OpenAI Implements New Measures to Safeguard Against Hostile Takeovers

Strategies to Fortify OpenAI’s Governance Structure Amid Elon Musk’s Threat / REUTERS/Nathan Howard/File Photo

Elon Musk's recent unsolicited attempt to take over OpenAI has raised significant concerns about the company's future governance and direction. CEO Sam Altman and OpenAI's nonprofit board rejected Musk's overture, but the incident has prompted OpenAI to consider restructuring its governance to prevent similar threats in the future. Reports indicate that OpenAI is exploring measures that would provide its existing nonprofit directors with enhanced voting rights, ensuring they maintain control as the organization transitions to a public benefit corporation for profit.

By consolidating authority within its nonprofit arm, OpenAI could effectively counter Musk’s claims that the organization has strayed from its initial philanthropic mission. This strategic move would also empower board members to potentially overrule decisions made by major investors in the for-profit entity, including technology giants like Microsoft and SoftBank. This shift in governance necessitates careful navigation by OpenAI’s board and Altman, especially given the ongoing legal challenges posed by Musk, who is seeking to block the organization’s transition to a profit-driven model.

Nonprofit law expert Ellis Carter highlights that while there are strategic frameworks to protect nonprofits from hostile takeovers, achieving a governance structure that is “truly unhijackable” requires meticulous planning. She emphasizes the importance of governance design for nonprofit corporations, which do not have stock or formal ownership structures.

Currently, OpenAI's board is empowered to resist outside acquisitions because it operates as a nonprofit without shareholders or voting members. However, experts, including UCLA law professor Rose Chan Loui, suggest that OpenAI's focus appears to be on solidifying defenses against hostile takeovers that could arise following its transformation into a public benefit corporation.

Specifically, Chan Loui posits that OpenAI may grant its board members a special class of voting stock within the newly formed for-profit subsidiary. This could potentially give them superior voting rights compared to other equity holders, effectively allowing the board to veto any acquisition attempts by private investors, including its principal investor, Microsoft.

The precise nature of these proposed voting rights remains uncertain, with possibilities ranging from limited powers to block takeover bids to broader rights comparable to those currently held by the nonprofit board. Chan Loui calls for more clarity on this matter.

As it stands, investors like Microsoft do not hold equity stakes in OpenAI; instead, they possess limited profit interests in the for-profit subsidiary. Microsoft is entitled to 75% of profits until it recoups its $13 billion investment, with the remaining 25% allocated to employees and early investors, subject to specific profit limits. Once Microsoft’s principal investment is recouped, it will receive 50% of profits until reaching a profit cap of $92 billion.

OpenAI has expressed a desire to transition its nonprofit parent into a Delaware public benefit corporation (PBC) that would issue traditional shares of stock. This transition could enable the PBC to attract new investors while potentially converting existing limited profit interests into equity stakes.

To reinforce its defenses against potential hostile takeovers, OpenAI could implement special voting rights that function as a “poison pill.” This would allow the board and current shareholders to purchase additional shares at a substantial discount, making a takeover less appealing to outside parties.

Despite the board's authority, OpenAI is not entirely shielded from external acquisition offers. Legally, the board must prioritize its mission to ensure that artificial general intelligence benefits all of humanity. The organization’s charter explicitly states its commitment to supporting value-aligned projects that prioritize safety and ethical considerations in AI development.

Under Delaware law, where OpenAI is incorporated, the nonprofit board is required to conduct a thorough review of any acquisition offers and provide justifications for any rejections. Although charitable organizations are not typical targets for hostile takeovers, they can indeed safeguard against internal power struggles through the allocation of special voting rights, as noted by nonprofit attorney Frank DeVito.

Elon Musk and Sam Altman co-founded OpenAI in 2015 as a nonprofit but eventually parted ways over strategic disagreements, with Musk later launching a competing AI venture, xAI. Musk's lawsuit against OpenAI revolves around his initial $45 million donation, which he claims was contingent on the organization remaining a nonprofit entity. OpenAI has countered that converting to a for-profit model is essential for attracting additional funding to sustain its ambitious AI projects.

Musk’s recent $97 billion takeover offer fell short of the current valuation of OpenAI’s assets, which estimates range from $260 billion to $300 billion, particularly with SoftBank's planned $40 billion investment. In a public rebuttal, Altman made light of Musk’s proposal by suggesting OpenAI could purchase Twitter for $9.74 billion, highlighting the absurdity of Musk’s offer in comparison to the organization’s actual worth.

In a court filing, OpenAI noted that Musk’s bid contradicted his claims in the ongoing lawsuit regarding the protection of the organization’s assets from profit-driven motives. The board formally rejected Musk's acquisition proposal on February 14, asserting that "OpenAI is not for sale" and emphasizing the unanimous decision to resist Musk’s disruptive attempts.