DealLawyers.com Blog

Earlier this month, in Fortis Advisors LLC v. Krafton, Inc. (Del. Ch.; 3/26), the Chancery Court decided to extend an earnout period after finding that acquiror, Krafton, breached an equity purchase agreement by improperly seizing operational control of the target, Unknown Worlds Entertainment, after terminating key employees without valid “cause,” allegedly to avoid earnout payments. This Troutman Pepper alert gives some background:

[G]aming conglomerate Krafton, Inc. acquired Unknown Worlds Entertainment […] in October 2021 for $500 million upfront plus up to $250 million in contingent earnout payments tied to revenue performance through a defined testing period ending December 31, 2025. The equity purchase agreement (EPA) guaranteed that three “key employees,” co-founders […] would retain operational control of the studio during the earnout period and could only be terminated “for cause.” The EPA defined “cause” narrowly […] By spring 2025, as Subnautica 2 neared its planned early access launch, Krafton’s internal financial projections showed that a successful release would generate between $191.8 million and $242.2 million in earnout payments.

Krafton’s CEO, who had personally led the acquisition, became concerned that the payout would damage his reputation and consulted an AI chatbot for strategies to avoid the obligation. Krafton formed an internal task force, internally called Project X, to either negotiate a reduction of the earnout or execute a corporate takeover of the studio.

Krafton terminated all three key employees, citing a single reason: their “intention to proceed with a premature release of Subnautica 2.” Krafton then locked the studio out of its Steam publishing platform, blocked the game’s release, and replaced the key employees with Krafton representatives.

The court found that the terminations failed to meet the limited “cause” definition negotiated and memorialized in the purchase agreement, and that Krafton’s attempt to pivot justifications for the terminations during litigation was impermissible. It also disagreed that the founders’ decision to download company data to their personal devices breached the agreement, as the purchase agreement permitted the use of confidential information to monitor their rights.

But the remedies are what’s most notable here:

The court enforced the EPA’s express provision that irreparable harm would result from any breach and that the nonbreaching party was entitled to specific performance, and ordered the following:

– The court ordered the reinstatement of Gill as CEO of Unknown Worlds with full operational authority, effective immediately. The court declined to reinstate Cleveland and McGuire, finding that restoring Gill alone was sufficient to vindicate the sellers’ operational control rights under the EPA [. . .]

– The July 1, 2025, board resolution through which Krafton seized control of the studio was declared ineffective to the extent it infringed on Gill’s operational control right.

– The court equitably extended the earnout testing period by 258 days, the duration of Gill’s wrongful ouster, moving the base deadline from December 31, 2025, to September 15, 2026, with Fortis retaining its contractual right to further extend the period to March 15, 2027.

The alert shares a number of important takeaways from this case — including that the Chancery Court may order an equitable (and exact) extension of the earnout if there’s wrongful interference by the acquiror. It also points out that:

The acquiror’s use of an AI chatbot to develop strategies for avoiding the earnout, and the subsequent deletion of those logs-featured prominently in the court’s factual findings. Parties should treat AI-generated content as they would any other business communication: subject to discovery, preservation obligations, and potential adverse inference.

I love this case, not just because of the AI chatbot consultation, but because I have a lot of experience with Subnautica. I can’t say that about many games, but my husband is a big fan of all types of games. Since he buys very few video games and has a slight obsession with submarines, I’ve sat on the couch with Subnautica in the background many a time. It’s not my favorite background track — I find the music stressful. But submarines are probably the most common theme of the movies and video games playing in the background in our house. A few weeks ago, a neighbor texted me that my daughter said to her kids, “Thank goodness you were home. My parents are cleaning the house and watching something called Das Boot.” Apparently, they prefer Subnautica.

– Meredith Ervine