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Hello and welcome you are 
listening to Patrick Boyle on 

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Finance, a podcast exploring 
ideas from quantitative finance,

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examining events occurring in 
markets right now and financial 

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history to see what lessons can 
be taken away, including 

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interviews with some of the most
interesting people in the world 

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of finance. 
To learn more about the podcast,

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visit on finance.org. 
Elon Musk filed a lawsuit last 

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week against Open AI and its CEO
Sam Altman, alleging the 

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company's deal with Microsoft 
compromised the startup's 

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original mission. 
Musk is seeking disgorgement, 

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additional unspecified damages, 
and specific performance. 

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The lawsuit is quite interesting
for a number of reasons, most of

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which relate to the unusual 
corporate structure of Open AI, 

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which was founded as a tax 
exempt non profit, later 

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establishing a holding company 
that allowed it to take money 

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from investors in a capped 
profit subsidiary. 

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The investors in the capped 
profit subsidiary are not 

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entitled to board seats as they 
would be in a normal 

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corporation, and the profits 
returned to investors are capped

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at 100 times the amount 
investors initially put in, 

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which many would view as a 
decent return on investment. 

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But it is still a capped return.
Investors in the for profit 

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subsidiary were amusingly warned
when investing it would be wise 

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to view any investment in Open 
AI Global LLC in the spirit of a

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donation, with the understanding
that it may be difficult to know

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what role money will play in a 
post AGI world. 

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This is quite unusual. 
In essence, this is a breach of 

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contract lawsuit, but 
surprisingly, no actual contract

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appears to exist, which can make
things complicated. 

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The fact that the lawsuit was 
filed in California is also 

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surprising as it names 8 
Delaware registered corporate 

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entities as defendants, and so 
you would expect the suit to be 

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filed in Delaware. 
The fact that it's not probably 

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relates to Musk's anger with the
Delaware court system. 

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Musk's lawsuit asks the court 
for judicial determination that 

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Open A is GPT 4 software 
constitutes artificial general 

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intelligence, or AGI. 
There is, of course, no legal 

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definition for artificial 
general intelligence, which 

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might make this difficult. 
The suit requests trial by jury,

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which means that a jury would be
expected to decide on this topic

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if it went trial. 
The lawsuit accuses Open AI of 

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breach of fiduciary duty to mask
as a donor, but then in other 

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parts of the lawsuit says that 
the board's sole fiduciary duty 

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is to humanity. 
I guess in mathematical terms, 

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Set A is humanity and Set B is 
Elon Musk, and Set B is a very 

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clear subset of Set A, so maybe 
they do owe him a fiduciary duty

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as part of humanity. 
I'm happy to send this diagram 

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to Musk's lawyers and to appear 
as an expert witness if needed 

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for a small fee. 
There is a section accusing Open

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AI of unfair business practices 
and unfair competition which 

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doesn't describe any business 
practices or competitive 

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behaviour, but which concludes 
that the plaintiff is entitled 

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to restitution and or 
disgorgement of any or all 

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monies received by the 
defendants while Open AI engaged

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in such practices. 
The lawsuit does however make a 

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very interesting point relating 
to tax policy and corporate 

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structure. 
It argues that if a company can 

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launch as a nonprofit working 
for the public benefit and can 

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collect pre tax donations later,
transferring the IP into a for 

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profit venture once it's become 
useful, Every startup will do 

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this going forward. 
The lawsuit points out that for 

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every dollar that an investor 
invests by contributing to a non

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profit, that investor gets 
approximately $0.50 back from 

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the state and federal 
governments in the form of 

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reduced income taxes. 
So the net cost to investors of 

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each $1.00 of investment is only
$0.50. 

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That is an attractive way to 
invest if it is allowed. 

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The complaint argues that if the
court validates open AI's 

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conduct, every startup will 
follow this playbook to the 

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detriment of legitimate 
nonprofits, the government's tax

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coffers, and ultimately, the 
people of California and beyond.

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So humanity, I guess. 
So let's go through these claims

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1 by 1, see what legal experts 
have been saying about the case.

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And we'll also discuss the Open 
AI memo saying that the claims 

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in this lawsuit stem from Elon's
regrets about not being involved

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in the company today, and the 
emails they released showing 

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Musk initially supported the 
plan to create a for profit 

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entity and wanted a merger that 
would make Tesla its cash cow. 

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Let's start with the breach of 
contract claims. 

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One of the biggest problems with
the breach of contract claims in

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this lawsuit is that no actual 
contract exists. 

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The lawsuit mentions the 
founding agreement 32 times, but

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no founding agreement actually 
exists. 

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Instead, the lawsuit tells us 
that the founding agreement must

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be inferred from various emails 
and conversations between the 

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founders text from the website 
of Open AI and the Delaware 

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Certificate of Incorporation. 
The Delaware Certificate of 

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Incorporation is even included 
as Exhibit One and is referenced

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in the lawsuit as being part of 
the founding agreement. 

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A Certificate of incorporation 
is unfortunately not a contract.

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It's a document that you file 
with a state in order to 

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incorporate a corporation. 
Musk didn't sign this 

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certificate and it gave him no 
rights as a shareholder. 

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Because there are no 
shareholders in a nonprofit 

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organization. 
It actually states that on the 

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certificate. 
Exhibit 2 of the lawsuit is an 

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e-mail exchange between Altman 
and Musk with five bullet 

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points, which include questions 
like will you be involved 

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somehow in addition to just 
governance? 

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And ideally you'd come by and 
talk to them about progress once

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a month or whatever. 
There's no mention of money 

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anywhere in the exchange, Musk 
replied to Altman's e-mail with.

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Agree on all It's unlikely that 
a court would see this as being 

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a contract, and even if they 
did, it's not obvious how it 

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supports Musk's claims. 
I should add in, for the sake of

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completeness, that on page seven
of the complaint it says that in

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2023 the defendants set the 
founding agreement aflame. 

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Which is most likely a metaphor,
but who knows? 

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Maybe the reason Musk has not 
presented anything that looks 

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like a contract is that it was 
set aflame last year. 

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I feel that the Lord should aim 
to write with greater clarity 

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than that with regard to the 
lawsuit being filed in 

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California rather than Delaware.
Anne Lipton of Tulane University

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writes in her Business law Blog 
that must claims that he has a 

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contract formed under California
law that allows him to dictate 

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the governance choices of a 
Delaware organized non stock 

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corporation and further that a 
California court should order 

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this Delaware corporation to 
conduct itself in accordance 

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with his contract. 
She goes on to explain that Open

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AI as a nonprofit is subject to 
jurisdiction not only of the 

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Attorney General of the state of
its organization, but also the 

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Attorneys General of the state 
where it operates. 

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Musk is not an Attorney General 
and thus can't bring charges 

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that a nonprofit violated the 
legal rules governing nonprofits

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in California. 
Possibly for this reason, he's 

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instead claiming A contractual 
right to dictate the governance 

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of a Delaware organized non-stop
corporation. 

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Lipton argues that if Open AI 
wanted to take this as a serious

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threat, it could file a 
declaratory judgement action in 

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Delaware to the effect that 
these contracts, if they even 

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exist, are in fact contracts 
concerning internal affairs 

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matters governed by Delaware 
law. 

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And under Delaware law, at least
at the corporate level, they are

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illegal intrusions into the 
board's authority. 

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Jeremy Tellman from Oklahoma 
City University School of Law 

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highlights on his blog that with
respect to these claims, Mr. 

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Musk seeks unspecified damages 
but also specific performance of

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the alleged contractual or non 
contractual promises. 

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While Open AI and Microsoft 
could refund Musk's investment 

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and pay any damages claimed, 
specific performance is a big 

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ask. 
According to Tellman. 

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Specific performance means the 
court requiring Open AI to 

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fulfill their contractual 
obligations, Telman writes. 

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I don't see a court ordering a 
company to work for the 

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betterment of humanity. 
To quote the lawsuit, in 

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addition to discouragement and 
damages, Musk seeks specific 

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performance in the form of. 
One, an order requiring that 

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defendants continue to follow 
Open AIS, long standing practice

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of making AI research and 
technology developed at Open AI 

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available to the public. 
And two, an order prohibiting 

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defendants from utilizing Open 
AI, Inc or its assets for the 

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financial benefit of the 
individual defendants, 

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Microsoft, or any other 
particular person or entity. 

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So if this was granted, Open AI 
would be required to release all

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of their work to the public and 
continue working without any 

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financial benefit. 
In a rather funny article on The

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Verge, Nilay Patel dismisses the
entire complaint as a nuisance 

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lawsuit that's likely to be 
dismissed by the court. 

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He writes that Musk's lawyers 
have figured out that letting 

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the world's richest man rack up 
billable hours filing 

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nonsensical lawsuits is more 
lucrative than fitting the facts

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to the law or whatever it is 
that regular lawyers do. 

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He writes that the breach of 
contract claim admits that the 

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founding agreement is basically 
a vibe everyone caught in some 

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emails moving on from the breach
of contract claims. 

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The breach of fiduciary duty 
claim doesn't hold much water 

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either. 
The Supreme Court clarified in 

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Atherton versus FDIC that under 
the internal affairs doctrine, 

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the law of the state of 
incorporation of the 

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organization is the applicable 
law regarding the fiduciary 

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duties of corporate directors 
and officers. 

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So this part of the case would 
need to be litigated in 

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Delaware, not in California. 
Under Delaware case law, 

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directors are charged with an 
unyielding fiduciary duty to 

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protect the interests of the 
corporation and to act in the 

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best interests of its members. 
As I mentioned earlier, there 

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are no members or shareholders 
in a Delaware nonprofit 

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corporation and thus the board 
has no fiduciary duty to mask. 

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The Financial Times wrote in an 
article on Thursday that the 

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lawsuit reads like a mash up 
between a science fiction film 

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script and a letter from a 
jilted lover. 

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The section on unfair business 
practices is confusing. 

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It doesn't describe any business
practices or competitive 

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behaviours, but it does say that
the practices deceived Musk and 

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are likely to deceive other 
members of the public. 

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The most interesting part of the
lawsuit, as I mentioned earlier,

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is the section on how availing 
of tax breaks by launching as a 

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non profit before transferring 
the IP into a for profit venture

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once the technology has been 
proved if allowed, would mean 

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that all startups would follow 
this path. 

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I don't know if a California 
court can judge on this, but it 

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does appear to be quite a tax 
loophole that other startups 

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could possibly exploit. 
Sometimes companies find and 

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exploit tax loopholes, and if a 
government decides not to close 

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them up, they go on to become 
the way things are done going 

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forward. the US government might
decide that they're happy to 

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allow this loophole in order to 
incentivize investment in 

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startups. 
The four O 1K retirement plan 

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came about when Hughes Aircraft 
Company used a loophole in the 

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IRS Revenue Code to convert its 
after tax savings plan into what

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we now call a Four O 1K plan. 
While Musk has highlighted this 

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issue in his lawsuit, I don't 
believe the California court 

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will decide on an issue like 
this. 

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But the press around this 
lawsuit may draw the attention 

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of the Office of Tax Policy. 
In the wake of the lawsuit, Open

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AI Chief Strategy Officer Jason 
Kwan wrote an internal memo, 

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which has been seen by numerous 
press organizations, which said 

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we believe the claims in this 
suit may stem from Elon's 

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regrets about not being involved
with the company. 

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Today Open AI disputes Musk's 
version of events and is moved 

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to dismiss his legal claims. 
In a blog post this Tuesday, 

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Open AI's Co founders released a
number of emails sent by Elon 

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Musk which showed that Musk had 
supported Open AI's move to 

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create a for profit business 
entity and had even wanted to 

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fold the company into Tesla, the
blog post says. 

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In late 2017, we and Elon 
decided the next step for the 

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mission was to create a for 
profit entity. 

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Elon wanted majority equity, 
initial board control and to be 

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CEO. 
In the middle of these 

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discussions, he withheld 
funding. 

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Reed Hoffman bridged the gap to 
cover salaries and operations in

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one of the released emails. 
Musk discouraged making the 

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research freely available, 
saying if you can't seriously 

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compete but continue to do 
research in the open, you might 

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in fact be making things worse 
and helping them, meaning Google

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out for free because any 
advances are fairly easy for 

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them to copy and immediately 
incorporate at scale in the same

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2018 e-mail, he writes. 
A for profit pivot might create 

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a more sustainable revenue 
stream over time and would, with

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the current team, likely bring 
in a lot of investment. 

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He goes on to say the most 
promising option I can think of,

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as I mentioned earlier, would be
for Open AI to attach to Tesla 

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as its cash cow. 
The Open AI founders claim that 

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Elon soon chose to leave Open 
AI, saying that our probability 

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of success was 0 and that he 
planned to build an AGI 

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competitor within Tesla. 
When he left in late February 

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2018, he told our team he was 
supportive of us finding our own

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path to raising billions of 
dollars. 

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Musk's lawsuit is asking the 
court to return his donations, 

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pay him damages, and for an 
order forcing Open AI to release

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all of their source code into 
the public domain and end 

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Microsoft's exclusive license 
agreement. 

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The court will of course be 
aware that Musk runs a competing

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for profit artificial 
intelligence company called XAI,

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along with other companies that 
claim to use artificial 

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intelligence like Tesla and 
Twitter. 

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Matt Levine at Bloomberg points 
out that Musk's protests about 

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Open AIS unseemly pursued of AI 
profit for investors looks a 

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little insincere since he's 
doing the exact same thing at 

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his other firms. 
The Centre for AI Policy wrote 

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in an open letter on their 
website that it's possible that 

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Musk is simply tech washing and 
creating chaos in the 

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marketplace. 
The unusual corporate structure 

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of Open AI has allowed Microsoft
to put billions of dollars into 

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the company over the last 
several years. 

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Open AI is using Microsoft's 
computing resources to develop 

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its technology and Microsoft is 
integrating Open AI services 

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into its core products. 
Microsoft has been able to do 

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this without attracting 
antitrust scrutiny as they claim

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to not exercise any control over
the limited for profit company 

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controlled by a non profit 
organization. 

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That lack of control has since 
been called into question after 

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Microsoft stepped in when Sam 
Altman was fired late last year.

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The Justice Department and the 
Federal Trade Commission are now

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00:18:38,680 --> 00:18:42,640
reported to be deep in 
discussions over which agency 

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can probe Microsoft's 
involvement with Open AI on 

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antitrust grounds. 
The relationship between the two

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firms has additionally drawn 
scrutiny from the UK's 

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Competition and Markets 
Authority and the European 

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Commission. 
I'm not sure that Musk's lawsuit

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will lead to much. 
Noah Feldman, a professor at 

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Harvard Law School, told the New
York Times that the contract 

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Musk claims Open AI and the 
Altman breached contains a hole 

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you can drive a truck through. 
Open AI Certificate of 

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Incorporation, which Musk's 
lawyers claim is part of the 

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founding agreement, says the AI 
maker will seek to open its work

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to the public for its benefit 
when applicable. 

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And Open AI can easily argue 
that it is adhering to this 

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term, which is vague. 
While the lawsuit itself may not

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be awfully interesting, it does 
highlight the unusual structure 

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of Open AI, which has all sorts 
of tax and antitrust 

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implications which are of great 
interest in corporate finance. 

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week's podcast, with a special 

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00:19:56,200 --> 00:20:00,160
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00:20:02,520 --> 00:20:04,080
you again soon. 
Bye. 

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00:20:04,880 --> 00:20:08,320
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