Delaware Court Of Chancery Orders Specific Performance And Extends Earnout Period 258 Days After Buyer’s Pretextual Takeover

Key Takeaways

• The Delaware Court of Chancery held that a buyer’s termination of “Key Employees” was pretextual, finding the buyer’s “true focus” was avoiding its earnout exposure rather than any legitimate operational concern.
• The court ordered specific performance rather than damages, reinstating the target’s CEO and equitably extending the earnout measurement period by 258 days, confirming that Delaware courts will restore the status quo when a buyer meaningfully disrupts the earnout framework.
• AI-generated strategy materials are discoverable. The buyer’s ChatGPT consultation supplied compelling evidence of premeditation and bad faith, even though the chat logs were deleted, because the outputs survived in other records. Read on for more information, as well as practical takeaways for drafting and negotiating earnout provisions.

In Fortis Advisors LLC v. Krafton, Inc., C.A. No. 2025-0805-LWW (Del. Ch. Mar. 16, 2026), the Delaware Court of Chancery found that a buyer’s termination of three contractually designated “Key Employees” was pretextual—part of a takeover campaign that the buyer’s CEO devised with the help of an artificial intelligence (AI) chatbot, whose outputs proved critical evidence at trial—and ordered specific performance, reinstating the target company’s CEO, restoring operational control, and equitably extending the earnout measurement period by 258 days.

The decision offers a striking example of a Delaware court deploying equitable remedies to protect earnout participants from buyer misconduct, and it underscores that pretextual interference with earnout-related governance protections carries serious consequences.

This content is Part Two of our earnout series. Part One addressed the Delaware Supreme Court’s January 2026 decision in Johnson & Johnson v. Fortis Advisors LLC, 352 A.3d 229 (Del. 2026), which upheld an extracontractual fraud claim in the earnout context and affirmed the enforceability of commercially reasonable efforts obligations and anti-avoidance clauses. Together, these decisions represent a clear trend: Delaware courts are willing to hold buyers accountable when their post-closing conduct is designed to avoid earnout obligations.

Case Overview: Fortis Advisors v. Krafton

In October 2021, Krafton, Inc.—the South Korean gaming conglomerate behind PUBG—acquired Unknown Worlds Entertainment, the studio responsible for the Subnautica franchise, pursuant to an Equity Purchase Agreement (EPA). The transaction included a $500 million upfront payment and up to $250 million in contingent earnout payments based on revenue generated through December 31, 2025, with an option to extend the measurement period to June 2026. The earnout formula was highly leveraged: once revenue surpassed a $69.8 million threshold, Krafton was obligated to pay $3.12 for every additional dollar of revenue, up to the $250 million cap.

To protect the earnout, the EPA granted three Key Employees—founders Charlie Cleveland and Max McGuire, along with CEO Ted Gill—“operational control” of Unknown Worlds “in all material respects,” including product roadmap, launch, planning, partnering, budgeting, and employee matters. Id. at 918. These control rights endured so long as any Key Employee remained employed. The EPA defined for-cause termination narrowly, limiting it to fraud, felony, gross misconduct, or wrongful disclosure of trade secrets. Each departing Key Employee would reduce qualifying revenue by only $1 million—a negligible financial consequence designed to preserve the earnout even if individual founders stepped back.

Background: How the Subnautica 2 Earnout Dispute Arose

After Krafton’s Moonbreaker (a new game developed by Unknown Worlds) failed commercially, founders Cleveland and McGuire transitioned to other projects. Cleveland shifted to film and transmedia work, including a Subnautica movie and other creative projects; McGuire moved to social impact and CSR initiatives. Both reduced their salaries from approximately $400,000 to $100,000. Critically, Krafton knew about and supported these transitions, which were entered into Krafton’s own HR systems. Gill assumed the CEO role and effectively ran day-to-day operations, while development of Subnautica 2 progressed well under studio leadership, targeting an August 2025 early access release.

Krafton’s internal financial projections showed that Subnautica 2 would easily trigger the full $250 million earnout (with a base case of $191.8 million and a best case of $242.2 million in revenue). Krafton’s CEO, Changhan Kim, feared a reputation as a “pushover” for paying the full earnout, and internally characterized the EPA as a “bad deal.” Id. at 926–27. Kim consulted ChatGPT to devise a “takeover” strategy to either negotiate a reduction in the earnout or seize control of the studio. Id. at 929. ChatGPT produced a “Response Strategy to a ‘No-Deal’ Scenario” that recommended “preemptive framing,” “securing control points,” locking down publishing rights, compiling “systematic materials for legal defense,” and pursuing a “two handed strategy.” Id. at 928. Kim then deleted the specific chat logs.

Krafton formed an internal task force, “Project X,” and proceeded to follow ChatGPT’s recommendations. It posted an unauthorized message on Unknown Worlds’ website falsely stating that the founders were considering returning; locked Unknown Worlds out of the Steam publishing platform; sent a “Legal Letter” demanding the founders resume their original roles; and, when negotiations stalled, terminated all three Key Employees on July 1, 2025. Id. at 930. The stated justification was an “intention to proceed with a premature release of Subnautica 2.” Id. at 929.

Delaware Court of Chancery Key Holdings

Terminations Were Not for “Cause” Under the Earnout Agreement

Vice Chancellor Will found that none of Krafton’s justifications for the terminations satisfied the EPA’s narrow for-cause standard. The court addressed each in turn:

Role Changes and Reduced Involvement. Krafton argued that the founders’ transitions to non-operational roles constituted “dishonesty” justifying for-cause termination. The court rejected this, finding that Cleveland and McGuire transparently communicated their role changes, that Krafton knew about and consented to the transitions, and that no deception occurred. The salary reductions were entered into Krafton’s own HR system.

Data Downloads. Krafton pointed to data downloads by the Key Employees as evidence of “intentional dishonesty.” Id. at 934–38. The court acknowledged the downloads were “misguided” but found they were defensive in nature—the Key Employees feared being locked out of systems (a fear that proved justified)—and that the data was kept confidential and promptly returned. Id. at 937. This did not rise to the level of “intentional dishonesty” required for cause. Id. at 937–38.

Game Readiness. The original termination letters cited an “intention to proceed with a premature release of Subnautica 2.” Id. at 929. Krafton dropped this argument during litigation.

Mend-the-Hold and After-Acquired Evidence Doctrines. The court applied the mend-the-hold doctrine to bar Krafton from shifting its justifications during litigation, and the after-acquired evidence doctrine to prevent Krafton from retroactively manufacturing “Cause” based on information developed after the termination decision had already been made. As the court stated: “This court of equity will not permit a party to use the after-acquired evidence doctrine to fabricate Cause where the evidence shows the termination decision was made for different reasons.” Id. at 942. Krafton’s “true focus” was “avoiding its financial exposure,” not any legitimate operational concern. Id. at 941.

Operational Control Rights Not Forfeited

Krafton also argued that the Key Employees had forfeited their contractual right to operational control by delegating responsibilities and reducing their involvement. The court disagreed on multiple grounds:

Ordinary Course Covenant. The court assessed the ordinary course covenant at the company level, not the individual level. Unknown Worlds continued operating in accordance with its established model—Subnautica 2 development proceeded on schedule under the same team structure the studio had used for prior titles (the founders had not led development of Below Zero either).

Schedule II Restrictions. The EPA’s Schedule II imposed specific restrictions on the studio’s operations. The court found no breach: there was no constructive termination and no unauthorized executive hiring.

Good Faith Obligation. The court held that the founders’ role transitions were transparent, not a scheme to undermine the agreement. The Key Employees did not breach any obligation of good faith in managing the studio’s operations.

Remedies: Specific Performance and a 258-Day Equitable Earnout Extension

Rather than awarding money damages, the court ordered specific performance—a remedy that illustrates the seriousness with which Delaware courts treat post-closing interference with earnout protections. The court:

• Reinstated Gill as CEO with full operational authority under Section 2.7(f) of the EPA. The court declined to restore Cleveland and McGuire to their peripheral roles, finding that Gill alone satisfied the contractual requirement that at least one Key Employee retain operational control.
• Equitably extended the earnout Testing Period by 258 days—the period of Gill’s wrongful ouster—establishing a new base deadline of September 15, 2026 (with Fortis retaining the right to further extend to March 15, 2027).
• Declared the July 1 board resolution ineffective to the extent it infringed on Gill’s operational control.
• Enjoined Krafton from circumventing Section 2.7(f), impeding the launch of Subnautica 2, or interfering with operational control, and ordered Krafton to immediately restore Steam platform access.

The ChatGPT Angle

One of the most unusual features of the case was the role of AI in the buyer’s strategy. Krafton’s CEO, Kim, consulted ChatGPT to develop a plan for wresting control of Unknown Worlds and avoiding the earnout obligation. The AI tool produced a detailed “Response Strategy” recommending preemptive public framing, securing publishing control points, building legal defense materials, and executing a “two handed strategy” of simultaneous negotiation and takeover preparation. Kim then deleted the specific chat logs—though the strategy’s outputs were preserved in other records.

The ChatGPT consultation proved devastating as evidence of premeditation and bad faith. When the AI advised that the earnout was “difficult to cancel,” Kim complained that the EPA was “a contract under which we can only be dragged around.” The sequence—AI consultation, task force formation, and step-by-step execution of the AI’s recommendations—provided the court with a clear roadmap of Krafton’s intent to manufacture pretexts for termination. Practitioners should advise clients that AI-generated strategies are discoverable in litigation and can powerfully establish state of mind.

Practical Takeaways for M&A Earnout Drafting and Negotiation

The decision carries significant implications for M&A practitioners:

• Narrow For-Cause Definitions Have Teeth. The court enforced the EPA’s for-cause termination standard strictly, rejecting Krafton’s attempts to stretch “dishonesty” and “gross misconduct” beyond their ordinary meanings. Sellers who negotiate narrow cause definitions can expect Delaware courts will not permit buyers to manufacture pretexts that fall outside the contractual language.
• Operational Control Clauses Are Enforceable. The court assessed operational control at the entity level and found that delegation to competent subordinates—consistent with past practice—did not forfeit contractual control rights. Buyers should not assume that a founder’s reduced day-to-day involvement automatically creates grounds for termination or triggers a loss of control.
• Specific Performance Is Available for Earnout Interference. The court’s decision to reinstate the CEO and equitably extend the earnout period—rather than attempting to calculate speculative damages—demonstrates that Delaware courts have the tools and apparent willingness to restore the status quo when a buyer’s misconduct disrupts the earnout framework. This may be a more effective remedy for sellers than damages in cases where the earnout period has not yet expired.
• Mend-the-Hold Constrains Post-Hoc Justifications. Buyers who shift their stated reasons for adverse action—particularly during litigation—risk having later justifications excluded under the mend-the-hold and after-acquired evidence doctrines. This decision reinforces that a buyer’s contemporaneous reasons for action will be the primary focus of judicial inquiry.
• AI-Generated Strategies Are Discoverable and Potentially Damaging. The use of ChatGPT provided compelling evidence of premeditation. Clients should understand that AI consultations—including deleted conversations whose outputs are preserved elsewhere—are part of the evidentiary record and can be used to establish intent and bad faith.
• Document Legitimate Business Rationale. As with Johnson & Johnson, this decision underscores that buyers must carefully document the legitimate business rationale for post-closing decisions that may affect earnout participants. Where the contemporaneous record reveals that a buyer’s primary motivation is avoiding earnout exposure, Delaware courts will not hesitate to intervene.

Settlement Update

In early July 2026, Krafton, Unknown Worlds, and the Key Employees announced a mutual settlement, agreeing to dismiss all pending legal proceedings. Under the settlement, the Unknown Worlds staff received their earnout bonuses. Ted Gill stepped down as CEO as part of the resolution, and Krafton confirmed that Unknown Worlds will continue leading development of Subnautica 2, with Krafton providing support. Subnautica 2 has since launched and achieved significant commercial success, validating the revenue projections that drove Krafton’s efforts to avoid the earnout.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.