In a significant post-trial decision, the Delaware Court of Chancery addressed a dispute between Fortis Advisors LLC, representing Unknown Worlds Entertainment’s former shareholders, and Krafton, Inc., the global video game publisher that acquired the studio. The case centered on Krafton’s attempt to terminate the founders and CEO and seize operational control, particularly as the Subnautica 2 release approached. The opinion provides important guidance on drafting and enforcing tightly drafted “for cause” definitions for key employees and the limits of post-closing “takeover” tactics.
The court found that Krafton breached the Equity Purchase Agreement (EPA) by terminating the three key employees (the founders and CEO) without contractual cause and by usurping their bargained-for operational control, including authority over Subnautica 2’s launch. As a remedy, the court reinstated the CEO with full operational authority and extended the base earnout period by the length of his wrongful ouster.
Background
Krafton’s 2021 acquisition of Unknown Worlds, the studio behind the hit game Subnautica, included significant contractual protections for the sellers. The $500 million upfront purchase price was supplemented by a potential $250 million earnout, based on “Group Company Revenue” during a testing period ending December 31, 2025, with the sellers having an option to extend to June 2026. The earnout formula was highly leveraged: for every dollar above a $69.8 million threshold, Krafton would owe $3.12, up to the cap. Central to the deal was the designation of founders Charlie Cleveland and Max McGuire and President/CEO Edward (Ted) Gill as “Key Employees.” As long as any Key Employee remained employed, they were guaranteed operational control of Unknown Worlds in all material respects, including authority over the product roadmap, launch, planning, partnering, budgeting, and employee matters. This control was conditioned on running the business in the ordinary course, complying with certain negative covenants (such as requiring Krafton’s consent for major corporate actions), and exercising control reasonably, in good faith, and in compliance with law.
The EPA’s “Cause” standard for termination was narrowly negotiated, requiring an intentional act of fraud or dishonesty in connection with the Key Employee’s duties. Other grounds included conviction of a felony, willful gross misconduct, or intentional wrongful disclosure of trade secrets. The EPA did not require all Key Employees to remain employed; voluntary departures would simply reduce the earnout by $1 million per departing Key Employee.
After the acquisition, Unknown Worlds continued operating according to its established “Unknown Worlds way” defined as “a flat, remote organizational structure and a ‘community focused’ approach”. The founders, Cleveland and McGuire, focused on Moonbreaker, a digital miniatures game, while a separate team managed the Subnautica franchise. Gill oversaw all studio operations, including finance, HR, strategy, and integration with Krafton, later formally assuming the CEO title to align with Krafton’s corporate structure, though his day-to-day responsibilities remained unchanged.
Moonbreaker’s early access launch in 2022 did not meet commercial expectations, and by late 2023, Cleveland was experiencing severe burnout after prolonged efforts to support the project. He took an extended leave with Krafton’s knowledge and support. McGuire became dissatisfied with the people-management aspects of his Technical Director role and felt increasingly out of place as the organization scaled. Development of Subnautica 2 was led by a new team, with the founders in reduced, advisory roles. After Cleveland and McGuire helped re-orient the project with a new prototype, Gill testified that progress “completely took off.” In 2024, Cleveland returned from leave and publicly stated he was “no longer making video games,” instead working a few hours weekly on Subnautica-related film and television projects and mentoring the game team. McGuire transitioned to a “Special Projects Director” role, focusing on social impact and neurodiversity initiatives, including research on Subnautica’s benefits for children with autism. With Krafton’s knowledge and support, these title changes were formalized: Cleveland became “Franchise Creative Director” with a transmedia focus, McGuire became “Special Projects Director,” and Gill transitioned to CEO. Both founders voluntarily reduced their salaries, and all changes were visible in Krafton’s HR and finance systems and discussed at senior levels.
Krafton’s Earnout Fears Spark Unusual AI-Driven Strategy
As the Subnautica 2 launch approached in spring 2025, Krafton’s internal projections indicated that a successful early access release could trigger a massive earnout payout, potentially up to the $250 million cap, even exceeding the studio’s then-calculated enterprise value to Krafton. This prospect alarmed Krafton’s CEO, CH Kim, who worried that paying the earnout would reflect poorly on his leadership and the deal itself. Kim expressed frustration internally about being “taken advantage of,” questioned the need to rush the launch, and after being cautioned by his in-house legal counsel that taking action towards the Key Employees could result in a lawsuit and reputational risk, turned to an AI chatbot (ChatGPT) for advice on handling the earnout and potentially orchestrating a “takeover” of the studio.
Initially, ChatGPT responded that the earnout would be difficult to cancel, however, after some coaxing, the AI suggested that Kim form an internal task force, dubbed “Project X,” to pursue either a negotiated earnout deal or a direct takeover of Unknown Worlds. The ChatGPT-assisted “Response Strategy to a ‘No-Deal’ Scenario” recommended aggressive tactics, including preemptive public messaging to shape fan and legal perceptions, locking down publishing rights and access to development pipelines, maintaining leverage over the earnout, and preparing systematic legal defenses (the court also took note that Kim admitted at trial that he had deleted specific relevant chat logs, raising questions about transparency and the risks of using AI in legal strategy).
Krafton’s subsequent actions reflected these strategies. On June 12, 2025, Krafton unilaterally posted a message on Unknown Worlds’ and Subnautica’s websites, purporting to “invite” Cleveland and McGuire to “once again helm the journey” of Subnautica 2, falsely suggesting they were considering the invitation. Unknown Worlds’ leadership had no involvement in this messaging, which the court viewed as part of a broader pressure campaign. Krafton also assumed control of the Steam publishing app, locking Unknown Worlds out of its own publishing systems and effectively blocking Subnautica 2’s early access release. Repeated requests from Gill to restore access were ignored, and a Krafton executive privately confirmed that Kim had “no intention” of returning control.
On the legal front, Krafton sent a letter to the founders demanding they revert to their prior roles and “rededicate themselves” to leading Subnautica 2’s development, and that Gill and the board enable these steps. Internally, Krafton began compiling evidence of the founders’ film activities and social media presence for potential litigation. Meanwhile, Krafton executives debated whether to remove some or all Key Employees. As Krafton tightened its grip on the studio’s platforms and signaled a potential takeover, the Key Employees began downloading substantial volumes of company data to personal devices in June 2025. Gill exported his corporate email, Google Drive, and Slack messages, triggering an internal security alert that he downplayed as “just backing a few things up.” McGuire downloaded nearly 100,000 files, including Moonbreaker and Subnautica documents, while Cleveland downloaded over 72,000 files, including proprietary source code and design materials, later exporting additional collaboration-platform boards and removing some personal files.
All corporate files (other than certain personal or prototype items) were ultimately returned to Unknown Worlds/Krafton after the terminations. The court found no evidence the data was misused, disclosed externally, sold, or used to set up a competing business. On July 1, 2025, Krafton sent termination notices to all three Key Employees, effective at month’s end. The stated reason was their alleged “intention to proceed with a premature release of Subnautica 2,” which Krafton claimed would cause “long-term damage” to the franchise and purportedly violated their Employment Agreements.
That same day, Krafton removed the Key Employees from Unknown Worlds’ board, installed Krafton-aligned directors, and caused the new board to adopt a resolution prohibiting Subnautica 2’s early access release without further review and majority board approval, directly undermining the Key Employees’ contractual authority over the game’s launch. Krafton then appointed the CEO of another subsidiary, who had never played a Subnautica game and had no early access development experience, as part-time CEO of Unknown Worlds. Fortis, acting as seller representative, filed suit in the Delaware Court of Chancery on July 10, 2025, alleging breach of the EPA (including the earnout and operational control provisions), breach of contract seeking specific performance, and breach of the implied covenant of good faith and fair dealing. The court expedited the specific performance and control issues (Phase One), reserving earnout and damages questions for a later phase.
Krafton’s Shifting Justifications Collapse Under Judicial Scrutiny
Initially, Krafton defended its actions by claiming it had “no choice” but to terminate the Key Employees due to an “unprepared” Subnautica 2 release. However, during discovery and at trial, Krafton shifted its justification, arguing instead that the founders had effectively “semi-retired” and abandoned their roles (with Gill allegedly concealing this), and that the late-June data downloads constituted termination grounds. The court’s analysis began with a close reading of the EPA’s “Cause” definition, particularly the “intentional act of dishonesty” requirement. The court held that, under Delaware law, dishonesty implies a conscious objective to mislead and that mere inaccuracies or unauthorized conduct are insufficient. The modifier “intentional” required Krafton to show the Key Employees acted with specific purpose to deceive, and the definition had to be read in context of other serious termination grounds, such as fraud or gross misconduct. The court found the founders’ role and salary changes were not dishonest. Cleveland’s move from day-to-day game development to Subnautica film projects, and McGuire’s shift to special projects and social impact work, were broadly disclosed and accepted by Krafton both internally, in HR and finance systems, and publicly. Krafton’s own communications acknowledged and even contemplated officially recognizing Cleveland’s film work as a strategic initiative. The court rejected any claim that the founders’ changed duties were concealed or misrepresented.
As for the data downloads, the court found that while mass extractions of corporate data to personal devices were improper from an IT or compliance perspective, they were not dishonest within the contract’s meaning. The court credited testimony that the downloads were undertaken in good faith as defensive measures anticipating a hostile takeover and possible lockout, not to steal or misuse intellectual property. The files were kept confidential and returned after termination, and the court noted that “these are not the actions of thieves.” Gill’s incomplete explanation to an operations manager saying he was “just backing a few things up” was evasive but did not amount to intentional deceit.
Because Krafton changed its termination justification during litigation, the court applied two important legal doctrines. First, under the “mend-the-hold” doctrine, an employer who terminates on specified grounds cannot later shift to different justifications it knew but did not rely on at the time. Since Krafton knew of the founders’ role and salary changes before July 1, 2025, but cited only “premature release” in the termination letters and answer, it was barred from later relying on those changes as Cause.
Second, the “after-acquired evidence” doctrine requires that for genuinely new information learned after termination (such as the data downloads’ full scope), the employer must show both that the conduct meets the contract’s Cause standard and that it would have terminated on that basis alone if known. The court found the data downloads did not satisfy the “intentional dishonesty” standard and that the record did not credibly establish Krafton would have fired the Key Employees solely for defensive copying, especially given its focus on avoiding the earnout.
Having found no valid Cause for termination, the court considered whether Krafton could nonetheless strip the Key Employees of operational control based on alleged EPA condition breaches. The court found that the “ordinary course of business” covenant required Unknown Worlds to operate consistent with its past custom and practice, assessed at the company and not the individual level. The studio continued running a remote, flat organization, developing and launching games via early access with community feedback, and delegating project leadership, as it had done previously. The planned early access launch of Subnautica 2 under Gallegos and Gill, with the founders in mentoring and transmedia roles, was consistent with this model. The court rejected the argument that the ordinary course required Cleveland and McGuire to remain primary creative and technical leads on every project.
Krafton also argued that the founders’ own salary and duty reductions created circumstances qualifying as “Good Reason” under their Employment Agreements, thus breaching the EPA’s bar on actions likely to give rise to such claims. The court found this argument misconceived: “Good Reason” provisions protected Key Employees against adverse employer actions, and the founders could not “constructively terminate” themselves by voluntarily changing their own roles. No such claims were asserted, and the provision was not triggered. Similarly, the court held that assigning Kalina and Gallegos to lead Subnautica 2 did not breach restrictions on hiring or replacing executive-level personnel, as these were not corporate executive offices and fell within the Key Employees’ reserved authority over employee matters.
Finally, the court found no bad faith in the founders’ transitions. Cleveland’s burnout and McGuire’s discomfort with management were candidly communicated to Krafton, and Gill’s efforts to retain the founders in revised roles were reasonable, especially since the EPA accounted for voluntary departures with only a modest earnout adjustment. There was no evidence the Key Employees sought to undermine Unknown Worlds or deprive Krafton of its bargain’s benefit. As to the data downloads, the court reiterated they were misguided but not undertaken in bad faith or with intent to harm the company.
Conclusion
This decision offers several critical lessons for acquirers and employers structuring post-closing arrangements. First, narrow for cause termination definitions will be strictly enforced, terms such as “intentional dishonesty” require proof of a conscious objective to deceive, not merely unauthorized or imprudent conduct. Second, buyers who acquiesce to known changes in executive roles or compensation may be barred from later citing those changes as termination grounds. Third, ordinary course covenants are assessed at the company level, not the individual employee level; founders stepping back while the business continues operating in its historical manner does not constitute a breach. Fourth, courts will scrutinize post-hoc rationalizations for termination with skepticism, particularly where the employer has a financial incentive (such as avoiding earnout payments) to manufacture cause. Fifth, specific performance clauses will be honored absent a compelling reason to disregard them, and courts may equitably extend earnout periods to remedy breaches that deprived sellers of their bargained-for runway. Finally, the case serves as a cautionary tale about documenting strategy discussions, including with AI tools, that may reveal improper motives if produced in litigation.
