Disney found a way to buy Character.AI without buying its lawsuits

19 October 2026 4 min read هدهد تك | Hudhud Tech

This week, Character.AI declared bankruptcy, a move that some view as a sign of trouble for the chatbot platform. However, court documents reveal that this decision was part of a strategy allowing Disney to hire most of Character.AI’s staff, including its former CEO Karandeep Anand, and potentially acquire its technology while avoiding the startup’s legal liabilities.

Character.AI has been embroiled in multiple lawsuits regarding the safety of its chatbots and is under investigation by regulators globally. In a declaration filed during the bankruptcy, the newly appointed CEO stated that the bankruptcy aimed to achieve a “consensual resolution” with personal injury claimants and state investigators while maximizing asset value for shareholders.

The arrangement with Disney appears to be a form of a “reverse acquihire,” where a buyer orchestrates a series of deals to hire key employees and gain access to a target company’s technology, leaving the original company diminished.

Legal Maneuvering

Companies often argue that reverse acquihires do not constitute mergers, thus avoiding the need to notify federal antitrust regulators. This practice has drawn scrutiny from Congress, particularly in the AI sector.

Character.AI’s legal counsel indicated that Disney insisted on completing the deal through bankruptcy due to the startup’s dwindling cash reserves and significant litigation risks. A spokesperson for Character.AI directed inquiries to Disney regarding whether the deal was contingent on the bankruptcy declaration, but Disney declined to comment.

Transaction Details

According to court filings, the deal consists of two interconnected transactions—one executed before the bankruptcy and one afterward. In September, Disney paid Character.AI $5.5 million, along with a refundable $2 million deposit. Disney also hired the majority of Character.AI’s employees and agreed to allow some of them to assist in keeping Character.AI operational for five months.

Character.AI filed for Chapter 11 bankruptcy on October 12. Through these proceedings, Disney aims to secure a perpetual, worldwide, nonexclusive license for a wide array of Character.AI’s technology, including its trust and safety moderation tools and age-prediction technology. Notably, the license does not include user data or Character.AI’s website.

This license will be auctioned in the coming months. If Disney wins the bid, it will pay an additional $12.5 million to Character.AI. If not, the company will receive its $2 million deposit back along with a breakup fee.

Concerns Over Employee Transition

To maintain a competitive bidding process, Disney has agreed to allow the winning bidder to interview up to 80% of the employees it has hired from Character.AI. However, experts express concerns that transferring employees between companies in such a short time frame may not be feasible, and the current deal may be difficult to reverse.

Disney has also prepared a draft court order, known as the “363 Free and Clear Order,” which would clarify that this arrangement should not be viewed as a merger and that Character.AI will remain liable for any obligations, including legal claims.

A spokesperson for Character.AI stated they could not speculate on the bankruptcy proceedings’ outcome and referred inquiries to the court docket.

Legal experts note that while corporate law has developed to address buyers wanting to acquire assets without assuming liabilities, the Disney-Character.AI deal is structured in a way that circumvents traditional safeguards.

Previous Deals

This is not Character.AI’s first experience with a reverse acquihire. In August 2024, Google reportedly paid $2.7 billion to license Character.AI’s technology while hiring some of its founders and research team members. However, most of Character.AI’s employees remained with the company.

In subsequent years, both Google and Character.AI faced lawsuits, including one involving a tragic case where a teenager committed suicide after interacting with a Character.AI chatbot. Google contended it was not liable since it was a separate entity at the time of the incident, but the court did not find this argument convincing.