OpenAI considers special voting rights to fend off hostile bidders such as Musk
Start-up in talks over ways to allow its non-profit board to maintain control after conversion to a for-profit business
OpenAI is considering granting special voting rights to its non-profit board in order to preserve the power of its directors, as the $157bn start-up fends off an unsolicited takeover bid from Elon Musk.
Chief executive Sam Altman and other board members are weighing a range of new governance mechanisms after OpenAI converts into a more conventional for-profit company, according to people with direct knowledge of the discussions.
Giving the non-profit’s board outsized voting power would ensure it retained control of the restructured company and was able to over-rule other investors including existing backers such as Microsoft and SoftBank.
While no firm decisions have been made, special voting rights would also ensure OpenAI can fight off hostile bids from outsiders such as Musk. The billionaire made a surprise $97.4bn cash bid for the assets held by the non-profit, including its controlling stake in the start-up’s for-profit subsidiary.
Special voting rights could keep power in the hands of its non-profit arm in future and so address the Tesla chief’s criticisms that Altman and OpenAI have moved away from their original mission of creating powerful AI for the benefit of humanity.
The ChatGPT-maker is in the midst of a complex conversion from a non-profit research organisation to a more conventional for-profit business known as a public benefit corporation (PBC).
Its executives argue the shift would allow it to receive billions of dollars more investment as it races rivals such as Google to build the technology, while potentially unlocking greater returns for investors. OpenAI is also in talks to raise $40bn from an investment group led by SoftBank at a valuation of $260bn.
The San Francisco-based group’s plans have come under fire from Musk, who co-founded OpenAI and donated tens of millions of dollars before leaving its board in 2018 in a fallout with Altman. He said at an event in Dubai last week that “OpenAI is trying to completely delete the non-profit, [and] that seems too far.”
The comments come as the board seeks to find a fair price for the non-profit’s assets and decide what role its charitable arm should play in the PBC.
The FT has previously reported that OpenAI has discussed trading the non-profit’s assets for $30bn, paid largely in equity in the PBC. Musk’s $97.4bn offer implies that OpenAI is vastly underpricing the deal.
To complete the conversion, the attorney-general of Delaware — where OpenAI is incorporated — must decide whether the transaction represents fair value and is for the public benefit. People close to OpenAI said the board is under no obligation to sell, or to maximise the valuation of the non-profit’s assets in a competitive auction.
On Friday, the board unanimously rejected the offer from Musk, calling it his “latest attempt to disrupt his competition.”
“OpenAI is not for sale,” Bret Taylor, chair of OpenAI, added. “Any potential reorganisation of OpenAI will strengthen our non-profit and its mission.”
“Of course they are putting the charity’s assets up for sale. That is what their ‘reorganisation’ is all about,” Musk’s attorney, Marc Toberoff, responded in a statement to the FT.
“They are just selling it to themselves at a fraction of what Musk has offered, enriching board members in a classic self-dealing transaction. Will someone please explain how that benefits ‘all of humanity’?”
Carl Tobias, professor at the University of Richmond School of Law, said Musk’s bid was unlikely to affect OpenAI’s conversion to a PBC.
“I think Musk is simply trying to torture Open AI generally and Sam Altman specifically,” he said.
However, the takeover offer has focused minds at the start-up on how to retain control once a conversion is completed.
Silicon Valley groups have often adopted corporate structures that include special voting rights, often to entrench the power of founders. Meta’s Mark Zuckerberg has retained control over his company, despite owning less than 15 per cent of the social media group, thanks to his ownership of shares with outsized voting power.
Another option that could be considered by OpenAI’s board is introducing a shareholder rights plan, or poison pill, which would allow shareholders to buy up additional shares at a discount in order to fend off hostile takeovers. Poison pills were pioneered by lawyer Martin Lipton, co-founder of the firm now advising OpenAI’s board, in the 1980s.
In 2022, Twitter launched a poison pill defence in a failed attempt to prevent Musk’s $44bn buyout of the company.
As part of the conversion under discussion, the current board is expected to oversee the PBC. The non-profit will recruit new directors.
OpenAI is being advised by Goldman Sachs and M. Klein & Company, who are tasked with ensuring that the conversion into a PBC, with a separate non-profit arm, is fair and responsible, according to multiple people with knowledge of the matter.
“A well-thinking board would actually think about [the $97.4bn bid],” said one person with knowledge of OpenAI’s deliberations. But, they added, “the board needs to consider the mission and nobody else — not Sam, not the brand OpenAI, and certainly not Mr Musk.”