Exclusive: OpenAI investors consider suing board after CEO’s sudden firing

The OpenAI logo is seen in this illustration taken on February 3, 2023. REUTERS/Dado Ruvic/Illustration/File Photo Acquire Licensing Rights

Nov 20 (Reuters) – Some investors in OpenAI, the makers of ChatGPT, are exploring legal remedies against the company’s board, sources familiar with the matter told Reuters on Monday, after directors ousted Chief Executive Sam Altman and sparked a potentially massive leaving employees.

Sources said the investors were working with legal counsel to explore their options. It was not immediately clear whether those investors would sue OpenAI.

Investors are worried they could lose hundreds of millions of dollars they have invested in OpenAI, the crown jewel of some of their portfolios, with the potential collapse of the hottest startup in the fast-growing generative AI sector.

OpenAI did not respond to a request for comment.

Microsoft ( MSFT.O ) owns 49 percent of the for-profit operating company, according to sources familiar with the matter. Other investors and employees control 49 percent, with 2 percent owned by OpenAI’s nonprofit parent company, according to Semafor.

OpenAI’s board fired Altman on Friday after a “communication breakdown,” according to an internal memo seen by Reuters.

By Monday, most of OpenAI’s more than 700 employees had threatened to resign unless the company changed its board.

Venture capitalists typically have board seats or voting rights in their portfolio companies, but OpenAI is controlled by its non-profit parent company, OpenAI Nonprofit, which, according to the OpenAI website, was created to benefit “humanity, and not to OpenAI’s investors.”

As a result, employees have more power to pressure the board than the venture capitalists who helped finance the company, said Minor Myers, a law professor at the University of Connecticut. “There’s not exactly anyone in the headquarters of an injured investor,” he said.

That’s a feature, not a bug, of the structure of OpenAI, which began as a nonprofit but added a for-profit subsidiary in 2019 to raise capital. Maintaining control of operations allows the nonprofit to maintain its “core mission, management and oversight,” according to the company’s website.

Nonprofit boards have legal obligations to the organizations they oversee. But those duties, such as the duty to exercise care and avoid self-harm, leave a lot of leeway for leadership decisions, experts said.

Those obligations can be further narrowed in a corporate structure like OpenAI, which uses a limited liability company as its operating branch, potentially further isolating the nonprofit’s directors from investors, said Paul Weitzel, a law professor at the University of Nebraska.

Even if investors find a way to sue, Weitzel said they will have a “weak case.” Under the law, companies have wide latitude to make business decisions, even ones that backfire.

“You can fire visionary founders,” Weitzel said. Apple ( AAPL.O ) famously fired Steve Jobs in the 1980s before bringing him back about a decade later.

Reporting by Anna Tong in San Francisco and Crystal Hu in New York Additional reporting by Jody Godoy in New York Editing by Tom Hals, Kenneth Lee, Lisa Shoemaker and Matthew Lewis

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Anna Tong is a Reuters correspondent based in San Francisco, where she reports on the technology industry. She joined Reuters in 2023 after working at the San Francisco Standard as a data editor. Previously, Tong worked at tech startups as a product manager and at Google, where she worked in consumer insights and helped run a call center. Tong graduated from Harvard University. Contact: 4152373211

Krystal reports on venture capital and startups for Reuters. It covers Silicon Valley and beyond through the prism of money and heroes, with a focus on growth-stage startups, tech investments and AI. She previously covered M&A for Reuters, breaking stories about Trump’s SPAC and Elon Musk’s Twitter funding. She previously reported on Amazon for Yahoo Finance, and her investigation into the company’s retail practices was cited by lawmakers in Congress. Crystal began a career in journalism, writing about technology and politics in China. She has a master’s degree from New York University and enjoys a scoop of Matcha ice cream as much as a scoop at work.

Jody Godoy reports on banking law and securities law. Contact her at [email protected]

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