Disney has acquired most of Character.AI's technology and staff through a bankruptcy deal, avoiding its legal liabilities. The deal includes a $5.5 million payment and a potential $12.5 million closing payment.
The deal involves two interrelated transactions—one before Character.AI declared bankruptcy, and one after. As part of the first transaction, which occurred in September, Disney paid the startup $5.5 million, along with a refundable "good faith deposit" of $2 million.
Disney also hired the "majority" of Character.AI’s employees, including the CEO, and agreed that it would let some of the now-Disney employees help keep Character.AI operational for five months.
Through the bankruptcy proceedings, Disney hopes to secure a perpetual, worldwide, nonexclusive license for a huge range of Character.AI’s code, documentation, frameworks, tools, and "other artifacts," including those produced for its trust and safety moderation stack, training infrastructure, and age-prediction technology.
The list of IP included in the filings does not include users’ data (which can get additional protections in bankruptcy proceedings) or Character.AI’s website. That license will be auctioned off in the coming months.
"There’s decades of corporate law that developed to deal with the problem of a buyer who always wants to take on all the assets and never wants to take on any of the liability," said John Newman, a law professor at the University of Memphis School of Law and a former deputy director of the Federal Trade Commission’s Bureau of Competition.
But the Disney-Character.AI deal is extremely unusual and structured in a way, he said, that "all those corporate law safeguards really weren’t built to guard against."
The move appears to be a new twist on what some have dubbed a "reverse acquihire," a process in which a buyer carefully orchestrates a succession of deals with a target company, usually in an effort to hire key employees and obtain expansive license to use and build on the target company’s unique technology.
Stripped of its employees, the target becomes a husk of itself.
Companies often take the position that reverse acquihires are not actual mergers, and that they do not have to notify federal antitrust regulators about those deals as they would otherwise be required to by law.
Disney prepared a draft of a court order referred to as the "363 Free and Clear Order" in the filings, a version of which would be approved by the court at or before closing, that would clarify that this process should not be viewed as a merger of the two companies and that Character.AI would remain responsible for "any liability or other obligation" it might have, including any legal claims against it.
Disney did not say whether the deal was contingent on the startup declaring bankruptcy, and the outcome of the bankruptcy proceedings remains uncertain.
Source: arstechnica
