Character Technologies - Chapter 11 Bidding Procedures Summary

Bidding Procedures / Stalking Horse License Summary

Stalking Horse Bid

• Purchase price: $20 million in cash from Disney Worldwide Services, Inc. (or a designated affiliate). The price buys a perpetual, worldwide, non-exclusive license to the debtor's AI technology and patents, plus any unreleased claims the debtor holds against former employees who join Disney (together, the Disney Target Assets). It is payable as follows:
  • $5.5 million up-front payment, paid prepetition on Sept. 18, 2026 under an exclusivity and prepayment agreement, or EPA, and non-refundable in all circumstances;
  • $2 million refundable good-faith deposit, also paid on Sept. 18, 2026; and
  • $12.5 million in remaining cash consideration, due at closing.
• Outside the cash price, Disney agreed to hire a majority of the debtor's workforce, including its chief executive officer, which shifts those personnel costs away from the debtor. It is also providing transition services at no fee. Employee compensation, retention payments and equity incentives are paid by Disney directly to employees and are not consideration to the debtor.
• Disney assumes no liabilities.
• Disney is deemed a qualifying bidder and its agreement a qualifying bid. The bid sets a floor only for the Disney Target Assets, and prospective bidders may also pursue the debtor's other assets.
• The debtor is not seeking to release or allocate any sale proceeds without a further court order.

Parties

• Seller/licensor: Character Technologies, Inc., operator of the Character.AI platform.
• Stalking horse: Disney Worldwide Services, Inc., a Florida corporation, or one of its designated affiliates.
• Investment banker: Houlihan Lokey, retained in September 2026 to run the postpetition sale process.
• Insider considerations: the debtor says Disney is not an insider and has no agreements with current management. However, Disney hired the debtor's former CEO, who was an insider, along with most of the workforce. The debtor argues the business judgment standard should still apply for four reasons:
  • no common directors or controlling equity holders exist between Disney and the debtor;
  • the board's special transaction and restructuring committees, both made up solely of independent directors, led the deal and recommended board approval;
  • Disney does not control the debtor; and
  • no former insider had meaningful input into the case or the sale process.
• The proposed sale order would find that certain Disney employees were insiders of the debtor, because former debtor employees, including the former CEO, now work for Disney. It would also find that Disney was not an insider or affiliate immediately before closing.

Background and Sale Process

• Character Technologies runs Character.AI, an AI entertainment platform where users interact with fictional or imagined characters through chat, generated images, video and audio. The debtor says development costs, potential litigation-related liabilities and regulatory engagement left it unable to generate enough cash flow to support the business. It filed Chapter 11 in Delaware on Oct. 12, 2026 to pursue value-maximizing sales. If no higher or better offers emerge, or the Disney transaction is not approved, the platform will be wound down.
• The debtor began looking for strategic or financial partners more than a year before filing. In August 2025 it retained an investment banker, which approached approximately 28 mostly strategic and financial parties. Feedback was consistent: the product and engaged user base were impressive, but the litigation and regulatory overhang was too great. The outreach produced a single proposal, which was not considered actionable, and the banker's engagement ended in August 2026.
• By September 2026, a special transaction committee of independent directors was negotiating mainly with two interested parties. At the same time the company faced mounting employee attrition, an operational risk because the platform cannot run without key personnel monitoring user safety. The committee chose Disney's two-stage structure:
  • a prepetition stage that delivered immediate capital and moved employees to Disney, with transition services keeping them available to the debtor; and
  • a postpetition license sale.
  Disney required that the transaction be completed through a Chapter 11 sale process.
• The debtor and Disney had signed a mutual NDA on Aug. 19, 2026. On Sept. 18, 2026 the debtor signed the EPA and a transition services agreement, or TSA, with Disney. The EPA gave Disney exclusivity until the petition date, and that exclusivity ended on filing. The parties then signed an amended and restated TSA and the stalking horse transaction agreement, both dated Oct. 13, 2026, to carry out the postpetition stage.
• Houlihan populated a data room before filing and began circulating a teaser at filing. The proposed timeline gives about 38 days from the motion to the bid deadline. The debtor says the up-front payment gives it enough cash runway to market the assets, but its monthly burn and the Dec. 17, 2026 outside date require a timely sale. The debtor has asked that the bidding procedures be heard on 13 days' notice.

Disney Target Assets

• Disney is buying a license, not the business. The Disney Target Assets are a perpetual, worldwide, non-exclusive license to specified technology and patents, plus any unreleased claims the debtor holds against former employees who accept employment with Disney or its affiliates.
• Licensed technology: code repositories, documentation, frameworks, tools and other artifacts covering:
  • post-training, training recipes, training infrastructure, reward models, benchmarks and evaluation frameworks;
  • the model safety stack, including classifiers, RL safety adapters, the Guardian long-horizon safety monitoring system and the age-prediction model;
  • the inference stack and GPU cluster management, and the Lorebook and prompt management stack;
  • multimodal image and video generation, and the chat stack and chat styles framework;
  • trust and safety moderation, red teaming, security infrastructure, and data science and agentic pipelines; and
  • other technical materials reasonably necessary to use these and to develop future models.
• Licensed patents: issued patents and pending or unpublished applications covering audio turn understanding, character turn summaries, retraining of large language models, key value cache optimization for LLM inference, and meta agents that modify the behavior of LLM-based agents. The license also covers any other patents and applications the debtor owns at closing.
• Excluded from the license:
  • third-party technology;
  • trademarks and other brand elements;
  • domain names, social media accounts and website content;
  • consumer-facing applications;
  • end-user data, inputs and outputs, and unprocessed data; and
  • training data and finished models, including each user-selectable conversational model or chat style.
• Purchased employee claims: these are the only claims Disney acquires, and the debtor says it does not believe they have any value.

Retained Assets and Liabilities

• Retained assets: apart from the license and the purchased employee claims, the debtor keeps all of its assets, properties, businesses and operations. Disney will not acquire or operate the consumer-facing platform, products, customer accounts, contracts, trademarks, websites, domains or ongoing operations. The transaction is not a going-concern transfer, and the debtor's records are not being sold.
• Liabilities: Disney assumes no liabilities of the debtor or its affiliates, whether they arose before, on or after closing of the initial transaction or the sale. All of the debtor's liabilities stay with the debtor.

License Terms

• Term: perpetual from closing. The license is irrevocable, non-terminable, fully paid-up and royalty-free. It covers using, modifying and making derivative works of the licensed technology, and commercially exploiting the licensed patents, in connection with Disney-branded products and services.
• Transfer: Disney may assign the license without consent only to its affiliates, or to a buyer or successor of a Disney business that uses or relates to the licensed IP. It may not transfer the license to any third party on a standalone basis. Sublicensing is limited to:
  • consumer end users;
  • service providers and distribution-channel partners;
  • Disney affiliates; and
  • permitted assignees.
• The debtor keeps ownership and may continue to use, develop, license and monetize the licensed IP, including non-exclusively licensing or selling it to third parties. The term sheet contemplates that the definitive agreements will bar the debtor from selling, exclusively licensing or encumbering the IP in a way that would materially limit Disney's use, and from actions intended to impair the availability of key employees Disney has identified; key-employee time on bidder diligence and TSA services does not count as impairment up to 20% of weekly work.
• Disney owns all derivative works and outputs it creates, including models, weights and synthetic data, and the debtor and any successor, including a buyer of the debtor's IP, may not challenge Disney's right to exploit those outputs unless they infringe IP outside the license or result from a breach of the agreement. The license survives:
  • termination of the transaction documents;
  • any later change of control, assignment or exclusive licensing of the licensed IP; and
  • the debtor's bankruptcy or insolvency, with section 365(n) protection, which the proposed sale order would confirm.
• The debtor must give Disney access to the relevant GitHub and Google Drive repositories for 30 days. It has no obligation to prosecute, maintain, enforce or update the licensed IP. The IP is licensed as-is, with representations limited to:
  • ownership and authority to grant the license;
  • no ownership challenges in the past two years;
  • employee and contractor invention assignments;
  • no encumbrances that would prevent the license; and
  • legal compliance.

Bid Protections

• Break-up fee and expense reimbursement: together capped at 3.5% of the $20 million cash purchase price, or $700,000.
• The protections are payable whether or not Disney bids at the auction, if the debtor:
  • materially breaches the stalking horse agreement or another transaction document; or
  • completes an alternative transaction for the Disney Target Assets, including where Disney is not the winning bidder.
  They are not owed where the alternative transaction is a back-up bid that closes because Disney breached.
• Payment and priority:
  • they are due at the closing of the alternative transaction, paid directly from its proceeds and as a precondition to it;
  • they carry administrative expense status under sections 503(b) and 507(a)(2), and survive termination of the agreement;
  • Disney needs no stay relief to enforce them; and
  • if the debtor fails to pay and Disney wins a suit to collect, the debtor also owes Disney's documented costs and attorneys' fees.
• Disney's successive auction bids are credited with the $700,000. No one other than Disney or a designated additional stalking horse is entitled to any break-up fee, expense reimbursement or similar payment.
• The debtor says the protections, together with the EPA releases and the exclusivity period, were critical to Disney's agreement to serve as stalking horse.

Additional Stalking Horse Purchasers

• Designation deadline: Nov. 9, 2026. The debtor may, but need not, designate additional stalking horses for assets other than the Disney Target Assets. It may offer them protections capped at 3.5% of the applicable cash purchase price, as an administrative expense, payable if the debtor sells the covered assets to another bidder.
• Any additional stalking horse is deemed a qualifying bidder with a qualifying bid. Under the proposed order, any additional stalking horse agreement remains subject to final court approval at the sale hearing.

Credit Bid

• None. The bidding procedures require that bids propose payment only in cash.

Overbid

• Minimum overbid: a bid for the Disney Target Assets, or for assets covered by an additional stalking horse agreement, must at least equal the stalking horse's value plus the applicable break-up fee plus $1 million.
• The motion applies this minimum to bids to license or purchase the Disney Target Assets, while the bidding procedures exhibit applies it to bids for an exclusive license or purchase of those assets.
• Bidding increment: $500,000, which the debtor may change at the auction. Bidding opens at the baseline bid, which must at least equal the minimum overbid.

Good Faith Deposit

• Deposit: 10% of the aggregate purchase price, or a larger amount set by the debtor. Disney does not have to post a deposit beyond the $2 million it paid under the EPA.
• All deposits, including Disney's, are held in a segregated account and do not become estate property until released under the applicable stalking horse agreement or by court order.
• Bidders that are not selected as the winning bidder get their deposits back within five business days after the sale closes, including Disney's $2 million if it does not win. The winning or back-up bidder's deposit is applied to the price. It may be kept as damages if that bidder fails to close because of its own breach, and the debtor keeps its other remedies.
• Disney's deposit is also refundable if the transaction does not close before the Dec. 17, 2026 outside date (as the parties may agree to extend), or under the EPA if the debtor failed to file Chapter 11 on the term-sheet terms, including with Disney as stalking horse. The debtor must wire any refund within three business days of Disney's notice.

Bid Requirements

• To get data room access, a potential bidder must provide identifying documentation, a signed confidentiality agreement, and evidence of financial wherewithal and a bona fide purpose.
• To be a qualifying bid, a bid must arrive by the bid deadline and, among other requirements:
  • be all cash, state the price and the liabilities to be paid or assumed, and identify the assets covered, on terms substantially the same as or better than the applicable stalking horse agreement;
  • include a clean signed agreement and a redline against the applicable stalking horse agreement;
  • be formal, binding, unconditional and irrevocable until two business days after the sale closes, with no financing, internal approval or diligence contingencies;
  • if the bidder lacks cash on hand, include unconditional committed financing covering the price and going-concern operations;
  • provide adequate assurance information, identify the contracts to be assumed and provide for cure costs;
  • state the bidder's plans for hiring the debtor's current or former employees and for providing transition services to the debtor;
  • commit to a closing deadline, list required regulatory and third-party approvals with expected timing, and include board authorization;
  • agree to serve as back-up bidder; and
  • seek no break-up fee or expense reimbursement unless the bidder is seeking designation as an additional stalking horse.
• Bids must commit to close by Dec. 17, 2026 under the bidding procedures, which control over the motion; the motion states Nov. 30, 2026.
• Bidders take the assets as-is and confirm they relied only on their own diligence. They waive substantial contribution claims and accept the bankruptcy court's exclusive jurisdiction, with a jury trial waiver. The debtor may consider combinations of bids and may work with bidders to fix deficient bids before the auction.

Due Diligence

• Disney and the debtor will identify five key employees, now employed by Disney, to be reasonably available for diligence with potential bidders. To qualify, a bidder must have signed an NDA, shown financial capability, submitted a preliminary indication of interest, and be expected to qualify under the bidding procedures. Diligence runs through the bid deadline.

Auction

• Auction: Nov. 23, 2026, at 10 a.m. (ET), in person or by videoconference, if a qualifying bid other than a stalking horse bid is received. Otherwise the debtor will seek approval of the applicable stalking horse agreement at the sale hearing.
• Only Disney, any additional stalking horse and other qualifying bidders may bid. Bids are made on the record, the auction is transcribed, and bidders must confirm they have not colluded.
• The debtor, consulting with any consultation parties, picks winning and back-up bids based on price, assumed liabilities, certainty and timing of closing, changes to the stalking horse form, and net benefit to the estate. Winning and back-up bids stay irrevocable until two business days after the sale closes.
• After the auction, parties may raise supplemental objections at the sale hearing, limited to:
  • the conduct of the auction;
  • a winning bidder that is not a stalking horse;
  • changes to a stalking horse agreement; and
  • adequate assurance from a winning bidder that is not a stalking horse.

If Disney Is Not the Winning Bidder

• Disney receives the bid protections, capped at $700,000, and gets its $2 million deposit back within five business days after the sale closes.
• Transition services: Disney will provide one winning bidder with services reasonably comparable to a form TSA filed with the motion. They last no longer than the lesser of 60 days after the sale closes and 75 days after the auction ends. Under that form:
  • the winning bidder pays Disney's fully allocated cost plus a 10% margin and reimburses third-party costs; and
  • Disney personnel need not spend more than 20% of their time on the services.
• Employees: Disney will let one winning bidder interview and make offers to former debtor employees now at Disney, and will work in good faith to transfer those who accept. Disney may exclude up to 20% of those employees from the process.
• Release: the form winning-bidder TSA requires the winning bidder to release Disney and its affiliates and representatives from claims arising from Aug. 1, 2026 through the TSA's effective date. The release covers claims relating to the debtor, its Chapter 11 case and wind-down, transactions with Disney, the transition services, Disney's hiring of former debtor employees, and related IP use, including the licensed IP.

Back-Up Bidder

• If the winning bidder fails to close within two weeks after entry of the sale order, as the debtor may extend, the back-up bid becomes the winning bid and the debtor may close with the back-up bidder without a further court order or notice; the motion instead sets that deadline at Nov. 30, 2026, but the bidding procedures control.
• If Disney is the back-up bidder:
  • it is not subject to any penalties;
  • it may terminate on its own if the sale does not close by Dec. 17, 2026, unless the failure results from its material breach; and
  • its back-up obligations follow the terms of its last auction bid.

Key Dates

• Petition date: Oct. 12, 2026
• Bidding procedures motion filed: Oct. 13, 2026, with a request to hear it on 13 days' notice
• Bidding procedures order: within 21 days after the petition date, or Disney may terminate
• Cure notice deadline: Nov. 4, 2026
• Additional stalking horse designation deadline: Nov. 9, 2026
• Sale objection deadline: Nov. 13, 2026, at 4 p.m. (ET)
• Contract objection deadline: Nov. 18, 2026, at 4 p.m. (ET)
• Bid deadline: Nov. 20, 2026, at 5 p.m. (ET)
• Qualifying bid and baseline bid designation: Nov. 21, 2026
• Auction (if necessary): Nov. 23, 2026, at 10 a.m. (ET)
• Debtor's reply to objections: Nov. 23, 2026, at noon (ET)
• Sale hearing: Nov. 24, 2026, subject to court availability
• Sale order milestone: Nov. 30, 2026
• Outside date: Dec. 17, 2026

Milestones and Termination Rights

• Disney may terminate the stalking horse agreement if:
  • the debtor breaches its representations, warranties or covenants under the agreement, the EPA or the TSA in a way that would prevent closing;
  • the Chapter 11 case was not filed by Oct. 12, 2026, or the bidding procedures motion by Oct. 13, 2026 (both milestones were met);
  • the bidding procedures order, including the bid protections, is not entered within 21 days after the petition date, or is stayed, reversed, vacated or modified;
  • the bid deadline does not occur by Nov. 20, 2026, or an auction is needed and is not held by Nov. 23, 2026, in each case unless the court requires a later date;
  • the sale order is not entered by Nov. 30, 2026, or is entered in a form Disney does not accept in its sole discretion (the filed form is acceptable to Disney);
  • the debtor materially breaches the bidding procedures order or the sale order and does not cure within 10 days of notice, or the court enters an order materially inconsistent with either;
  • any party obtains stay relief to foreclose on the licensed IP or the purchased employee claims;
  • the case is dismissed or converted to Chapter 7 before closing; or
  • any closing condition is not, or will not be, met by Dec. 17, 2026, or closing has not occurred by that date.
  Some of these rights are unavailable where Disney's own breach causes the failure.
• The debtor may terminate if:
  • Disney breaches its representations, warranties or covenants under the agreement, the EPA or the TSA in a way that would prevent closing, or materially breaches the bidding procedures order, and in either case does not cure within 10 days of notice, unless the debtor's own breach caused the failure to close; or
  • the debtor's board decides, after advice from outside counsel, that going forward would be inconsistent with its fiduciary duties.
• On termination, the debtor must still refund the deposit as the EPA requires, and liability survives only for fraud or willful breach. Either party may seek specific performance or an injunction to enforce the agreement. The debtor has also agreed not to seek dismissal or conversion of the case before closing.

Closing Conditions

• Mutual:
  • the prepetition initial transaction has closed;
  • no law or court order blocks the deal;
  • the debtor's board has approved it on the recommendation of a committee of independent directors; and
  • all required approvals have been received, including any consents relating to the license.
• Disney's:
  • a sale order that is final and non-appealable, acceptable to Disney in its sole and absolute discretion, and not stayed, reversed or vacated;
  • access to and copies of the licensed technology, and reasonable diligence access;
  • no material adverse development affecting the licensed IP or the key employee group; and
  • accurate representations and performance of covenants.
• The debtor's: receipt of the $12.5 million remaining cash consideration and release of Disney's deposit, and entry of an order approving the transaction.
• The parties do not expect the transaction to require antitrust or other regulatory clearance.

Employee Matters

• Under the EPA term sheet:
  • Disney required up to six key employees, including the CEO, to accept offers, and committed to offer jobs to at least 60 other employees;
  • based on a preliminary review of approximately 65 offered employees, Disney estimates their annual run-rate total compensation at approximately $60 million; and
  • Disney is funding a $30 million retention pool, paid in portions on the first and second anniversaries of the initial transaction closing, and estimates total compensation and retention over years one through three at approximately $180 million.
• The vast majority of employees offered roles at Disney accepted. Under the TSA they continue to support the debtor's operations, sale process and wind-down.
• The debtor's obligations to the departing employees:
  • it waived notice periods and agreed not to enforce non-compete, non-solicit, confidentiality or invention-assignment covenants that would restrict employment with Disney;
  • it remains responsible for compensation, benefits, accrued paid time off, employment taxes and any severance through each employee's last day; and
  • it may not solicit Disney's new hires for three years after the initial transaction closes.
• No debtor employees are deemed to transfer to Disney by operation of law.

Transition Services Agreement

• Fee: none. The debtor reimburses Disney's documented third-party costs, and late payments accrue interest at 10% per year, compounded monthly.
• Term: up to five months from Sept. 18, 2026. Services supporting continued operations end at the earlier of that date and closing, while wind-down and qualified-bidder diligence services run to the five-month mark. No Disney employee must spend more than 20% of their time on the services.
• If Disney is the winning bidder, the debtor will seek at the sale hearing to assume the amended and restated TSA, including the EPA. The debtor says it is not in default and that any cure should be minimal because the TSA is on below-market terms. The proposed sale order provides that no cure is owed.
• The debtor indemnifies Disney for claims arising from operating the Character.AI business while services are provided. Disney generally bears no liability for the services absent gross negligence, willful misconduct, actual fraud or bad faith.
• Exculpation: the proposed sale order would exculpate Disney and its affiliates, successors, officers, directors, employees and professionals from liability to any person for administering or performing the TSA or overseeing the transition services. The exculpation does not cover willful misconduct, bad faith or gross negligence determined by final order.

Releases

• Under the stalking horse agreement, the debtor, its affiliates and their representatives release Disney, its affiliates and representatives. The released parties include former debtor employees, consultants and service providers hired by Disney, among them the debtor's former CEO.
• The release covers all claims through the later of closing and entry of the sale order, expressly including claims relating to:
  • negotiation of the transaction documents;
  • Disney's recruiting and hiring of debtor personnel;
  • any wind-down or liquidation of the debtor;
  • services between the parties; and
  • the licensed IP.
  It comes with a covenant not to sue and a California Civil Code Section 1542 waiver, incorporates the earlier EPA release, and carves out rights under the transaction documents and matters that cannot legally be released.
• Under the EPA term sheet, the debtor will release all employees who accept Disney offers, including its CEO, from claims, including fiduciary duty claims. Disney is separately buying any of the debtor's claims against those employees that remain unreleased.

Proposed Sale Order Protections

• Free and clear: the licensed IP and purchased employee claims transfer free and clear of liens, claims, interests, encumbrances and reclamation rights, with any interests attaching to the proceeds. The debtor seeks section 363(m) good-faith purchaser protection for Disney and any other purchaser.
• Successor liability: neither the transaction nor the hiring of former employees would make Disney and related parties a successor, a de facto merger partner, a joint employer or a mere continuation of the debtor. This would apply under ERISA, WARN, CERCLA and labor, employment and products liability law. The order would also find that the transaction is not an acquisition of the debtor's equity or of substantially all of its assets.
• Injunction: all creditors, expressly including litigation claimants, would be permanently barred from asserting claims against Disney and related parties that arise from the debtor, the transaction, the TSA or Disney's hiring of former employees.
• Integrated transaction: the order would find that the sale order, stalking horse agreement, TSA, EPA and Disney's employment of former debtor employees form a single integrated transaction that is not a sub rosa plan. It would also provide that:
  • the debtor, its creditors and any trustee could not reject or avoid those agreements; and
  • the order's terms would survive plan confirmation, conversion or dismissal.
• After closing, Disney would need no stay relief to enforce its remedies. The parties could amend the agreement without a further court order if the change has no material adverse effect on the estate.

Assumption and Assignment

• The debtor will file and serve cure notices by Nov. 4, 2026. Objections to assumption, assignment, cure amounts or Disney's adequate assurance are due Nov. 18, 2026, at 4 p.m. (ET). Adequate assurance objections to a winning bidder that is not a stalking horse are due at or before the sale hearing.
• Only contracts selected by the winning bidder will be assumed and assigned:
  • a contract disputed only on cure may still be assigned if the asserted cure amount is put in escrow;
  • contracts added after the sale hearing get a 14-day objection period; and
  • counterparties that do not object are deemed to consent and are bound by the noticed cure amount.
• The form sale order assigns contracts to Disney only if Disney asks for them; the TSA is the only agreement assumed outright at closing.

Consultation Parties and Fiduciary Out

• The only consultation party is any official committee of unsecured creditors, and none had been appointed when the motion was filed. Consultation rights carry no veto.
• Directors and officers are not required to act against their fiduciary duties. Subject to the stalking horse agreement and the bidding procedures order, the debtor may change deadlines, bid increments and bid requirements, and may adjourn or cancel the auction.