Recent developments within OpenAI, the creator of ChatGPT, have thrust the company into a state of turmoil, as investors explore legal options following the ousting of CEO Sam Altman by the board.
Microsoft holds a substantial 49 percent stake in the for-profit operating company, with other investors and employees controlling an equal share, and 2 percent owned by OpenAI’s nonprofit parent.
Investors, integral to the success of OpenAI, are reportedly considering legal recourse amid concerns of potential financial losses, questioning the future of a once-prominent player in the generative AI sector. This uncertainty follows the board’s decision to remove Altman due to a “breakdown of communications,” as revealed in an internal memo seen by Reuters.
The situation escalated further as over 700 employees of OpenAI threatened mass resignations unless the board was replaced. This unique power dynamic stems from OpenAI’s structure, where its nonprofit parent, created to benefit humanity, holds control over the for-profit operations.
Unlike traditional venture-backed companies, this setup grants employees significant leverage in influencing board decisions.
Minor Myers, a law professor at the University of Connecticut, notes that OpenAI’s structure intentionally favors employees over traditional venture capitalists, allowing the organization to maintain its core mission and governance.
This structure, established as a nonprofit but incorporating a for-profit subsidiary in 2019, enables the preservation of OpenAI’s objectives while securing necessary capital.
Despite potential legal challenges, experts suggest that OpenAI’s corporate structure, including the use of a limited liability company for its operating arm, could insulate the nonprofit’s directors from investor actions.
The legal obligations of nonprofit boards offer a degree of flexibility for leadership decisions, creating challenges for investors seeking legal avenues.
Even in the event of a lawsuit, experts like Paul Weitzel, a law professor at the University of Nebraska, argue that investors may face a “weak case.” The law generally provides companies with broad discretion in making business decisions, even those that may have adverse outcomes.
Historical examples, such as Apple’s decision to fire Steve Jobs in the 1980s, highlight the latitude companies have in shaping their leadership.
As OpenAI navigates this challenging period, the struggle for control, legal complexities, and the implications for the future of generative AI remain at the forefront.
The unfolding events underscore the intricate balance between investor interests, corporate governance, and the unique structure that sets OpenAI apart in the rapidly evolving AI landscape.