February 2025 in Brief: Mergers & Acquisitions

Musk’s Bid for OpenAI

By Marco Del Grosso

A $97.4 billion hostile bid has been made to acquire control of OpenAI by a group of investors led by Elon Musk. The group includes Atreides Management, Baron Capital, Endeavor chief executive Ari Emanuel, Valor Equity Partners, Vy Capital, and 8VC. OpenAI, Inc. was created as a 501(c)(3) nonprofit organization; its for-profit subsidiary, OpenAI LP, is controlled by the nonprofit. Hence, it cannot be acquired by a typical hostile takeover. 

Hostile takeovers entail a swift maneuver to acquire a target company without the consent of its board of directors. Usually, hostile takeovers are pursued through strategies including tender offers, the acquisition of most of the target’s shares, and proxy fights.

The hostile takeover of a nonprofit cannot be carried out through a tender offer because it does not have shareholders. Instead, it requires supplanting the existing board by campaigning to replace its directors.

However, in December, OpenAI revealed plans to restructure its for-profit arm as a public benefit corporation and end the control of the nonprofit board. Musk’s bid seems aimed at increasing the valuation of the nonprofit arm of OpenAI to complicate its conversion to a for-profit company. OpenAI was valued at $157 billion during its previous funding round. Now, it plans to raise an additional $40 billion to develop a $500 billion AI infrastructure through a SoftBank-backed project (the Stargate Project), along with Oracle and an Emirati sovereign wealth fund. As part of OpenAI’s conversion, it would need to purchase assets from the nonprofit, and it plans to estimate the value of its nonprofit arm at around $30 billion—a figure that would be lowballing its value, according to Musk’s attorney Marc Toberoff. Toberoff seemed to confirm this intent as he declared that “[i]t is vital that the charity be fairly compensated for [the loss of] control over the most transformative technology of our time.”

The plan to raise the valuation of OpenAI’s nonprofit arm is apparent when considering the fiduciary duties of a nonprofit board, which is not required to sell to hostile bidders and must focus on its mission, but if it sells its assets it must do so at a fair market value.

When OpenAI’s structure shifts to a benefit corporation, it will mark a significant change in OpenAI CEO Sam Altman’s role, as he will receive equity for the first time. This change will also have implications for OpenAI’s board of directors, as their fiduciary duties will need to prioritize the best interest of the shareholders while attending to OpenAI’s mission to pursue social good. An offer at that stage would completely change how the board would act if threatened by a hostile bidder.

Redomestication: Delaware Supreme Court Clarifies Business Judgment Rule Applies in Absence of Well-Pled Allegations

By Patrick V. Johnson II, Howard University School of Law

On February 7, 2025, the Delaware Supreme Court reversed the Court of Chancery’s decision in Maffei v. Palkon and unanimously held that the business judgment rules applies when plaintiffs have not pled particularized facts triggering the entire fairness standard. At issue in Maffei was whether transactions that would change the corporate domiciles of Tripadvisor, Inc., and Liberty TripAdvisor Holdings, Inc. (together, “Tripadvisor”), from Delaware to Nevada provided nonratable benefits to Gregory B. Maffei, who is effectively the controller of Tripadvisor, as well as to members of the boards of directors of both corporations. The Court of Chancery held that Plaintiffs below (Appellees) adequately alleged that Defendants below (Appellants) would receive a material nonratable benefit in the form of reduced liability exposure as directors and officers by reincorporating to Nevada and that the transactions were not entirely fair.

In its review, the Delaware Supreme Court recognized how concerns over controller and director self-interest animate the entire fairness standard, but the alleged nonratable benefit must be material to trigger an entire fairness review. After sifting through relevant case law, the Court likened Tripadvisor’s motivation to reincorporate in Nevada to typical Section 102(b)(7) provisions or boards procuring D&O policies. However, the Court was careful to distinguish between limitations of directors’ liability exposure for past and future acts, where the former seeks to extinguish potential liability for past conduct. With this temporal distinction, the Court found that the present instance of reincorporating and having reduced liability was more akin to limiting liability exposure for future acts since the Plaintiffs failed to allege harm to any particular litigation claims or particular transactions post-reincorporation. Indeed, the Court found that the Appellees’ arguments regarding the defendant-friendly nature of Nevada law and how Appellants would personally benefit were too speculative to constitute a material, nonratable benefit, triggering an entire fairness review. Therefore, in maintaining the values of flexibility and private ordering, the Court declined to second-guess the board’s decisions and held that the business judgment rule protects Tripadvisor’s decision to reincorporate in Nevada.

While not creating a bright-line rule, the Maffei opinion provides key guidance for companies looking to reincorporate by clarifying the materiality of an alleged nonratable benefit and what constitutes “interest” when directors make such decisions. In addition, by the Court’s application of the business judgment rule instead of the entire fairness standard, practitioners can feel more comfortable that the Delaware Supreme Court intends to give broad deference to board decisions on reincorporation.