Musk is Proving the Legitimacy of OpenAI (c)(3)’s Poison Pill
The financial and technical media are reporting that OpenAI (c)(3) will be the beneficiary of a shareholder rights plan – aka “a poison pill” – with respect to its anticipated ownership in OpenAI Public Benefit Corporation.
“Sam Altman and other board members are weighing a range of new governance mechanisms after OpenAI converts into a more conventional for-profit company. Giving the nonprofit’s board outsized voting power would ensure it retain[s] control of the restructured company and [is] able to over-rule other investors including existing backers such as Microsoft and SoftBank,” the FT wrote. “While no firm decisions have been made, special voting rights would also ensure OpenAI can fight off hostile bids from outsiders such as Musk.”
“Special voting rights could keep power in the hands of its nonprofit arm in future and so address the Tesla chief’s criticisms that Altman and OpenAI have moved away from their original mission of creating powerful AI for the benefit of humanity,” the FT wrote.
OpenAI could also consider a poison pill or a shareholder rights plan that would let shareholders “buy up additional shares at a discount in order to fend off hostile takeovers,” the FT article said. But it’s not clear whether this is a likely option, as the article said it’s just one that “could be considered by OpenAI’s board.”
In the halls of academia there are still debates about the legitimacy of poison pills. But in less than two months, Elon Musk has pretty much crushed all arguments against them. All one has to do is read the news to see what kind of damage can result from a hostile takeover by forces more interested in gutting than running America, Inc. The same thing might happen with OpenAI Public Benefit Corporation and even by the same hostile corporate raider gutting America, Inc. How crazy is that?
It’s impossible to be entirely general about poison pills because they are crafted with as much English and mathematical calculations as is appropriate to the unique needs of the incumbents they are meant to protect. Here is an AI generated description of poison pills:”
A poison pill, also known as a shareholder rights plan, is an anti-takeover device designed to prevent a change of control of a company without the approval of its board Desert Partners, L.P. v. USG Corp., 686 F. Supp. 1289 Dynamics Corp. of Am. v. CTS Corp., 805 F.2d 705.It typically allows existing shareholders to buy additional shares at a discount or be bought out at a premium upon the occurrence of a triggering event, such as a hostile takeover attempt. ,. CSX Corp. v. Children’s Inv. Fund Mgmt. (UK) LLP, 654 F.3d 276
Under Delaware law, which is highly influential in corporate governance matters, a poison pill is not inherently invalid Desert Partners, L.P. v. USG Corp., 686 F. Supp. 1289.When adopted as a defensive measure against a hostile takeover, corporate directors are protected by the business judgment rule if they can demonstrate reasonable grounds for believing that a threat to corporate policy and effectiveness exists NL Indus. v. Lockheed Corp., 1992 U.S. Dist. LEXIS 22652 NCR Corp. v. American Tel. & Tel. Co., 761 F. Supp. 475.This burden is met by showing good faith and reasonable investigation. Blue Fire Cap., LLC v. Pies & Pints Dev. Partners, LLC, 2023 U.S. App. LEXIS 17963.Directors have a fiduciary duty to act in the best interests of the corporation’s stockholders, which includes protecting the corporation from perceived harm, whether from third parties or other shareholders. JLL Consultants, Inc. v. Gothner (In re AgFeed USA, LLC), 546 B.R. 318 Delta Star, Inc. v. Patton, 76 F. Supp. 2d 617
That sounds about right, but I don’t have time to check all the cites. This is a blog, not a Memorandum in Opposition. But how crazy is it that Musk is making it so easy to prove that poison pills are good things? In hardly more than a month, the man has proven wrong years of scholarly condemnation of poison pills as inefficient tools of entrenchment to the ultimate detriment of shareholders. Taxpayers are shareholders in America, Inc. and right now shareholders are getting bent over, you understand what I’m saying? Why let him execute a hostile takeover of OpenAI PBC, once that gets off the ground, and screw us all even more. When OpenAI (c)(3) takes a stake in the OpenAI PBC, we taxpayers will have a stake. It will be OpenAI (c)(3)’ duty, not just right, to have a poison pill.
It probably would have been routine to include a poison pill even if Musk was not slithering around. But there is another reason why a poison pill is a great idea. I told you last week that Musk’s $97.4 billion offer triggers Revlon duties. The Board, no doubt advised by Morrison Foerster and those Wachtell mofos, said “Open AI is not for sale.” It’s for sale, trust me. Anyway, the AGs are gonna decide this thing in the end. It won’t make a difference whether Revlon applies if the AGs approve. AG approval will be like Kevlar.
I expect the Delaware and California AGs are loathe to approve a nonprofit’s acceptance of a lower offer. Musk promises to beat any offer so that creates a problem. But the AGs are likely to be easier persuaded if they are convinced that the PBC is sufficiently charitable, even if only as a PBC, and that a charitable shareholder will have mechanisms to protect the public benefit in more than theoretical ways.
darryll k. jones