On Monday, Elon Musk, the wealthiest person in the world, proposed acquiring the nonprofit organization that oversees OpenAI for a staggering $97.4 billion. This unsolicited offer would be backed by Musk’s AI venture, xAI, along with a group of external investors, according to a letter dispatched to the attorneys general of California and Delaware.
OpenAI’s CEO, Sam Altman, promptly rejected Musk’s proposal, using the opportunity to publicly rebuff him.
“No thanks, but we’ll take Twitter for $9.74 billion if you’re interested,” Altman replied in a post on X just hours after news of Musk’s offer surfaced. Musk is the owner of X, previously known as Twitter, which he acquired for approximately $44 billion in October 2022.
Musk and Altman have a complicated history; Musk is one of the co-founders of OpenAI, and both he and xAI are entangled in ongoing litigation that claims OpenAI has engaged in anticompetitive practices, among other allegations.
However, Altman’s dismissal of the $97.4 billion acquisition offer involves more intricacy than a simple “no thanks,” according to corporate governance experts who spoke with TechCrunch.
Delaying OpenAI’s Nonprofit Transition
To provide context, OpenAI was initially established as a nonprofit before shifting to a capped-profit model in 2019. The nonprofit remains the sole controlling stakeholder of the capped-profit OpenAI organization, which maintains its formal fiduciary responsibilities to the nonprofit’s foundational goals.
Currently, OpenAI is in the midst of restructuring — aiming to become a traditional for-profit organization, specifically a public benefit corporation — to generate significantly increased capital. However, Musk, known for initiating legal challenges against his adversaries, may have hindered this transition and escalated the valuation of OpenAI’s nonprofit with his proposal.
Attorneys general in Delaware and California have called for additional information from the ChatGPT creator regarding its plans to transition to a for-profit benefit corporation. This situation compels OpenAI to carefully evaluate external offers.
OpenAI’s board is expected to likely reject the offer, yet Musk has certainly prepared the groundwork for potential legal and regulatory confrontations. He is already seeking to delay OpenAI’s for-profit conversion through an injunction, essentially providing an alternative proposal of sorts.
The board must now prove that it is not undervaluing OpenAI’s nonprofit by transferring the nonprofit’s assets, which encompass intellectual property from OpenAI’s proprietary research, to an insider (for instance, Sam Altman) at a bargain price.
“Musk is complicating matters,” noted Stephen Diamond, a lawyer who has represented Musk’s adversaries in corporate governance disputes at Tesla, during an interview with TechCrunch. “He’s leveraging the board’s fiduciary duty to avoid undervaluing assets. [Musk’s proposal] is something OpenAI cannot ignore.”
Reports indicate OpenAI is preparing for a funding round that could value its for-profit division at $260 billion. Additionally, OpenAI’s nonprofit is anticipated to receive a 25% equity stake in its for-profit.
Musk’s proposition indicates that at least one group of investors is prepared to pay a significant premium for OpenAI’s nonprofit segment, positioning the board of directors in a challenging position.
Reasons for Rejection
Regardless, an eye-catching offer from Musk doesn’t necessitate that OpenAI’s nonprofit must acquiesce.
Corporate law grants considerable authority to existing boards to fend off unsolicited acquisition proposals, asserts David Yosifon, a corporate governance law professor at Santa Clara University.
OpenAI could argue that Musk’s offer constitutes a hostile takeover attempt since he and Altman have a fraught relationship.
Additionally, the company might contend that Musk’s offer lacks credibility due to OpenAI’s ongoing corporate restructuring.
Another possible route for OpenAI would involve questioning Musk’s financial backing. As highlighted by The New York Times, Musk’s wealth is primarily tied up in Tesla stock, implying that financial partners would need to contribute significantly to meet the $97.4 billion requirement.
The OpenAI board may need to evaluate Musk’s proposal in the context of whether it aligns with the nonprofit’s mission beyond just financial or strategic objectives, according to Scott Curran, who previously served as general counsel for the Clinton Foundation. This implies that Musk’s offer will be assessed in light of OpenAI’s mission “to ensure that artificial general intelligence—AI capabilities surpassing human intelligence—serves the interests of humanity as a whole.”
“When Altman tweeted that response [on X], it was likely done without proper legal consultation,” Yosifon remarked. “This kind of dismissive, instinctual tweet isn’t advantageous for how regulators might perceive the situation.”
Increasing the Valuation of OpenAI Assets
The board is likely to support Altman’s position. Almost all of the directors joined after Altman experienced a brief termination followed by reinstatement by the nonprofit’s board in late 2023. Notably, Altman is also a member of the board.
If nothing else, Musk’s bid might elevate the perceived market value of OpenAI’s nonprofit assets. This situation could compel OpenAI to seek more capital than initially expected, complicating negotiations with the startup’s existing investors. Furthermore, this could diminish the value of stakes held by OpenAI investors within the for-profit arm, notably significant partners like Microsoft.
This development is likely to frustrate Altman, who has spent months collaborating with investors to determine a fair compensation structure for the nonprofit.
In summary, OpenAI’s corporate restructuring efforts have just become significantly more intricate.
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