Disney hires most of Character.AI's staff and bids for its tech through bankruptcy

Character.AI filed for chapter 11 bankruptcy on October 12, and court filings show the move was part of a two-stage deal with Disney. Disney has hired most of the startup's employees, including former CEO Karandeep Anand, who has become Disney's first chief technology officer. Disney is also seeking a license to much of Character.AI's technology, while the company left behind keeps its legal liabilities.

The first transaction took place in September. Disney paid Character.AI $5.5 million plus a refundable $2 million good faith deposit, hired the majority of its employees, and agreed to let some of those staff help keep Character.AI running for five months. A filing spotted by Bloomberg says Disney will make offers to at least 60 employees, at an estimated $60 million in annual compensation, and that the vast majority of those offered jobs accepted.

The second stage runs through bankruptcy. Disney wants a perpetual, worldwide, nonexclusive license to code, documentation, frameworks and tools, including the trust and safety moderation stack, training infrastructure and age-prediction technology. User data and the website are not on the list. If Disney wins the auction and courts approve, it will pay an extra $12.5 million at closing. If not, it gets its deposit back and a breakup fee.

Character.AI has faced private lawsuits over the safety of its chatbots, including claims that bots encouraged minors to self-harm, as well as investigations by regulators and a group of states. Its new CEO said in a declaration that bankruptcy aims at a consensual resolution with injury claimants and the states. Disney's proposed order would say the transaction is not a merger and that Character.AI stays responsible for any liability.

Ars Technica describes the structure as a variation on the reverse acquihire, in which a buyer takes the people and a broad technology license and leaves a shell behind. Such deals have grown common in AI, as with Google's 2024 arrangement with Character.AI. John Newman, a law professor and former FTC competition official, calls the deal extremely unusual and says corporate law safeguards were not built for it.

Experts quoted by Ars also doubt that employees could realistically move to another company within months, and say the arrangement cannot easily be unwound. Disney declined to comment, and Character.AI referred questions to the court docket.

The main open question is whether another bidder emerges, since Disney's offer is a stalking horse bid. The winning bidder may interview and potentially offer jobs to up to 80 percent of certain newly hired employees, with Disney choosing which ones.

Also to watch is whether the court approves the proposed order clearing the sale of liabilities, and how it treats the claims of injured users and the states.