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Nonprofit Law Prof Blog

Musk Launches Derivative Action Against OpenAI (c)(3)’s Board

By nonprofitlawprof
November 18, 2024

Definition of the Derivative

No reasonable person could conclude OpenAI is proceeding in good faith as a charity committed to safety and transparency above profit, organized for public rather than private benefit, and working to avoid the undue concentration of powerful AI technology. Defendants have admitted as much by their commitments to investors to convert OpenAI to a fully for-profit enterprise

— Elon Musk, directly and derivatively, v. Sam Altman and OpenAI, Inc. (first amended complaint, paragraph 3)

Elon Musk’s first amended complaint against OpenAI (c)(3) contains an exhibit you’ve seen on this blog.  And it provides sensational context in which to discuss nonprofit derivative actions, especially standing and the demand requirement.  The complaint, filed last Thursday, adds 11 more counts to the 15 in his initial complaint against OpenAI (c)(3)’s board.   Musk adds three new plaintiffs — himself and another OpenAI (c)(3) “member” suing derivatively for OpenAI (c)(3), and his own public benefit corporation xAI suing for anti-trust violations.  At this point, Musk might as well throw the sink in too.   Still, I find myself in agreement with his overall point that OpenAI (c)(3) is no longer operating for charity as much as for profit.    

Whether OpenAI (c)(3) has members is an explicitly anticipated point of dispute in the complaint.  The concept of “members” has always been murky to me.  It seems inapposite to charities, and appropriate only to noncharitable exempt organizations that exist exclusively for the benefit of specific patrons . . . aka “members.”  Members have standing to bring derivative actions under most state statutes that allow nonprofit derivative actions.  Musk admits that neither he nor the other individual suing were literally designated “members.”  Most charities don’t have people designated “members,” do they? Musk is asserting a definition of “member” that is more functional than literal: 

  1. Though OpenAI, Inc.’s Certificate of Incorporation states, contrary to Delaware law applicable to charities, “[t]he corporation shall not have any members,” Ex. 21 at 5, its Bylaws expressly provide for membership and do not provide another means for electing directors or otherwise exercising ultimate control over the corporation. Ex. 21 at 8-10.
  2. By virtue of Article II, § 1 of OpenAI, Inc.’s Bylaws, Musk was a member of OpenAI, Inc. from its founding until his resignation on February 21, 2018.
  3. By virtue of Article II, § 1 of OpenAI, Inc.’s Bylaws, Zilis was a member of OpenAI, Inc. from March 11, 2019, until her resignation on March 23, 2023.
  4. Article III, § 1 of OpenAI, Inc.’s Bylaws expressly grants the persons defined to be members, such as Musk and Zilis, “the right to vote”: “for the election of a director or directors”; “on a disposition of all or substantially all of the assets of [the] corporation”; “on a merger or on a dissolution”; and “on changes to the articles or bylaws.” Id. § 1(a), (c)-(f).
  5. Musk and Zilis were thus not only members of OpenAI, Inc. pursuant to the express language designating directors as members in the Bylaws, but also by virtue of their powers recited therein.

That makes sense.  Musk also has to show “with particularity” that he made a demand on the Board (or the futility thereof).  So the exhibits include a small treasure trove of correspondence between Musk and Altman, Musk and OpenAI board members, OpenAI and the California AG’s office, and even a letter to the Chairperson of the Securities and Exchange Commission.  If you have a Bloomberg subscription – or you are an underpaid law professor and get it free through your law library – you can view the emails and letters here. 

The derivative claims are that Altman and the other Board members failed to act with due care, good faith and loyalty in their decision to form the Microsoft joint venture, and with respect to various other contracts with entities partly owned by Altman and other OpenAI (c)(3) trustees.  Those legal data points — the standing and demand requirements — make it worthwhile to give Musk more coverage.  Below is an excerpt from the complaint’s derivative allegations.

COUNT XXII: BREACH OF FIDUCIARY DUTY (Musk and Zillis, derivatively as members of OpenAI, Inc. Against Altman and Brockman)

  1. Plaintiffs Musk and Zilis, derivatively as members of OpenAI, Inc., re-allege and incorporate by reference paragraphs 1 through 439 inclusive, as though fully set forth herein.
  2. Defendants, as directors of OpenAI, Inc., owed it the responsibility to perform the responsibilities of a director, including the responsibilities as a member of its Board and of any committee of such Board on which they served, in good faith, in a manner they believed to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. Cal. Corp. Code § 5231(a).
  3. Defendants have breached these duties by failing to act in good faith and/or failing to use such care as an ordinarily prudent person in a like position would use under similar circumstances when, without limitation, undertaking: a. All acts and/or omissions identified in paragraph 254(a)-(l), supra; and/or b. The violations of law identified in paragraph 286(a)-(i), supra.

. . .

COUNT XXIII: SELF-DEALING UNDER CAL. CORP. CODE § 5233 (Musk and Zilis, derivatively as members of OpenAI, Inc., Against Altman, Brockman, and the Attorney General of California)

  1. Altman and Brockman engaged in transactions to which OpenAI, Inc. is a party and in which they had a material financial interest, to wit, the scheme to form the For Profit Entities, each of which has a contractual relationship to OpenAI, Inc., as detailed in paragraphs 135-36 and 145, supra. 456. Altman and Brockman engaged in transactions to which OpenAI, Inc. is a party and in which they had a material financial interest, to wit, the March 2023 contract with Stripe, as detailed in paragraph 142, supra.

Musk is angry about the 2019 joint venture between OpenAI (c)(3) and Microsoft.  But Musk left the board before the deal was signed, which means he may not have been a member at the time the harm occurred.  To meet that requirement, Musk essentially stretches the period of time over which the harm allegedly occurred.   

  1. In addition to his special interest in OpenAI, Inc. as, without limitation, a cofounder and director involved in its early governance and visibly associated with its work, Musk has standing under Cal. Corp. Code § 5710(b) to bring these claims on behalf of OpenAI, Inc., based on all transactions, any part of which took place before February 21, 2018, including, without limitation, the series of transactions forming capped for-profit entities, as Altman and Brockman had agreed to pursue such transactions prior to that date.

That might just work.  I don’t see anything in California’s nonprofit derivative statute – I haven’t done any more research than the statute — allowing standing for persons with “special interests,” but that status is recognized in the Restatement. So as a backup to his statutory standing claim, the complaint tracks Restatement of Law, Charitable Nonprofit Organizations §6.05, which grants standing to a person with a “special interest.”  

A private party has a special interest for purposes of bringing a derivative action on behalf of a charity under § 6.02 . . . only upon demonstrating all of the following conditions:

(a) the state attorney general is not exercising the office’s authority to protect the public’s interest in the charitable assets at issue, as provided in § 5.01; (b) the charitable assets at issue will not be protected without the grant of standing to the private party; (c) the alleged misconduct is egregious or the circumstances are serious and exigent; (d) the relief sought is appropriate to enforce the purposes of the charity or the purposes to which particular charitable assets are devoted; and (e) the private party has a substantial connection to: (1) the matter at issue and the charity, for an action under § 6.02

Musk might be an annoying pompous jerk who makes unimaginative ugly dystopian cars. But he certainly raises provocative questions worth pondering when he is not launching SLAPP suits against other charities.

darryll k. jones