Nov 20 (Reuters) – Some investors in OpenAI, maker of ChatGPT, are considering legal action against the company’s board, people familiar with the matter told Reuters on Monday, after the directors ousted CEO Sam Altman and triggered a potential mass exodus of employees.
Sources said investors were working with legal advisers to explore their options. It was not immediately clear whether those investors would sue OpenAI.
Investors fear losing the hundreds of millions of dollars they invested in OpenAI, a 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% of the for-profit operating company, according to people familiar with the matter. Other investors and employees control 49%, 2% of which is held by OpenAI’s nonprofit parent company, according to Semafor.
OpenAI’s board of directors fired Altman on Friday after a “communication breakdown,” according to an internal memo seen by Reuters.
On Monday, most of OpenAI’s more than 700 employees threatened to resign unless the company replaced the board.
Venture capitalists typically hold board seats or voting power in their portfolio companies, but OpenAI is controlled by its nonprofit parent company OpenAI Nonprofit, which according to the company’s website OpenAI, was created to benefit “humanity, not OpenAI investors”.
As a result, employees have more leverage to lobby the board than the venture capitalists who helped fund the company, said Minor Myers, a law professor at the University of Connecticut. “No one is exactly in the shoes of an aggrieved investor,” he said.
This is a feature, not a bug, of the structure of OpenAI, which started as a nonprofit but added a for-profit subsidiary in 2019 to raise capital. Maintaining control of operations allows the nonprofit to preserve its “core mission, governance and oversight,” according to the company’s website.
Nonprofit boards have legal obligations to the organizations they oversee. But these obligations, like the duty to exercise caution and avoid self-serving transactions, leave a lot of leeway for managers’ decisions, experts say.
These obligations may be even more restricted in a corporate structure such as OpenAI, which used a limited liability company as its operating arm, potentially further insulating the nonprofit’s directors from investors, said Paul Weitzel, professor of law at the University of Nebraska.
Even if the investors found a way to sue, Weitzel said they would have a “weak case.” Companies have wide latitude under the law to make business decisions, even those that backfire.
“You can fire visionary founders,” Weitzel said. Apple (AAPL.O) fired Steve Jobs in the 1980s, before bringing him back a decade later.
Reporting by Anna Tong in San Francisco and Krystal Hu in New York Additional reporting by Jody Godoy in New York Editing by Tom Hals, Kenneth Li, Lisa Shumaker and Matthew Lewis
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