Delaware Court Rules AI Chatbot Advice Cost Buyer $250 Million Earnout
A Delaware judge has ordered a South Korean gaming company to reinstate a studio's chief executive and extend the earnout measurement period by 258 days after finding that the company breached its acquisition agreement. The decision hinged partly on evidence that the buyer's CEO had consulted an AI chatbot for strategy on how to avoid paying $250 million in contingent earnout obligations.
The case, Fortis Advisors v. Krafton, decided March 16, 2026, involved Krafton's 2021 acquisition of Unknown Worlds Entertainment, the developer of the Subnautica gaming franchise. Krafton paid $500 million upfront and promised up to $250 million more based on post-closing revenue targets.
The Buyer's Strategy
By mid-2025, Subnautica 2 was tracking toward an August early access launch that internal projections suggested would trigger a $191.8 million to $242.2 million earnout payout. Krafton's CEO believed the deal was unfavorable and that paying the earnout would make him look like a "pushover."
After Krafton's legal team warned him that a for-cause termination wouldn't eliminate the earnout obligation, the CEO turned to an AI chatbot. The chatbot told him the earnout would be "difficult to cancel." The CEO then formed an internal task force called "Project X" to either renegotiate the earnout or execute a full takeover of the studio.
The chatbot provided a detailed "Response Strategy to a No-Deal Scenario" that included instructions to lock down the Target's publishing platform, control publishing rights, prepare legal defense materials, and apply both hardball pressure and softer retention incentives. The CEO later admitted at trial that he had deleted certain logs from the AI platform.
Krafton followed most of the chatbot's recommendations. It locked the studio out of its publishing platform, preventing release of Subnautica 2. It posted a false message claiming the founders were considering rejoining the project. On July 1, 2025, Krafton terminated the three key executives-the two co-founders and the CEO-citing their intention to prematurely release the game.
What the Court Found
Vice Chancellor Will rejected all of Krafton's justifications for the terminations. The acquisition agreement defined "Cause" narrowly: felonies, intentional fraud or dishonesty, gross misconduct, and wrongful disclosure of trade secrets or confidential information.
At trial, Krafton abandoned its original stated reason and offered two new theories. First, it claimed the founders had secretly entered semi-retirement and concealed their reduced roles. The court found this argument failed because Krafton had known about the founders' evolving responsibilities for over a year and had actively supported the changes. Krafton's own internal communications reflected its understanding of the salary reductions and scaled-back duties.
Second, Krafton argued that the executives' mass downloads of company data constituted grounds for termination. The court acknowledged the downloads were wrongful but found they were defensive measures taken in good faith to protect the studio's work in response to Krafton's escalating takeover. The executives kept the data confidential and returned it promptly after termination. "These are not the actions of thieves," the court wrote.
The court also applied two legal doctrines against Krafton. The "mend-the-hold" doctrine barred Krafton from citing justifications it had known about before the terminations but failed to include in the termination notices. The "after-acquired evidence" doctrine required Krafton to prove that later-discovered conduct was so severe it would have independently justified termination if known at the time.
Krafton failed both tests. The court held that the company lacked Cause to terminate the executives.
Operational Control and Remedy
The court separately found that Krafton's seizure of operational control violated the agreement. The acquisition agreement promised the key executives would retain operational control over product roadmap, launch timing, budgeting, and personnel decisions so long as any one of them remained employed.
The court rejected Krafton's argument that the founders' reduced involvement constituted a breach of the ordinary course covenant. It held that such covenants are assessed at the company level, not the individual employee level. The studio continued to design, develop, and prepare games using its established model.
Rather than simply restore the status quo, the court crafted a targeted remedy. It reinstated the Target's CEO with full operational authority and declared that Krafton's board resolution prohibiting release of Subnautica 2 was ineffective to the extent it infringed on the CEO's decision-making authority. Krafton was enjoined from using the board or any other corporate mechanism to circumvent the CEO's authority. The company was ordered to immediately restore the CEO's access to the publishing platform.
The court extended the earnout measurement period by 258 days-the exact duration of the CEO's wrongful ouster. The extension ensures the reinstatement remedy is not illusory; the executives need genuine time to achieve earnout targets.
What This Means for Deal Teams
AI communications are discoverable and may not be privileged. The court quoted extensively from the CEO's chatbot conversations and used them to establish the pretextual nature of Krafton's conduct. The CEO's admission that he deleted relevant logs may carry weight in the second phase of litigation over damages. Communications with AI platforms may be subject to discovery and used against the party that generated them. Deleting them can compound the problem.
Executives and counsel should treat AI communications with the same discipline applied to other non-privileged communications, including appropriate retention policies. The legal status of AI-generated communications is still evolving, and a proposed New York bill introduced in March 2026 would bar AI chatbots from posing as lawyers and give deceived users the right to sue.
Termination notices matter. The grounds cited in a termination notice are likely the grounds a company will be stuck with at trial. Krafton tried to substitute new justifications mid-litigation and failed. Acquirers should carefully consider whether their for-cause definitions are broad enough to cover realistic post-closing conduct and should understand the consequences of changing their stated rationale later.
Breaches during the earnout period carry hidden costs. The court demonstrated willingness to extend earnout measurement periods when a buyer's breach has deprived sellers of promised operational runway. For acquirers contemplating post-closing interventions, the cost of a breach includes not just lost litigation but also additional time on the earnout clock.
Specific performance clauses have real weight. Delaware courts enforce specific performance clauses unless the breaching party offers a persuasive, case-specific reason to override them. The court not only reinstated the CEO but issued broad injunctive relief preventing Krafton from using corporate mechanisms to circumvent the CEO's authority. For sellers, specific performance clauses are among the most valuable protections in earnout-heavy deals. For acquirers, the equitable remedies courts are willing to craft may extend well beyond simple reinstatement.
The second phase of the litigation remains pending, where the court will determine whether Krafton's actions actually impaired the earnout and what money damages are owed.
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