Musk's $97.4B OpenAI Bid: Impact on For-Profit Conversion

Elon Musk’s Bid for OpenAI Governance

A substantial offer to acquire the nonprofit overseeing OpenAI was made on Monday by Elon Musk, currently ranked as the world’s wealthiest individual. The proposed acquisition is valued at $97.4 billion.

The unsolicited bid would be funded by xAI, Musk’s artificial intelligence firm, alongside a group of external investors. Details of the offer were communicated via a letter addressed to the Attorneys General of both California and Delaware.

OpenAI’s Response

Sam Altman, the CEO of OpenAI, swiftly rejected Musk’s proposal. He used the opportunity to publicly respond with a pointed remark.

In a post on X, just hours after news of the offer surfaced, Altman countered with, “no thank you, but we will buy Twitter for $9.74 billion if you want.” Musk currently owns X, the platform previously known as Twitter.

He finalized the purchase of the social network in October 2022 for approximately $44 billion.

A History of Involvement

The relationship between the two figures is complex. Musk is a co-founder of OpenAI.

Currently, both he and xAI are participants in a legal action alleging OpenAI has engaged in practices that stifle competition, among other claims.

Implications of the Rejection

According to corporate governance specialists consulted by TechCrunch, Altman’s dismissal of the $97.4 billion takeover offer is not a simple refusal.

The situation involves layers of complexity beyond a straightforward “no thanks.”

The governance structure of OpenAI, as a nonprofit, presents unique challenges to such an acquisition attempt.

• The nonprofit status impacts the ability to be acquired.
• The Attorneys General of California and Delaware have oversight.
• Existing agreements and bylaws likely contain protective clauses.

Potential Delays to OpenAI’s Shift to For-Profit Status

Initially established as a non-profit organization, OpenAI underwent a structural change in 2019, adopting a “capped-profit” model. The original non-profit entity remains the sole controlling shareholder of the capped-profit OpenAI corporation.

Currently, OpenAI is undertaking a restructuring process aimed at becoming a traditional for-profit company, specifically a public benefit corporation. This transition is intended to facilitate the acquisition of significantly increased capital.

However, Elon Musk, known for his propensity to engage in legal challenges, may have complicated this transition and potentially increased the valuation of OpenAI’s non-profit arm with his recent bid.

The attorneys general of both Delaware and California have formally requested additional information from OpenAI regarding its plans for conversion to a for-profit benefit corporation. This request necessitates a thorough consideration of any external offers received.

While OpenAI’s board is highly likely to reject Musk’s bid, he is proactively positioning himself for future legal and regulatory confrontations. He has already initiated attempts to impede OpenAI’s for-profit conversion through legal injunctions.

The bid can be viewed as a counter-offer, compelling OpenAI to justify its valuation. The board must now demonstrate that it is not undervaluing the non-profit’s assets.

These assets include intellectual property derived from OpenAI’s exclusive research. Transferring these to an insider, such as Sam Altman, at a reduced price could be deemed a breach of fiduciary duty.

“Musk is deliberately creating obstacles,” stated Stephen Diamond, a legal counsel who previously represented parties opposing Musk in corporate governance disputes at Tesla, during an interview with TechCrunch. “He is leveraging the non-profit board’s obligation to maximize asset value.”

OpenAI is reportedly preparing for a funding round that would assign a valuation of $260 billion to its for-profit division. Current projections indicate the non-profit OpenAI will retain a 25% ownership stake in the for-profit entity.

Musk’s bid signals the existence of at least one investor group willing to pay a substantial premium for control of OpenAI’s non-profit holdings. This development presents a significant challenge for the board of directors.

Reasons for Potential Rejection

Despite Elon Musk’s substantial offer, OpenAI’s nonprofit structure doesn't obligate it to acceptance.

According to David Yosifon, a professor specializing in corporate governance law at Santa Clara University, corporate legislation grants significant power to existing boards to defend against unwanted acquisition attempts.

OpenAI could position Musk’s bid as a hostile takeover, considering the existing strained relationship between Musk and Sam Altman.

Furthermore, the organization might contend that the offer lacks credibility, given its current ongoing corporate restructuring initiatives.

An alternative strategy for OpenAI involves questioning Musk’s financial capacity to fulfill the offer. Reports indicate that a significant portion of Musk’s wealth is invested in Tesla stock, necessitating substantial contributions from investment partners to reach the $97.4 billion valuation.

Scott Curran, formerly the general counsel to the Clinton Foundation, suggests that OpenAI’s board must thoroughly evaluate whether Musk’s proposal is consistent with the nonprofit’s core mission, extending beyond purely financial or strategic considerations.

This evaluation would center on OpenAI’s stated goal: “to ensure that artificial general intelligence – AI systems that surpass human intelligence – benefits all of humanity.”

Yosifon commented that Altman’s initial response on X may have been premature. He stated, “Such a dismissive and reactive tweet could be viewed unfavorably by regulators.”

Enhancing the Worth of OpenAI's Holdings

It is anticipated that the board will favor Altman's position. The majority of the current directors were appointed following the temporary dismissal and subsequent reinstatement of Altman by the nonprofit's governing body in late 2023.

Altman also currently serves as a member of the board of directors.

At the very least, Musk’s proposal could potentially increase the assessed market value of the assets held by the OpenAI nonprofit organization.

This situation may necessitate OpenAI to seek additional funding beyond its initial projections, and could introduce complexities into negotiations with its current investors.

Furthermore, it has the potential to diminish the value of equity holdings possessed by investors in OpenAI’s for-profit subsidiary, including key collaborators like Microsoft.

Such an outcome would likely provoke dissatisfaction from Altman, who has been engaged in discussions with investors for several months to establish a just framework for compensating the nonprofit entity.

In essence, the planned corporate reorganization of OpenAI has become considerably more intricate.

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Potential Implications of Musk's Bid

• Increased scrutiny of OpenAI’s financial structure.
• Possible need for additional capital raising.
• Potential dilution of investor stakes.
• Complications in nonprofit compensation plans.

The current developments underscore the delicate balance between OpenAI’s nonprofit origins and its increasingly valuable for-profit ventures.

Successfully navigating these challenges will be crucial for the company’s future growth and sustainability.