How Disney found a route to Character.AI without buying its lawsuits
Bankruptcy tied to Disney deal
Character.AI filed for Chapter 11 bankruptcy on October 12, after facing private lawsuits and regulatory investigations in several countries. Its newly appointed CEO said the process was intended to resolve claims and investigations while maximizing the value of the company’s assets for shareholders.
A filing by the company’s lawyers says Disney required the deal to be completed through bankruptcy proceedings, citing Character.AI’s shrinking cash reserves and litigation and regulatory risks. Disney declined to comment, and Character.AI referred questions about the bankruptcy condition to Disney.
Two linked transactions
The court filings describe two connected transactions, one before the bankruptcy filing and another afterward. In September, Disney paid Character.AI $5.5 million and made a separate, refundable $2 million good-faith deposit.
Disney also hired most of Character.AI’s employees, including former CEO Karandeep Anand. It agreed to let some of those employees help keep the startup operating for five months.
Technology license up for auction
Disney hopes to obtain a perpetual, worldwide, nonexclusive license covering a wide range of Character.AI technology and materials. The filings include code, documentation, tools and work related to moderation, training infrastructure and age prediction, but not user data or the company’s website.
The license will be auctioned in the coming months. If Disney is selected by Character.AI and a committee of unsecured creditors, and the court approves, Disney has agreed to make a further $12.5 million payment; otherwise, its deposit would be refunded and it would receive a breakup fee.
Questions over deal structure
The arrangement resembles a reverse acquihire, in which a buyer hires key workers and secures rights to a company’s technology, leaving the original business diminished. Such deals have become more common in the AI industry and have drawn criticism from Congress over whether they should be reported to federal antitrust regulators.
To preserve competition in the auction, Disney agreed to allow the winning bidder to interview and potentially offer jobs to as many as 80 percent of certain employees it hired from Character.AI. Experts have questioned whether transferring workers between companies within months is realistic and whether the arrangement could be readily undone.
Key points
- Disney hired most of Character.AI’s staff and paid the startup $5.5 million in September.
- The bankruptcy process could give Disney a broad, perpetual license to Character.AI technology.
- Character.AI is expected to retain responsibility for its legal and regulatory disputes.
- The technology license will be auctioned, with Disney offering another $12.5 million if it wins and receives court approval.