Musk's $97.4B Bid May Hinder OpenAI's Profit Shift

On Monday, Elon Musk, the world's wealthiest individual, made a bold move by offering to purchase the nonprofit that essentially controls OpenAI for a staggering $97.4 billion. This unsolicited buyout proposal would be funded by Musk's AI venture, xAI, along with a group of external investors, according to a letter sent to the attorneys general of California and Delaware.

OpenAI's CEO, Sam Altman, was quick to reject Musk's offer, using it as an opportunity to take a public jab at him. "no thank you, but we will buy Twitter for $9.74 billion if you want," Altman posted on X, just hours after news of Musk's bid surfaced. Musk, who owns X (formerly known as Twitter), had acquired it for around $44 billion back in October 2022.

The relationship between Musk and Altman is far from simple. Musk, a co-founder of OpenAI, and his company xAI are currently entangled in a lawsuit accusing OpenAI of anticompetitive practices, among other issues.

However, Altman's dismissal of the $97.4 billion offer isn't as straightforward as it seems, according to corporate governance experts who spoke with TechCrunch.

Stalling OpenAI's nonprofit conversion

Currently, OpenAI is undergoing another transformation, aiming to become a traditional for-profit entity, specifically a public benefit corporation, to attract more capital. Musk's bid, known for his legal tactics, might delay this transition and inflate the value of OpenAI's nonprofit.

The attorneys general of Delaware and California have asked OpenAI for more details about its plans to convert to a for-profit benefit corporation. This situation compels OpenAI to take outside offers seriously.

While OpenAI's board is likely to reject Musk's offer, he's laying the groundwork for potential legal and regulatory challenges. For example, he's already trying to halt OpenAI's for-profit conversion through an injunction. His bid could be seen as another tactic to complicate matters.

Now, OpenAI's board must prove that it isn't undervaluing the nonprofit by transferring its assets, including intellectual property from OpenAI's research, to an insider like Sam Altman at a reduced price.

"Musk is throwing a spanner into the works," said Stephen Diamond, a lawyer who has represented Musk's adversaries in corporate governance disputes at Tesla, in an interview with TechCrunch. "He's exploiting the fiduciary obligation of the nonprofit board to not undersell the asset. [Musk's bid] is something OpenAI has to pay attention to."

OpenAI is reportedly preparing for a funding round that would value its for-profit arm at $260 billion. The Information reports that OpenAI's nonprofit is expected to receive a 25% stake in the for-profit entity.

With his bid, Musk has shown that there's at least one group of investors ready to pay a significant premium for OpenAI's nonprofit. This puts the board in a challenging position.

Grounds for rejection

Despite the hefty offer, OpenAI's nonprofit isn't obligated to accept it.

Corporate law grants significant power to existing boards to fend off unsolicited takeover bids, according to David Yosifon, a Santa Clara University professor specializing in corporate governance law.

OpenAI could argue that Musk's bid is a hostile takeover, especially given the strained relationship between Musk and Altman.

The company might also question the credibility of Musk's offer, considering OpenAI is already in the process of restructuring.

Another angle OpenAI could explore is challenging whether Musk has the funds. The New York Times points out that much of Musk's wealth is tied up in Tesla stock, meaning his investment partners would need to cover a large portion of the $97.4 billion.

OpenAI's board may need to thoroughly evaluate Musk's offer to see if it aligns with the nonprofit's mission, not just financial or strategic objectives, according to Scott Curran, former general counsel to the Clinton Foundation. This means weighing Musk's offer against OpenAI's mission: "to ensure that artificial general intelligence – AI systems that are generally smarter than humans – benefits all of humanity."

"When Altman posted that response [on X], that was probably done without legal guidance," Yosifon said. "It's not good for a regulator to see that kind of dismissive, knee-jerk tweet."

Raising the value for OpenAI assets

The board is likely to support Altman, especially since nearly all directors were appointed after Altman's brief dismissal and subsequent rehiring by the nonprofit's board in late 2023. Altman is also a board member.

If nothing else, Musk's bid might increase the perceived market value of OpenAI's nonprofit assets. This could force OpenAI to seek more capital than initially planned, complicating negotiations with existing investors. It might also dilute the value of stakes held by OpenAI's investors in the for-profit arm, including major partners like Microsoft.

This is sure to frustrate Altman, who has been working with investors for months to figure out how to fairly compensate the nonprofit.

In short, OpenAI's corporate restructuring plans have just become a lot more complicated.

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