OpenAI investors considering suing board after CEO’s abrupt firing: Sources
Sign up now: Get ST's newsletters delivered to your inbox
Investors worry that they could lose hundreds of millions of dollars they invested in OpenAI, with the potential collapse of the hottest artificial intelligence start-up.
PHOTO: AFP
Follow topic:
SAN FRANCISCO - Some investors in OpenAI, the maker of ChatGPT, are exploring legal recourse against the company’s board, sources familiar with the matter told Reuters on Nov 20, after the directors ousted chief executive Sam Altman and sparked a potential mass exodus of employees.
Sources said investors are working with legal advisers to study their options. It was not immediately clear if these investors will sue OpenAI.
Investors worry that they could lose hundreds of millions of dollars they invested in OpenAI, a crown jewel in some of their portfolios, with the potential collapse of the hottest start-up in the rapidly growing generative artificial intelligence sector.
OpenAI did not respond to a request for comment.
Microsoft owns 49 per cent of the for-profit operating company, according to sources. Other investors and employees control 49 per cent, with 2 per cent owned by OpenAI’s non-profit parent, according to news site Semafor.
OpenAI’s board fired Mr Altman on Nov 17
By Nov 20, more than 700 of the firm’s roughly 770 employees had threatened to resign
Venture capital investors usually hold board seats or voting power in their portfolio companies but OpenAI is controlled by its non-profit parent company, OpenAI Nonprofit, which according to OpenAI’s website was created to benefit “humanity, not OpenAI investors”.
As a result, employees have more leverage in pressuring the board than the venture capitalists who helped fund the company, said law professor Minor Myers at the University of Connecticut.
“There is nobody exactly who is in the seat of an injured investor,” he said.
That is a feature, not a bug of the OpenAI structure, which started out as a non-profit but added a for-profit subsidiary in 2019 to raise capital. Keeping control of operations let the non-profit preserve its “core mission, governance and oversight”, according to the company’s website.
Non-profit boards have legal obligations to the organisations they oversee. But those obligations, such as the duty to exercise care and avoid self-dealing, leave a lot of leeway for leadership decisions, experts said.
Those obligations can be further narrowed in a corporate structure such as OpenAI, which used a limited liability company as its operating arm, potentially further insulating the non-profit’s directors from investors, said law professor Paul Weitzel at the University of Nebraska–Lincoln.
Even if investors found a way to sue, Assistant Professor Weitzel said they would have a “weak case”. Companies have broad latitude under the law to make business decisions, even ones that backfire.
“You can fire visionary founders,” he said. Apple famously fired founder Steve Jobs in the 1980s, before bringing him back around a decade later. REUTERS
