, seven years prior to Snowden’s appointment as CEO, to join Gaming Leisure and Properties.

However, CEO Jay Snowden abruptly dismissed Lamb’s proposal, immediately quashing any possibility for the election of a third director. Snowden stated that, pursuant to PENN company bylaws, the board had set the number of Class II directors at two, deeming a proposal to nominate a third director as “out of order” and impermissible.

This proxy battle over board composition has been the subject of an intense, months-long dispute between PENN and HG Vora. Clifford had reportedly interviewed with PENN for a position on the board in 2020. PENN has indicated that it still holds some of the same concerns regarding Clifford’s expertise in digital gambling that it raised five years ago. In a May letter to shareholders, PENN asserted that Clifford lacked digital gaming and online sports betting experience, areas the company considers “essential to the future” of its business.

Federal Lawsuit Over Board Seats

In May, HG Vora filed a federal lawsuit against PENN in the Eastern Pennsylvania District Court, accusing the company of violating Pennsylvania Business Corporation law and breaching its fiduciary duty by reportedly reducing the number of seats available on the board. In response, PENN filed a motion to stay, urging a Pennsylvania court to temporarily halt legal proceedings. PENN argues that the merits of HG Vora’s claim do not “constitute good cause” and that speculation about a future board action cannot be a basis for the lawsuit, contending that such a speculative matter is not even a dispute “ripe for adjudication” because it rests upon contingent future events that may not occur as anticipated, or may not occur at all.

PENN has also criticised HG Vora for what it described as a failure to abide by disclosure standards in other instances. The Securities and Exchange Commission (SEC) notably announced a $950,000 settlement with HG Vora in March 2024 for the fund’s failure to make timely ownership disclosures in the lead-up to a May 2022 acquisition bid for trucking fleet company Ryder System Inc. According to the SEC, HG Vora had disclosed owning 5.6 percent of Ryder’s common stock as of December 31, 2021, and certified that it did not have a control purpose. The fund subsequently built its position to a 9.9% stake in the first half of 2022 and formed a control purpose in May of that year. However, HG Vora reportedly did not make the proper disclosures until May 13, 2022, the same day it made a proposal to buy all of Ryder’s shares for $86 a share.

Proxy Battle Tactics and Institutional Ownership

Ahead of Tuesday’s meeting, HG Vora had urged shareholders to vote using its “Gold card,” which featured the nominations of all three directors, including William Clifford. By noon on Tuesday, more than 55% of all votes cast in the election were reportedly submitted on the gold cards, according to HG Vora. At the same time, HG Vora claimed that approximately five of PENN’s top 30 institutional investors voted on the company’s white proxy card, based on preliminary tabulations from the fund’s proxy solicitor, Okapi Partners.

Parag Vora, founder of HG Vora, stated, as reported by iGaming Times, that “Penn’s shareholders have voted overwhelmingly for genuine change, including for the election of William Clifford to the Board,” adding, “There can be no mistake about the mandate from PENN’s shareholders that the status quo is simply unacceptable.” This ongoing proxy battle is being watched closely as it could serve as a template for other major sportsbook operators on how to handle disputes from activist investors. In a memo issued by PENN Entertainment last month, the company claimed that HG Vora violated several institutional investor waivers in which they agreed to remain passive in their activities. Furthermore, PENN asserted that the fund pushed for governance changes despite express prohibitions on doing so by state gaming regulators. For its part, the hedge fund has retorted that it does not consider itself to be an activist investor. To buttress its point, attorneys for HG Vora wrote in the suit that the PENN nominations marked the first time in the 16-year history of the fund that it nominated director candidates for a company in its portfolio. Over that span, HG Vora has invested in hundreds of firms.

In a Schedule 13D filing with the SEC issued on December 28, 2023, HG Vora disclosed an ownership stake of approximately 9.6% of PENN’s outstanding common stock. By the following December (2024), representatives for the fund appeared in Massachusetts for a licensing hearing. According to the lawsuit, HG Vora contends that it sought an emergency hearing with the Massachusetts Gaming Commission (MGC) in order to obtain a gaming license or limited relief in Massachusetts to be in a position to nominate candidates to the PENN board. After the MGC denied HG Vora’s request for relief, the fund decided to shave its holdings in PENN for licensing purposes. Weeks later, HG Vora disclosed in a 13D filing that the fund reduced its ownership in the company’s common stock by approximately half to 7.25 million shares, representing an equity stake at the time of 4.8%. According to TipRanks.com, a leading market research website, there is considerable institutional ownership in PENN, with 86.7% of shares held by institutional investors. Beyond HG Vora, three others maintain a stake of at least 4%, led by iShares which tops the list at 11.4%.

Investment into Digital Gaming and Executive Compensation

Before PENN’s significant foray into online sports betting, HG Vora had reportedly lauded the company for its execution on the retail gaming side. The fund pointed to PENN’s financial results in the second quarter of 2015, a period where PENN delivered a strong balance sheet that was considered favourable by industry standards in terms of net debt leverage and interest coverage.

However, HG Vora’s criticism specifically centres on PENN’s spending habits in growing its digital gaming business. PENN is notably in the midst of a 10-year, $1.5 billion deal with the Walt Disney Co. that led to the launch of ESPN BET. This August 2023 partnership was announced on the same day that PENN controversially sold Barstool Sports back to Dave Portnoy for just $1, despite having reportedly spent in excess of $400 million to initially purchase Barstool. With the Disney deal, PENN essentially swapped Barstool Sportsbook for ESPN BET as its front-facing sportsbook brand. At the time, CEO Jay Snowden had ambitious targets to hit 20% online sports betting market share by the end of 2027. However, as the two-year anniversary of the deal nears, ESPN BET’s nationwide market share reportedly still hovers in the low single digits. The ESPN BET deal also came on the heels of PENN’s acquisition of Score Media and Gaming Inc. for approximately $2.1 billion. TheScore, a digital media, sports betting, and technology company, is one of the most popular sports apps in Canada. Canadian Gaming Association CEO Paul Burns, speaking on the sidelines of Wednesday’s Canadian Gaming Summit, stated, as reported by iGaming Times, that the gaming industry is “in a fascinating spot” and could serve as a template for other proxy battles. He also pointed out that the shift towards private equity investment in digital gaming could be interesting given the previously low appetite for sportsbook operators before PASPA. Some industry observers have questioned the cost of the Score acquisition, considering other subsequent deals such as Fanatics purchasing PointsBet’s US assets for $150 million. An industry tech consultant, speaking to iGaming Times on condition of anonymity this week, reportedly believes PENN could have waited for valuations to moderate, noting that “timing is half of everything.”

HG Vora estimates that PENN may spend at least $4 billion in its attempts to grow its online business. Both PENN and ESPN have an opt-out clause at the end of the third year, which CEO Snowden noted could be exercised by either company if they believe ESPN BET has underperformed. HG Vora has advised PENN to abandon its online division, though comments from Snowden on a recent earnings call suggest such a move appears to be a longshot at best. Snowden stated on PENN’s first-quarter earnings call, as reported by iGaming Times, that “Our digital business continues to evolve, supported by our well-known brand-differentiated IP, a fully owned technology stack and newly recruited, industry-leading talent,” adding, “We are nearing an inflection point.” PENN is also reportedly bullish on a new initiative that enables customers to link their accounts between ESPN BET and the main ESPN app. These features, combined with the rollout of ESPN’s new streaming service, have PENN Chief Technology Officer Aaron Laberge reportedly intrigued by the “bespoke integrations” he stated will be unique to the market. ESPN BET will reportedly look to the upcoming football season to provide customers with new personalised offerings that integrate their sports betting and fantasy sports selections with quick biometric authentication. Despite PENN’s financial challenges, it is important to remember that top gambling names are valued in many cases as Software-as-a-service (SaaS) stocks. Stocks in this class are typically long-dated, high-growth companies in the tech sector, similar to how Amazon took years to first turn a profit. Nevertheless, questions remain if investors such as HG Vora will exercise enough patience before attempting to execute major change.

Executive compensation is a major point of contention for HG Vora. The fund contends that in April 2021, PENN’s board awarded CEO Snowden supplemental equity grants worth nearly $200 million keyed to certain price targets. HG Vora believes these grants have incentivised PENN’s attempts to grow its digital business without exercising enough financial restraint. Snowden’s reported compensation of $26.7 million in 2024 ranked second-highest for CEOs among a group of approximately a dozen peer companies, according to HG Vora. PENN, however, disputed some of these findings, stating in a memo that Snowden’s realizable pay represents only 45% of his reported compensation and is in the bottom quartile relative to the company’s proxy peer group. PENN also noted that Snowden has only exercised expiring options and has not sold any stock since 2021, and that transactions were only conducted to cover the strike price and taxes.

Since 2020, PENN executives and directors have purchased over $5.7 million worth of stock in the open market using their personal funds, including $2.8 million by Snowden. Of this amount, Snowden reportedly made $1.5 million in purchases over the last 10 months. However, this insider activity may not be enough to assuage the fund. In 2024, the Institutional Shareholder Services reportedly gave PENN a score of -100 on its “Pay-For-Performance” evaluation, a comparatively low rating that reflects high pay for low performance, according to HG Vora. Meanwhile, share advisory service Glass, Lewis & Co. reportedly gave PENN low marks for compensation levels relative to performance against its peers. More than 60% of the votes cast in the election were reportedly against PENN’s Say-On-Pay proposal, according to HG Vora. PENN did not respond to a request for comment from iGaming Times regarding these latest developments.

A case management conference in HG Vora’s lawsuit against PENN is scheduled for July 10 at the federal courthouse in Easton, Pennsylvania. On Nasdaq, PENN closed Wednesday at $17.28 a share, up nearly 5% on the session, though its shares are sharply down since hitting an all-time high of $142 in March 2021.