Krafton's Desperate ChatGPT Defense Backfired Spectacularly
Why It Matters
The ruling reinforces that precise earnout clauses and strict cause definitions are essential to protect sellers, and it warns acquirers that attempts to evade large contingent liabilities— even with AI‑generated strategies—will be closely examined by courts.
Key Takeaways
- •Earnout clause required operational control by three founders
- •Krafton attempted to fire founders to avoid $250M earnout
- •Delaware court ruled terminations lacked intentional dishonesty justification
- •Specific performance ordered reinstatement of CEO and earnout extension
- •Case highlights need for precise cause definitions in earnout deals
Summary
The Delaware Court of Chancery ruled on a high‑profile dispute between South Korean gaming giant Krafton (formerly Craftton) and Unknown Worlds Entertainment, the studio behind Subnautica. The case centered on a $500 million acquisition that included a $250 million earnout tied to revenue through the end of 2025, and a contractual guarantee that the three founding executives would retain operational control throughout the earnout period.
When Subnautica 2’s launch threatened to trigger the full earnout, Krafton’s leadership grew alarmed and, after consulting an internal AI project dubbed “ChatGPT Project X,” devised a strategy to terminate the founders on the grounds of “intentional dishonesty.” The company also seized the studio’s Steam publishing rights and issued a public statement to undermine the founders. Internal documents later revealed that the founders had already reduced their roles, disclosed salary cuts, and downloaded large volumes of data to protect it—actions the court found honest, not deceptive.
Vice Chancellor Will Morgan’s opinion emphasized that “intentional dishonesty” requires a conscious objective to deceive, a standard the plaintiffs failed to meet. The court rejected Krafton’s post‑termination justifications, applying Delaware’s “mend‑the‑hold” and “after‑acquired‑evidence” doctrines to bar the buyer from swapping causes after litigation began. As a remedy, the court ordered specific performance: reinstating CEO Ted Gil, restoring Steam access, and extending the earnout testing period by 258 days to ensure the sellers could still benefit.
The decision underscores the critical importance of narrowly drafted earnout protections and cause definitions in M&A agreements. Buyers cannot rely on operational control to sidestep large contingent payments, and courts will scrutinize any post‑hoc justifications. The case also serves as a cautionary tale about the misuse of AI tools in legal strategy, highlighting that sophisticated contractual safeguards, not clever tech, determine outcomes.
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