Disney seeks legal shield through Character.AI bankruptcy

Disney has structured a deal with bankrupt chatbot startup Character.AI to acquire its technology and staff while avoiding legal liabilities. The bankruptcy, declared on October 12, 2026, allows Disney to secure a perpetual license to Character.AI’s code, frameworks, and tools, with an additional $12.5 million payment if it wins a bid. The deal, described as a 'reverse acquihire,' involves two transactions: a $5.5 million payment in September and a $2 million deposit, with Disney hiring most of Character.AI’s employees, including former CEO Karandeep Anand. John Newman, a law professor, criticized the deal as unusual, noting it bypasses corporate law safeguards meant to prevent buyers from avoiding liability. Character.AI’s bankruptcy filings reveal ongoing legal battles, including a multistate investigation involving 46 states, which could challenge the bankruptcy plan. Disney also agreed to let the winning bidder interview up to 80% of its newly hired employees, though experts doubt the feasibility of such rapid staff transitions. Character.AI, which faced lawsuits over chatbot safety, including claims of contributing to a teen’s suicide, continues to develop AI tools despite financial struggles. The company’s bankruptcy filing includes a '363 Free and Clear Order' to ensure it remains responsible for its liabilities, potentially setting up a legal showdown with the states.