Disney asked Character.AI to go bankrupt to avoid legal baggage
What's the story
Disney reportedly required Character.AI to go through bankruptcy proceedings as part of a deal to acquire access to its technology and hire much of its staff, according to court filings reviewed by WIRED. The arrangement could allow Disney to obtain Character.AI's AI tools, including its safety and moderation technology, while leaving the start-up responsible for its existing lawsuits and regulatory investigations.
Deal details
'Consensual resolution' with personal injury claimants
Character.AI's newly appointed CEO revealed in a bankruptcy declaration that the aim was to achieve a "consensual resolution" with personal injury claimants and states investigating the company.
The deal with Disney is structured in such a way that whatever remains of Character. AI will be responsible for these legal battles, some of which are still ongoing.
Acquisition strategy
Deal is a 'reverse acquihire'
The deal between Disney and Character.AI is a classic example of a "reverse acquihire."
This process involves a buyer carefully orchestrating a series of transactions with a target company to hire key employees and obtain an extensive license to use and build on the target company's unique technology.
In this case, Disney has agreed to pay an additional $12.5 million as a closing payment if it wins the bid for Character.AI's technology stack in the upcoming auction.
Transaction structure
Two interrelated transactions
The deal between Disney and Character.AI consists of "two interrelated and integrated" transactions, one before the latter declared bankruptcy and one after.
In September, Disney paid Character. AI $5.5 million along with a refundable "good faith deposit" of $2 million.
It also hired most of Character.AI's employees, including its CEO, agreeing to let some now-Disney employees keep the company running for five months.
Tech acquisition
What does Disney hope to gain?
Through the bankruptcy proceedings, Disney hopes to acquire a perpetual, worldwide, nonexclusive license for a wide range of Character.AI's code, documentation, frameworks, tools, and "other artifacts."
These include those created for its trust and safety moderation stack, training infrastructure, and age-prediction technology.
The list of IP included in the filings does not cover user data (which can get additional protections in bankruptcy proceedings) or Character.AI's website.