How a Buyer’s AI Conversations Sank Its Earnout Avoidance Strategy

Key Takeaways

• AI chatbot advice used in M&A strategy became evidentiary proof
• Court extended earnout period by 258 days due to buyer breach
• Specific‑performance clause enforced, reinstating CEO and blocking board abuse
• “Cause” definition interpreted narrowly; termination notices must match grounds
• Mend‑the‑hold and after‑acquired evidence doctrines barred new justifications

Pulse Analysis

The Fortis Advisors v. Krafton case illustrates how earnout disputes can pivot on the precise wording of post‑closing covenants. Buyers often seek to retain strategic flexibility, but the EPA in this deal locked operational control with the target’s key executives for the earnout term. When Krafton attempted to replace those executives and lock the studio out of its publishing platform, the court found that the company violated the ordinary‑course‑of‑business covenant, demonstrating that courts will look beyond superficial changes and enforce the substance of the parties’ agreement. This reinforces the need for sellers to negotiate robust, enforceable operational rights and for buyers to respect those limits.

A striking aspect of the opinion is the court’s reliance on the buyer’s AI chatbot interactions. The AI‑generated strategy documents were admitted as evidence, showing that generative‑AI communications are not privileged and can expose a party’s intent. As AI tools become commonplace in deal‑making, counsel must treat such outputs like any other non‑confidential communication, instituting retention policies and considering the potential for discovery. The emerging legal landscape, including proposed legislation restricting AI from posing as legal counsel, signals that the intersection of AI and M&A will attract increasing regulatory scrutiny.

Practitioners should take away several drafting lessons. First, define "cause" narrowly and align termination notice language with those definitions, as courts will enforce the grounds cited at the time of dismissal. Second, embed specific‑performance clauses and consider injunctive relief to protect critical operational control during earnouts. Third, be prepared for equitable remedies such as earnout period extensions when a breach deprives sellers of the opportunity to achieve targets. By anticipating these risks, both buyers and sellers can structure deals that survive post‑closing challenges without costly litigation.