OpenAI investors consider legal action following CEO ousting and employee exodus

In a startling turn of events, some investors in OpenAI, the renowned creator of ChatGPT, are contemplating legal action against the company's board. There has been a rise in discontent among investors after the board fired CEO Sam Altman, triggering the possibility of a mass exodus of employees.

Investors are reportedly in consultation with legal advisers to explore their options, raising concerns over the potential loss of hundreds of millions of dollars invested in OpenAI—a crown jewel in many portfolios. The company's uncertain future has sent shockwaves through the generative AI sector, raising fears of the collapse of one of its most promising startups.

As of now, it remains unclear whether these disgruntled investors will pursue legal action against OpenAI.

Notably, Microsoft holds a 49% stake in the for-profit operating company. The remaining 49% is divided among other investors and employees, with the remaining 2% owned by OpenAI's nonprofit parent, as reported by Semafor.

The board's decision to terminate Altman on Friday, 17 November 2023, citing a "breakdown of communications," was communicated through an internal memo. By Monday, 20 November 2023, over 700 of OpenAI's employees had threatened to resign unless the board was replaced.

OpenAI's unique structure, controlled by its nonprofit parent company, OpenAI Nonprofit, has created a situation where employees hold more leverage than the venture capitalists who have invested in the company. According to Minor Myers, a law professor at the University of Connecticut, this structure is a deliberate feature, allowing the nonprofit to maintain control over its "core mission, governance, and oversight."

Despite nonprofit boards having legal obligations to the organizations they oversee, experts note that these obligations provide ample leeway for leadership decisions. OpenAI's use of a limited liability company as its operating arm further adds a layer of insulation, potentially shielding the nonprofit's directors from investor disputes, according to Paul Weitzel, a professor of law at the University of Nebraska.

Even if investors were to pursue legal action, Weitzel suggests they would have a "weak case," emphasizing that companies possess broad latitude under the law to make business decisions, even if they don't pan out as intended. As he pointed out, famous companies like Apple have made bold decisions in the past, such as firing visionary founders like Steve Jobs in the 1980s, only to later bring them back into the fold.