Delaware Court of Chancery reinstates seller CEO and extends earnout payment window, as buyer’s ChatGPT strategy fails

On March 16, 2026, the Delaware Court of Chancery in Fortis Advisors, LLC v. Krafton, Inc. issued a post-trial decision in which the court resolved in favor of plaintiff sellers the first phase of a dispute over a buyer’s extraordinary attempts to avoid having to pay a $250 million earnout it had agreed to pay in connection with an acquisition. Along the way, the court recounted how the defendant’s execution of a ChatGPT-generated corporate strategy, in its view, went awry. In addition, the court rejected defenses that key employees were properly terminated, reinstated one of the sellers as CEO, and extended the timeframe in which the earnout targets could be achieved.

Background facts

In 2021, South Korean video game publisher Krafton acquired the independent studio Unknown Worlds, known for the hit game Subnautica. The two companies executed an Equity Purchase Agreement (EPA) under which Unknown Worlds’ two co-founders and its president, Edward Gill, were designated “Key Employees” who, together with others, were eligible to share in a performance-based earnout payment of up to $250 million. The eligibility window for this payment was to run through December 31, 2025, with an option to extend through June 2026. If Unknown Worlds were to surpass $69.8 million in revenue in that time, Krafton would pay $3.12 for each additional dollar in revenue up to $250 million. The EPA granted the Key Employees “operational control” of the business “in all material respects,” so long as they operated in the “ordinary course of business” and in good faith and abided by certain negative covenants. The EPA also laid out the grounds for a Key Employee’s termination for cause, which was specifically negotiated to include a felony conviction, intentional wrongful disclosure of trade secrets or confidential information, willful gross misconduct, or an “intentional act of fraud or dishonesty.” 

Following the acquisition, the co-founders gradually stepped back from management of the company, turning everyday operations over to Gill, who assumed the role of CEO. Krafton senior management expressed support for these changes. As the Key Employees settled into their new roles, Unknown Worlds began making significant progress toward launching its widely anticipated sequel Subnautica 2, releasing a trailer and blog post teasing an early access launch in the second half of 2025. Krafton ran earnout projections showing that forecasted sales of the game would likely generate enough revenue to trigger an earnout payment of up to $242 million, and Krafton CEO Changhan Kim began confiding to colleagues that he felt the company had overpaid for Unknown Worlds and that the EPA represented a “bad deal.” Kim consulted Krafton’s legal team and main liaison to Unknown Worlds, who cautioned him that terminating Key Employees for cause would not terminate the earnout obligation. 

Kim then turned for advice to ChatGPT, which told him that the earnout would be difficult to cancel. Upon further prompting by Kim, it recommended forming a task force to either renegotiate the deal or execute a “Take Over” of Unknown Worlds. Kim asked ChatGPT to prepare a roadmap for a “No-Deal Scenario,” as well as responses to deliver to Key Employees, which Kim shared with another executive. Krafton subsequently executed this AI-generated strategy, beginning with a message to fans on Unknown Worlds’ website that the co-founders — much to their own surprise — were considering an invitation from Krafton to assume direction over Subnautica 2. Krafton then locked down publishing rights to prevent the game from launching and prepared legal materials to shift responsibilities among the Key Employees. After negotiations stalled in late June, Krafton terminated and replaced all three Key Employees, citing their intention to proceed with a premature release of the game. Having anticipated this, the Key Employees had begun mass downloads to their personal devices of Unknown Worlds’ data several weeks prior. They returned this data upon Krafton’s request after litigation commenced. 

Fortis Advisors, as the representative of Unknown Worlds’ former stockholders, filed suit against Krafton seeking damages and specific performance for breach of the EPA and the implied covenant of good faith and fair dealing. The Court of Chancery bifurcated the case into two phases, the first dealing with specific performance and operational control of Unknown Worlds, the second with the earnout and money damages. The court resolved the Phase 1 issues in its March 16 decision, concluding that Krafton breached the EPA by terminating the Key Employees without valid cause and by improperly seizing operational control of Unknown Worlds.

Opinion

The parties agreed that the only definition of “cause” under the EPA relevant to the employee terminations concerned an “intentional act of … dishonesty” by a Key Employee. Krafton argued that this phrase referred to a deliberate act, regardless of whether there was intent to deceive. The court held otherwise, clarifying that in order for conduct to constitute an “intentional” act of dishonesty, “the deception itself must be the actor’s specific aim.” Krafton advanced two theories here: first, that the Key Employees kept Krafton in the dark about the co-founders’ abandonment of their roles, and second, that the Key Employees improperly downloaded corporate data. The court found the role changes were transparent, citing public statements and direct communications to Krafton. The downloads, though wrongful behavior in the court’s eyes, did not meet the EPA’s high bar of specific intent to deceive. Notable here were the Key Employees’ decisions to keep the data confidential and return it when asked — “not the actions of thieves.” 

Even if these theories did pass muster, explained the court, Krafton did not cite them in its termination notices and only raised them later in the litigation. As a result, the justifications were insufficient under two Delaware doctrines designed to constrain pretextual termination: the mend-the-hold doctrine, which prevents an employer from relying on a ground for dismissal during litigation if it knew of but did not rely on that ground at the time of dismissal; and the after-acquired evidence doctrine, under which misconduct discovered after a termination can retroactively justify the termination only if the misconduct was so significant that the employer would have terminated the employee on those facts alone had it known of them. The court held that the mend-the-hold doctrine barred Krafton’s role-change justification, as it knew of but did not rely on those facts in its termination notices. The after-acquired evidence doctrine, meanwhile, was fatal to the data downloads justification. The evidence showed that Krafton’s CEO had expressed a strong desire to escape the earnout payment, sought and received a strategy from ChatGPT to achieve this, and ultimately pursued termination of Key Employees as part of that strategy. In the court’s words, the doctrine “does not grant an employer license to retroactively invent grounds for termination.”

Because Krafton did not terminate the Key Employees for cause, rightful control of Unknown Worlds’ operations belonged to them unless Krafton could show that it had other grounds to take control. The court rejected Krafton’s arguments that the Key Employees’ role changes, particularly the co-founders’ decisions to dial back their responsibilities, violated the EPA’s ordinary course covenant, its other negative covenants and the co-founders’ good faith obligation. While Krafton contended that the Key Employees ceased to operate in the ordinary course when they changed roles, the court held that ordinary course applies to company-level operations rather than to the duties of individual employees. The court also rejected Krafton’s arguments that the role changes breached two negative covenants that gave it the right to seize control of Unknown Worlds. One of these covenants barred the Key Employees from doing anything “reasonably likely to give rise to a claim of constructive termination/dismissal or a claim to resign for ‘good reason’” without Krafton’s consent. Krafton posited that the co-founders’ role changes met the definition of “Good Reason” in their contemporaneously executed employment agreements, thereby amounting to impermissible unilateral resignations for good reason. The court rejected this argument as conflating a right to resign and collect severance (the provision in the employment agreements provision) with a restriction on the Key Employees’ ability to terminate each other (the EPA provision). 

Krafton also asserted that the role changes necessitated the hiring and replacement of executives, which under the EPA required the parent company’s assent and which the co-founders neither sought nor obtained. The court dismissed this argument as meritless, pointing out that no such hires were in fact made and that the co-founders’ decision to assign leadership of specific projects to more junior employees was a “routine personnel decision” that did not require Krafton’s consent. Finally, Krafton contended that the Key Employees breached their good faith obligation by stepping back from their prior responsibilities; Krafton framed that decision as a ploy to “stay on the books” to collect the earnout payment. The court rejected this characterization, finding that full departures would have barely reduced the earnout payment and that nothing in the good faith requirement functioned as an employment lockup obliging the co-founders to stay in their previous roles. Accordingly, the court held that Krafton had not demonstrated grounds to remove operational control from the Key Employees. 

Relief

The court consequently reinstated Gill as CEO of Unknown Worlds, extended his period of operational control under the EPA by the amount of time that had elapsed between his wrongful termination and his restoration by the court, and declared Krafton’s July 1, 2025 board resolution ineffective to the extent it infringed on Gill’s right to exercise operational control. While declining to restore the Key Employees to Unknown World’s board, leaving in place Krafton’s replacement directors, it enjoined Krafton from circumventing the EPA or impeding Gill’s authority over the early access launch of Subnautica 2, ordering immediate restoration of Gill’s access to the release platform. Finally, to allow the sellers a “genuine opportunity” to achieve the earnout payment with Gill back at the helm, the court extended the base earnout testing period by the number of days between Gill’s termination and the court’s opinion — 258 days — to September 15, 2026, with Fortis retaining its contractual right to further extend the testing period to March 15, 2027. The court retained jurisdiction to enforce its order and to address matters set aside to Phase 2 of the litigation, including damages. 

Takeaways

This opinion colorfully highlights risks attendant to following a generative AI strategy without adequate legal oversight. Such a course may be particularly damaging when directors and officers are required to act in good faith and exercise business judgment. Here, the AI chats were not privileged; were subject to the same strictures, including preservation, as any other discovery material; and, according to the court, vividly underscored the defendant’s efforts to avoid its legal obligations. This episode may also serve to illustrate the well-documented tendency of AI models toward excessive agreeableness or sycophancy, affirming user beliefs and preferences far more readily than human beings. Separately, the court’s equitable extension of the earnout window to remedy Krafton’s breach of the EPA via its pretextual seizure of operational control from and termination of Unknown World’s key employees is also significant from a corporate deal perspective. This new period significantly outstrips the approximately six months remaining in the original earnout window at the time Krafton began interfering with the release of Subnautica 2. Finally, the court’s strict application of the mend-the-hold and after-acquired-evidence doctrines, likely influenced by its views of Krafton’s misconduct, reflects that companies may have difficulty upholding terminations based on after-the-fact justifications.