Chancery Finds Reasons to Fire Founders for Cause Were Pretextual and Motivated by Intent to Avoid Earnout

Fortis Advisors, LLC v. Krafton, Inc., 354 A.3d 906 (Del. Ch. Mar. 16, 2026)

By: Barnaby Grzaslewicz, Melissa Lagoumis, and Tyler O'Connell

Plaintiff, as representative of the former stockholders of an acquired video-game studio, sued the acquirer for breach of the parties’ purchase agreement. That agreement permitted the founders to retain “operational control” of the company “in all material respects,” and it entitled them to a significant earnout payment tied to a future game release.  Motivated by a belief that it had overpaid, the acquirer’s CEO consulted ChatGPT to devise a “takeover” strategy to obtain operational control, and then later deleted the chat logs.  The acquirer then proceeded with a plan to obtain operational control, which involved locking the studio out of its publishing platform and terminating the founders for cause.

Following an expedited trial on the plaintiff’s specific performance claim, the Court of Chancery reasoned that the acquirer’s justifications for the founders’ terminations changed over time. Initially it claimed the terminations were due to the founders’ intent to prematurely launch the game. During the litigation, it pivoted to rely on the founders’ changes in roles throughout the time period and their data downloads. The Court evaluated both the “mend-the-hold” doctrine and the “after-acquired-evidence” doctrine to evaluate the purported justifications. The Court found the shifting, litigation-driven testimony of the acquirer’s executives failed to establish the founders were terminated for “Cause”. Among other things, the Court found that an acquirer facing a nine-figure earnout it wished to avoid had searched for a pretext.  The Court reasoned that equity would not regard post hoc justifications where the real reason for termination lay elsewhere.

Because the founders were not terminated for Cause, they retained the right under the purchase agreement to have “operational control” of the company “in all material respects”.  Accordingly, the Court of Chancery awarded specific performance, reinstating the former CEO with full operational authority and equitably extending the earnout period by the duration of the ouster.