Conflicts after a takeover: lessons from the Subnautica 2–Krafton dispute

The international gaming industry is currently embroiled in a legal drama that highlights the complexity of conflicts following a company takeover. The dispute between the former owners of Californian game developer Unknown Worlds, creator of the hugely popular survival game Subnautica, and Korean publisher Krafton Inc. centers on a $250 million earn-out.

In this article, I will briefly explain the nature of this dispute and why learning from the experience of the parties involved could also be important for you.

Relatively high price

This amount represents no less than a third of the total deal value of $750 million, of which $500 million was paid immediately upon acquisition in 2021. Despite the resounding success of Subnautica, the amounts of $500 million and $750 million are considered high.

Subnautica is a so-called indie title, cheaper and smaller in scale compared to AAA (triple A) games such as GTA and FIFA. Think arthouse film versus Hollywood. The revenue (not the profit) generated by Subnautica (1) up to the deal date was probably closer to $100 million than the $500 million that was paid. Apparently, Krafton saw great potential for growth.

Core of the dispute

When the acquisition was agreed, it was agreed that if Subnautica 2 achieved certain revenue targets in 2025, Krafton would pay an additional $250 million. The former CEO and founders claim that Krafton deliberately delayed the release and fired them to avoid this payment.

According to them, the project was on track until early 2025 and even seemed to be performing better than expected. It was precisely this prospect that prompted Krafton to delay the game and look for ways to intervene in the development schedule.

Krafton denies this and attributes the layoffs and delay to the former owners’ poor performance. As the new owner of Unknown Worlds’ shares, Krafton has power within the entity and was able to use that power to carry out the layoffs and delay the game.

Complaint by sellers

The former shareholders responded by filing a lawsuit in the competent court in Delaware. In the complaint (read in full via this link) in this case, the former shareholders allege that Krafton went much further than simply delaying the release. According to the plaintiffs, this involved a coordinated series of obstructive actions: withdrawing marketing materials, restricting access to crucial development tools and analytics, withdrawing internal support, and blocking essential resources such as server capacity.

These steps were allegedly taken deliberately to make the agreed revenue targets unachievable. The consequences went beyond the founders: dozens of employees who were to receive part of the bonus also saw their interests harmed. This underscores that earn-out disputes often have not only financial consequences, but also affect motivation, reputation, and internal relationships within an organization.

Earn-out clauses: complex and strategic

Earn-outs are a commonly used tool in M&A transactions to bridge the gap between the seller’s and buyer’s valuation. Buyers often want to ensure a stable transition and want to make use of the founders and selling shareholders.

The earn-out is then a logical and effective means of motivating the sellers to remain committed to the success of the company. With an earn-out, part of the purchase price is deferred and only paid out once predetermined performance criteria have been met, such as turnover, EBITDA, or specific development milestones.

Although earn-outs can bring parties closer together in negotiations, they also create tension: the seller has an interest in maximizing performance within the earn-out period, while the buyer is in control. The buyer may then be tempted to temporarily sabotage the business (or present it in a worse light) in order to reduce the earn-out.

Earn-outs in practice, tight contracts

In transactions of this size, earn-out clauses are also negotiated in detail for this reason. Important elements include: the exact measurement criteria, the buyer’s influence on performance, obligations to use ‘commercially reasonable’ or ‘best efforts’, prohibited acts that negatively affect performance, and dispute resolution mechanisms.

Both sides were represented by top lawyers – Fenwick & West for Unknown Worlds and Kirkland & Ellis for Krafton – making it unlikely that either party could unilaterally change the earn-out terms without a compelling contractual basis.

Our expertise in structuring earn-outs

At Fruytier Lawyers in Business, we have an experienced M&A department that not only acts in disputes over earn-outs, but can also structure them from the outset in such a way as to minimize risks.

We ensure clear definitions, safeguards against strategic influence, transparent reporting obligations, and effective sanctions in the event of breach of contract. This careful contractual embedding is crucial to prevent parties from ending up in costly and lengthy proceedings after the acquisition.

Evidence in the Netherlands: new opportunities

In addition to the text of the earn-out provision, evidence can play an important role. Often, the selling shareholder and earn-out beneficiary (especially after dismissal) have only limited access to evidence.

We previously wrote about the reform of Dutch evidence law. This now offers broader possibilities for obtaining crucial evidence, such as (digital) seizure of evidence or a claim for access to the other party’s internal documents.

Where a lack of information used to block a case, these instruments can often be used to build a strong case. This is often decisive in earn-out disputes, because internal figures, emails, and reports can reveal the real motive behind decisions.

Earn-out issues? Call us

If you are involved in a dispute in the aftermath of an acquisition – for example, about an earn-out, bonus scheme, or performance agreement – or if you are considering an acquisition that includes an earn-out, it is wise to seek legal advice in good time. We will help you analyze your position, avoid pitfalls, and vigorously enforce your rights. Even if you are unsure and do not have the right information to decide whether you have a claim, it is advisable to take action. With the

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