Elon Musk recently attempted an unsolicited takeover of OpenAI that was rejected by CEO Sam Altman and OpenAI’s nonprofit board.
Now the creator of ChatGPT reportedly wants to make sure that any future coups from the world’s richest man — or any other investor — won’t be successful.
According to a report in the Financial Times, the changes being discussed would give OpenAI’s existing nonprofit directors special voting rights, allowing them to retain power over OpenAI even as the artificial intelligence organization restructures into a for-profit enterprise known as a public benefit corporation.
By concentrating such power in OpenAI’s nonprofit arm, the AI upstart could rebut Musk’s argument that it has moved away from its original charitable mission. It could also allow board members to potentially overrule other backers of the for-profit enterprise, such as Microsoft (MSFT) or SoftBank.
Sam Altman, co-founder and CEO of OpenAI. REUTERS/Axel Schmidt/File Photo ·Reuters / Reuters
All of that will take some maneuvering by OpenAI’s board members and Altman, all of whom are defendants in a lawsuit from Musk that seeks to block OpenAI from converting to a for-profit business.
“There are strategic decisions that can be made to protect a non-profit from a hostile takeover or coup d’etat,” nonprofit law expert Ellis Carter wrote in her Charity Lawyer blog. But making the nonprofit “truly unhijackable,” Carter explained, must be done carefully.
Because nonprofit corporations have no stock and no formal ownership, she added, “governance design is critical.”
For now, OpenAI’s board is empowered to fend off acquisitions because, as a non-profit, it has no shareholders and no voting members. But University of California, Los Angeles law professor Rose Chan Loui said OpenAI appears to be focused on fortifying against a hostile takeover that could come after its for profit subsidiary’s conversion to a public benefit corporation.
Chan Loui suspects that OpenAI would give its board members a special class of voting stock in the restructured for-profit firm with rights superior to other equity owners. At the very least, she said, their votes could overrule any takeover moves by private investors, including OpenAI’s largest investor, Microsoft.
Beyond that, she said, it’s unclear how specific the voting rights might be. For example, they could be limited to turning down takeover attempts or as broad as the all-encompassing rights currently held by the nonprofit board.
“We need more detail,” Chan Loui said.
OpenAI did not respond to a request for 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
Right now, investors like Microsoft are not equity holders in OpenAI but instead hold limited profit interests in OpenAI’s for-profit subsidiary. Once OpenAI is profitable, Microsoft is entitled to 75% of profits until it recoups its $13 billion principal investment. The other 25% of profits go to employees and early investors, up to specified profit caps.
Once Microsoft’s principal is repaid, it is entitled to 50% of profits until it reaches a profit cap of $92 billion.
OpenAI said it wants to convert its nonprofit parent to a Delaware public benefit corporation (PBC) that would issue ordinary shares of stock.
In theory, the PBC could offer equity interests to new investors and potentially convert existing investors’ limited profit interests to equity interests.
Chan Loui said the special voting rights could be designed to act as a poison pill that would allow the board and existing shareholders — other than any activist investor — to purchase additional shares at a significant discount.
OpenAI isn’t totally inoculated from outside bids, despite the board’s power. Legally, the board is tasked with carrying out its mission to “ensure that artificial general intelligence … benefits all of humanity.” And on its website, it says that could mean putting its resources behind a similarly oriented project.
“If a value-aligned, safety-conscious project comes close to building AGI before we do, we commit to stop competing with and start assisting this project,” the charity’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 registered, the nonprofit board has an obligation to seriously review acquisition offers and explain reasons for rejecting them.
Charitable organizations aren’t typically targets for hostile takeovers, especially not the type that Musk had in mind — an unsolicited $97.4 billion bid for OpenAI’s estimated $157 billion in intellectual property and other assets.
Instead, nonprofits more commonly face internal power struggles, like the offensive on the environmental group Sierra Club started in 2003 by anti-immigration advocates.
But nonprofits can, in fact, protect from member takeovers by allocating special voting rights to board members as long as the rights adhere to the laws of the state where the charity is organized, nonprofit lawyer Frank DeVito wrote in a blog post.
Musk and Altman originally co-founded OpenAI in 2015 as a nonprofit, but Musk separated himself from the AI firm over disagreements regarding how to move forward with the venture and eventually started a competing AI company called xAI.
Musk’s lawsuit seeking to prevent OpenAI’s conversion to a for-profit enterprise centers around Musk’s initial $45 million donation to fund the startup, which he claims was contingent on OpenAI remaining a nonprofit organization.
OpenAI has said it needs to convert to a for-profit structure to attract new capital.
At $97 billion, Musk’s takeover offer fell significantly below the current valuation for OpenAI’s assets. Japanese conglomerate SoftBank plans a new investment of $40 billion, which would place OpenAI’s value at anywhere from $260 billion to $300 billion, according to various media reports.
Altman made his rejection public in a post on X, the social media platform formerly known as Twitter that Musk purchased for $44 billion in 2022.
Altman wrote: “no thank you but we will buy twitter for $9.74 billion if you want.”
Elon Musk and Sam Altman in 2015. (Photo by Michael Kovac/Getty Images for Vanity Fair) ·Michael Kovac via Getty Images
OpenAI also said in a separate court document that Musk’s bid for OpenAI contradicted his claim in his current lawsuit that OpenAI’s assets should not be used for profitable gain.
“Musk’s purported takeover bid cannot be reconciled with the charitable trust claim [he] is advancing in this court,” it said.
OpenAI’s board officially rejected Musk’s bid on Feb. 14. “OpenAI is not for sale, and the board has unanimously rejected Mr. Musk’s latest attempt to disrupt his competition,” Bret Taylor, OpenAI’s chairman, said in a statement on behalf of the board.
