Recently, Elon Musk made an unsolicited offer to acquire OpenAI, which was declined by CEO Sam Altman and OpenAI’s nonprofit board.
The creator of ChatGPT is now reportedly taking steps to prevent any future attempts by the world’s wealthiest individuals — including Musk — from succeeding in such moves.
As reported by the Financial Times, the proposals under consideration could grant OpenAI’s current nonprofit directors enhanced voting privileges, thereby ensuring they maintain authority over the organization amid its transition to a for-profit structure known as a public benefit corporation.
By consolidating control within its nonprofit division, OpenAI could counter Musk’s assertion that the organization has strayed from its original philanthropic goals. This strategy might also enable board members to potentially override the decisions of other investors in the for-profit venture, including Microsoft (MSFT) or SoftBank.
Sam Altman, co-founder and CEO of OpenAI. REUTERS/Axel Schmidt/File Photo · Reuters / Reuters
Such efforts will require strategic planning from OpenAI’s board and Altman, as all of them face a lawsuit from Musk aimed at blocking OpenAI’s shift to a for-profit model.
Nonprofit law expert Ellis Carter noted on her Charity Lawyer blog, “Certain strategic moves can be implemented to shield a nonprofit from hostile takeovers or coups.” However, she stressed that making a nonprofit “truly unhijackable” necessitates careful consideration.
Carter pointed out that since nonprofit organizations lack stock and formal ownership, “designing governance is crucial.”
Currently, OpenAI’s board can resist acquisition attempts because, as a nonprofit, it has no shareholders or voting members. However, UCLA law professor Rose Chan Loui mentioned that OpenAI seems to be taking steps to strengthen its defenses against potential hostile takeovers following its transition to a public benefit corporation.
Loui speculated that OpenAI might create a special class of voting shares for its board members in the restructured for-profit company, conferring them with superior rights to those of other shareholders. Their votes could at least counter any takeover initiatives from private investors, including Microsoft, OpenAI’s primary backer.
However, the precise nature of these voting rights remains somewhat ambiguous. They could either be limited specifically to rejecting buyout proposals or could extend to the broad rights currently held by the nonprofit board.
“We require further details,” Loui remarked.
OpenAI has not provided additional clarification.
Microsoft CEO Satya Nadella, right, and OpenAI CEO Sam Altman, left, in 2023 at the OpenAI DevDay conference. (Justin Sullivan/Getty Images) · Justin Sullivan via Getty Images
At present, investors such as Microsoft do not hold equity in OpenAI; they possess restricted profit interests in the organization’s for-profit subsidiary. Once the company becomes profitable, Microsoft is entitled to 75% of profits until it recoups its $13 billion principal investment, while the remaining 25% of profits will go to employees and early investors, capped at specified amounts.
Following the recovery of Microsoft’s principal, it will then receive 50% of profits until it achieves a profit cap of $92 billion.
OpenAI has expressed its intention to transform its nonprofit parent into a Delaware public benefit corporation (PBC) that would issue ordinary shares.
In theory, this PBC structure could allow for new equity interests to be offered to investors, as well as the conversion of existing investors’ limited profit interests into equity.
Loui suggested that the special voting rights might serve as a poison pill, enabling the board and existing shareholders, excluding any activist investor, to buy more shares at a substantial discount.
Despite the board’s authority, OpenAI is not completely shielded from external offers. Legally, the board is responsible for fulfilling its mission of ensuring that artificial general intelligence… benefits all of humanity. The organization’s website indicates that this may involve supporting a similarly aligned initiative.
“If a value-aligned, safety-conscious project approaches building AGI prior to us, we pledge to cease competition and assist this project,” the nonprofit’s charter states.
Elon Musk after a meeting with Indian Prime Minister Narendra Modi in Washington, D.C., on Feb. 13. REUTERS/Nathan Howard/File Photo · Reuters / Reuters
Under Delaware law, where OpenAI is headquartered, the nonprofit board is required to thoroughly consider acquisition proposals and provide justifications for any rejections.
Typically, hostile takeovers target for-profit companies rather than nonprofit organizations, especially not Musk’s unsolicited $97.4 billion offer for OpenAI’s estimated $157 billion in intellectual property and assets.
Nonprofits often face internal conflicts rather than external hostile moves, reminiscent of the challenges faced by the environmental group Sierra Club initiated in 2003 by anti-immigration activists.
However, nonprofits can safeguard against member-led takeovers by bestowing special voting rights upon board members, provided that such rights comply with state legislation governing the charity’s incorporation, as noted by nonprofit attorney Frank DeVito.
Originally co-founded by Musk and Altman in 2015 as a nonprofit, Musk parted ways with OpenAI due to differing visions for the organization and went on to establish a competing AI company named xAI.
Musk’s lawsuit, which seeks to inhibit OpenAI’s transformation into a for-profit entity, revolves around his earlier $45 million donation meant to support the startup, which he argues was contingent upon OpenAI remaining a nonprofit.
OpenAI maintains that it needs to transition to a for-profit structure to secure additional funding.
Musk’s $97 billion acquisition proposal significantly undervalued OpenAI’s current asset valuation. Reports indicate that SoftBank is looking to invest an additional $40 billion into OpenAI, potentially elevating its worth to between $260 billion and $300 billion.
Altman publicly announced the rejection of Musk’s proposal in a post on X, the social media platform formerly known as Twitter, which Musk acquired for $44 billion in 2022.
In his post, Altman quipped: “no thank you, but we will buy Twitter for $9.74 billion if you’re interested.”
Elon Musk and Sam Altman in 2015. (Photo by Michael Kovac/Getty Images for Vanity Fair) · Michael Kovac via Getty Images
OpenAI subsequently stated in a court filing that Musk’s acquisition bid contradicted his assertion in his current lawsuit that OpenAI’s assets should not be exploited for profit.
“Musk’s alleged takeover attempt is incompatible with the charitable trust claim [he] is presenting in this court,” OpenAI argued.
The board of OpenAI officially rejected Musk’s proposal on February 14, stating, “OpenAI is not for sale, and the board has unanimously turned down Mr. Musk’s latest effort to disrupt his competition,” as articulated by Bret Taylor, the board chairman.
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