Before the bell rings

Part 2

ON AUG. 5, 2024, two months after he voluntarily dismissed his initial lawsuit against Sam Altman and OpenAI, Elon Musk was back with new lawyers, new theories and a new lawsuit. He filed this one in federal court, and it was ultimately assigned to Judge Yvonne Gonzalez Rogers sitting in Oakland.

Gonzalez Rogers is a seasoned federal district court judge who is known among lawyers for her no-nonsense manner. Her reputation precedes her when she steps into the courtroom; lawyers know she will be well-prepared and ready — actually eager — to engage. She will expect lawyers to be thoroughly prepared, candid with the court and ready to answer the question she asks — not some other question that counsel would have preferred.

And Gonzalez Rogers is not a newbie to the world of high drama, big dollar, advanced tech litigation; she heard Epic Games’ challenge to the 30% developer fee Apple imposed for the privilege of letting Epic’s apps into the App Store. In that case, she ruled in Apple’s favor on Epic’s antitrust claims but found Apple violated California’s unfair competition law in one respect. She enjoined Apple on that issue, and when she determined later that Apple had violated her injunction, she held the world’s most valuable company in civil contempt, describing Apple’s conduct as “gross insubordination.”

Musk’s new filing was what lawyers call a “kitchen sink” complaint. Musk asserted 26 separate claims, including federal antitrust and racketeering counts as well as many state law claims. One of those said that OpenAI and Altman violated California nonprofit law by transferring charitable assets from the nonprofit to the subsidiary and allowing Microsoft to obtain control over the assets by way of its multibillion-dollar investment.

The breadth of Musk’s claims was matched by his urgency. There were press reports that even as the lawsuit was pending, Altman was allegedly engineering a complex restructuring of the overall organization that would leave OpenAI as a for-profit corporation.

Musk asked the court to order OpenAI to keep the status quo in place while the lawsuit proceeded. Musk argued that it would be impossible to reverse that type of corporate change if conversion to for-profit status was later proven unlawful.

At a preliminary injunction hearing on Feb. 4, 2025, Gonzalez Rogers said preliminary injunctions are rarely granted and require a high degree of proof that the party seeking the injunction will be irreparably injured without the court’s intervention. Another requirement, she noted, was near certainty of a winning case. She questioned whether Musk had come close to meeting that standard.

The expression on her face showed that she was also troubled by the fact that Musk’s company, x.AI, was a competitor to OpenAI. She said, “this country likes competition,” and added that she would not hamstring competition in an area as important and fluid as the development of artificial intelligence.

While she took the case under advisement — that is, to consider it further before issuing a decision — it did not look good for Musk. Weeks later on March 4, she issued her definitive ruling, denying Musk’s request for preliminary injunction.

It seemed Musk was dangerously close to losing the entire case.

But then Gonzalez Rogers threw a curveball that had not been requested by the lawyers.

She agreed with Musk that the issue of the charitable assets was of great public importance. She said, “the Court agrees that significant and irreparable harm is incurred when the public’s money is used to fund a non-profit’s conversion into a for-profit.” Her reference to the “public’s money” was a nod to the public subsidy (that is, the tax deductions) that OpenAI’s donors received for their donations.

Accordingly, she said she would put the other claims in the case on the backburner but would “fast track” the claim for breach of OpenAI’s charitable mission so that it could be heard in the fall of 2025.

Billions and billions

Between the time of the Feb. 4 hearing on the preliminary injunction and Judge Gonzalez Rogers’ March 4 ruling, there had been an extraordinary development.

Musk and a group of investors publicly proposed to pay $97 billion for OpenAI’s assets. The offer had a performative aura (Musk’s lawyer told the press about it), but were it real and actually effectuated, the nonprofit OpenAI would instantly become one of the world’s wealthiest nonprofit enterprises.

OpenAI immediately rejected the offer and reported it to the court as evidence in support of its position that Musk was really a disgruntled investor. (Musk shot back that OpenAI’s immediate rejection of the massive purchase price showed it was out for its principals, not humanity.)

While the offer did not seem to be of great interest to the judge (she tossed it aside in a footnote to her March 4 opinion), the Attorneys General of Delaware and California must have been intrigued.

The AGs

In many states, the state attorney general has broad authority over charitable corporations. Delaware — the state of OpenAI’s incorporation — was one of them.

On Dec. 30, 2024, Delaware’s Attorney General Kathleen Jennings asked Judge Gonzalez Rogers to permit her to file a “friend of the court” or “amicus” brief in the Musk lawsuit. In her friendly brief, which was allowed by Gonzalez Rogers, Jennings advised that as attorney general she had an interest in the controversy.

She said that under Delaware law, she had authority to review the proposed conversion of OpenAI into a for-profit corporation. The legality of the transaction would be governed by Delaware law. If she determined it was not lawful, she had the power to ask for modifications to the transaction or seek an injunction in Delaware state court.

Jennings advised Gonzalez Rogers that she was in “ongoing dialogue” with OpenAI and she was “actively reviewing” the transaction to ensure that OpenAI adhered to its specific charitable purposes, as opposed to the commercial or private interests of OpenAI’s directors or officers.

She said her review would include an analysis of whether the charitable purposes of OpenAI’s assets would be impaired by the transaction and whether OpenAI’s directors were meeting their fiduciary duties.

Meanwhile, in California, Attorney General Rob Bonta was technically a party to the lawsuit after having been joined in the case as an “involuntary party.” Before the suit, Musk asked Bonta for permission to sue “on behalf of” OpenAI on the theory that its alleged conflicts of interest and self-dealing prevented it from asserting its own rights. When Bonta did not answer the question, Musk named him as a party.

But whether he was a party, Bonta, like Jennings, had a keen interest in the case.

Back in 2017, OpenAI Inc. had been added to the Registry of Charitable Trusts maintained by California’s attorney general. The registration requirement, subject to some exemptions, applied to charitable corporations that were “holding assets for charitable purposes or doing business in the State of California.”

When the act applies, “The Attorney General may investigate transactions and relationships of corporations and trustees subject to this article for the purpose of ascertaining whether or not the purposes of the corporation or trust are being carried out in accordance with the terms and provisions of the articles of incorporation or other instrument.”

That section gave Bonta a big stick to take a look at what was going on under the OpenAI circus tent.

The recapitalization

With the preliminary injunction threat out of the way, in October 2025 OpenAI closed a “recapitalization” of its for-profit subsidiary that converted the old enterprise into OpenAI Group PBC (“PBC”), a “public benefit corporation,” that is, a for-profit corporation that not only pursues profits for its shareholders but also pursues a mission that benefits the public.

Under the restructuring, OpenAI Inc., the nonprofit parent, became OpenAI Foundation (the “Foundation”) and was given a 26% stake in the public benefit corporation valued at $130 million. Microsoft ended up with a 27% share valued at $135 billion. The remaining 47% was allocated to employees and other investors.

The Foundation got special governance rights that gave it authority to appoint (and remove) the PBC’s directors. PBC was charged with the same mission as the Foundation.

A Safety and Security Committee — with a mission to focus on AI safety — will report directly to the Foundation.

Altman presented it as a win for everyone. PBC was able to raise capital to pursue its goal of creating AGI. The Foundation’s role as the protector of humanity was preserved through its special governance rights and it got a stake in PBC worth $130 billion to do endless good. And to top it all off, the AGs of Delaware and California were able to ensure that the Foundation had the right — at least on paper — to keep the for-profit subsidiary in line. (Bonta also had the win of a provision that committed the Foundation and PBC to remain in California.) Who could complain?

But there were a few things in the recapitalization that weren’t exactly what Altman highlighted. They were technical things, things that didn’t spring out, but they might change how you viewed the transaction, even if it was still damp from holy water the AG’s sprinkled over it.

First, before the transaction, the Foundation was the owner of the for-profit subsidiary and was entitled to all of the value after the “capped profits” were achieved. Now it had 26% of the value without any caps.

No doubt that caps were high hurdles, but if OpenAI actually created AGI, the enterprise value would not be measured in billions but skidillions and in that case the 26% number (even goosed by an undisclosed accretion formula based on future valuation) looked paltry.

AI blogger Zvi Mowshowitz wrote a 24-page Substack post that called the deal “the largest theft in human history,” though he slightly qualified that by saying the events surrounding the dissolution of the USSR and the transferring of its assets to Russian oligarchs might have been a larger theft.

Second, while the Foundation had the power on paper to replace the directors of PBC at any time, the directors of the Foundation, with one exception, were the same people who were directors of PBC. That overlap was theoretically to change over the years, but it was a very Altman-friendly structure.

In fact, during the crucial first year after the restructuring closed, there was no way mathematically that the Foundation could override anything that PBC did, at least as long as a majority of the PBC directors who supported the action did not change their mind about it when they voted in their other capacity as Foundation directors.

Even after a year, the Foundation was mathematically neutered if five PBC directors (present or future) with cross-board seats supported the PBC action. Nothing in the special governance rights required the Foundation to fill a majority of its seats with people who were not on PBC’s board.

When it was all boiled down, the Foundation was the parent on paper, but as long as the board of PBC had a majority of the Foundation’s board seats and they voted together, PBC had a working veto over the Foundation.

How that would all work out in the fullness of time was hard to unravel, but Altman had deftly created a structure in which — at least for the time being — the oversight enterprise (the Foundation) was under the de facto control of the company being overseen. And Altman was the CEO of PBC as well as a board member of PBC and the Foundation so he would have visibility into everything.

With the restructuring completed and blessed by the AGs, it seemed as if Altman had everything he wanted. He was in control of the company and was going full bore in the race for AGI (Artificial General Intelligence). He’d turned the OpenAI structure into something that would be very unlikely to reprise the humiliating ouster he’d suffered. Soon he’d be able to pursue an IPO (an initial public offering of PBC stock) and bring vast capital to the table.

There was still one thing left to check off the list; he needed to get rid of Musk’s lawsuit.

In Part Three we will follow how the issues narrowed (and expanded) as the case advanced to trial.