Delaware AG Pours Very Cold Water on Musk’ OpenAI(c)(3) Injunction Fire
From Elon Musk Files Injunction to Stop OpenAI Becoming a For-Profit Company
Yesterday, I blogged about Musk’s efforts to enjoin OpenAI (c)(3)’s effort to sell its assets to a Delaware Public Benefit Company. OpenAI plans to use the proceeds to continue its mission to research and develop beneficial artificial intelligence. In conjunction with the PBC. That plan raises private benefit and excess benefit issues, though perhaps not insurmountable. The post makes the point that so long as OpenAI (c)(3)’s board members meet their fiduciary duties, the Board gets to decide whether OpenAI should sell or not. The Board gets to decide even if “shareholders” — the taxpaying citizens of California and Delaware, in particular — might disagree with the Board’s decisions. Encode ai, a nonprofit devoted to safe AI filed an amicus brief supporting Musk’s efforts to enjoin the sale but Encode and Musk are mere “shareholders.” They don’t get to displace the Board’s considered judgement simply because they disagree. Their demand for judicial usurpation of the Board’s “business judgment” must fail unless they can show the Board violated one or more fiduciary duties.
Three days after Encode filed its brief, the Delaware AG filed an amicus brief of her own. Musk is already mad at Delaware after the Chancery struck down his $56 billion Tesla salary. That case is pending before the Delaware Supreme Court. Meanwhile, Musk has threatened to take his whole outfit out of Delaware and move to Texas. He should be none too happy about Delaware’s amicus brief because it severely undercuts his case for injunctive relief.
Delaware’s brief informs the court that Delaware and OpenAI are in “ongoing dialogue” regarding OpenAI’s transformation and that Delaware will not hesitate to step in if there is something wrong. Without taking a position one way or the other, Delaware is letting everybody know that “we got this.” That Delaware is on record asserting that it is closely monitoring the situation should definitely undercut a judge’s willingness to enjoin a transaction Musk and Encode characterize as dangerous, unwise, or the product of fiduciary violations. If Delaware is watching, how can the transaction be all that Musk and Encode say it is? Musk can’t be happy because Delaware’s supervision eliminates the need for extraordinary relief. The amicus brief is only about 6 pages so I have quoted a lot of it. Here is the gist:
The Delaware Attorney General submits this brief to make the Court aware that she is conducting a concurrent review of the Proposed Transaction on behalf of the public pursuant to her authority under Delaware law. Specifically, the Delaware Attorney General has authority to review the Proposed Transaction for compliance with Delaware law by ensuring, among other things, that the Proposed Transaction accords with OpenAI’s charitable purpose and the fiduciary duties of OpenAI’s board of directors. The Delaware Attorney General has not yet concluded her review or reached any conclusions regarding the Proposed Transaction, and she takes no position on the propriety of a preliminary injunction in this case. The Court, however, should be aware that Delaware will not hesitate to take appropriate action to protect the public interest if the Delaware Attorney General’s review demonstrates that such action is warranted.
Pursuant to her responsibility and authority to protect the public by supervising and overseeing charities, the Delaware Attorney General is in ongoing dialogue with OpenAI regarding the Proposed Transaction. The Delaware Attorney General’s authority includes the ability to review the transaction for, inter alia, whether the charitable purpose of Open AI’s charitable assets would be lost or impaired; whether any intended for-profit entity will adhere to the existing charitable purpose of OpenAI (assuming the not-for-profit entity remains affiliated with it); whether OpenAI’s directors are meeting their fiduciary duties; and whether, if applicable, the Proposed Transaction satisfies Delaware’s “entire fairness” test.
As part of this review, the Delaware Attorney General will consider whether the OpenAI board members are satisfying their fiduciary duties to OpenAI’s beneficiaries—the public. See Gassis v. Corkery, No. CIV.A. 8868-VCG, 2014 WL 2200319, at *14 (Del. Ch. May 28, 2014), aff’d, 113 A.3d 1080 (Del. 2015) (explaining “a nonprofit charitable corporation’s board owes fiduciary duties to its beneficiaries” (emphasis in original)). Specifically, each board member has a fiduciary duty “to act with fairness and loyalty, devoid of considerations of self-interest” and “to advance [OpenAI’s] charitable goals and protect its assets.” See Oberly, 592 A.2d at 462. In connection with the Proposed Transaction, the board members must act to advance OpenAI’s charitable purpose and protect its charitable assets for the benefit of the public, without any consideration of their own self-interest.
To the extent the Proposed Transaction is an “interested transaction,” Delaware law may also require that the Proposed Transaction meet the “entire fairness” standard, which would include assessing the fairness of the price and the fairness of the negotiations. See Oberly, 592 A.2d. at 468-69. If implicated, this too will be part of the Delaware Attorney General’s review.
While the parties before this Court have generally referenced the public interest and how it will be impacted by their respective positions, the interest of the charity’s beneficiaries receives only limited consideration in the briefing. The Proposed Transaction—or its enjoinder—is likely to have multiple and profound impacts on the public. The Delaware Attorney General is well-positioned to consider how the interests of the charity’s beneficiaries are best served. If the Delaware Attorney General concludes that the Proposed Transaction is not consistent with OpenAI’s mission and its obligations to the public, that OpenAI’s board members are not fulfilling their fiduciary duties, or, if applicable, that the value of the Proposed Transaction or the process for deriving it is not entirely fair, the Delaware Attorney General will take appropriate action, whether through a requested modification of the terms of the Proposed Transaction or, if necessary, by seeking an injunction if and when she determines judicial intervention is necessary.
I wonder what strategy motivated the AG’s brief. Pretty slick move, I’d say.
darryll k. jones