On the Friday following Christmas, OpenAI published a blog post titled “Why OpenAI’s structure must evolve to advance our mission.” The post outlined the company’s plan to reorganize its for-profit arm into a public benefit corporation (PBC). Over the past few weeks, I have consulted with some of the nation’s leading corporate law experts to gain a deeper understanding of OpenAI’s plan and its implications for the company’s mission to develop safe artificial general intelligence (AGI).

What is a public benefit corporation?

According to Jens Dammann, a professor of corporate law at the University of Texas School of Law, “Public benefit corporations are a relatively recent addition to the universe of business entity types.” The concept of PBCs originated from a certification program created by a nonprofit organization called B Lab. Companies that complete a self-assessment and pay an annual fee to B Lab can carry the B Lab logo on their products and websites and call themselves B-Corps. However, B Corp status is not a legally recognized designation, but rather a stamp of approval from this specific nonprofit.

As a result, B Lab eventually felt that the certification program “was not enough,” according to Michael Dorff, executive director of the Lowell Milken Institute for Business Law and Policy at UCLA. “They wanted something more permanent and more rooted in the law.” B Lab collaborated with legal experts to create a model statute for what would become the benefit corporation. The organization lobbied state legislatures to pass laws recognizing benefit corporations as legal entities, and in 2010, Maryland became the first state to do so. In 2013, Delaware enacted its own version of the law, using the term “public benefit corporation” instead.

Delaware is a crucial state for corporate law in the US, thanks to the Delaware Chancery Court and its business-friendly case law. As of 2022, 68.2 percent of all Fortune 500 companies, including many tech giants, are incorporated in the state despite largely operating elsewhere. OpenAI plans to reincorporate its for-profit arm as a PBC in Delaware.

The fundamental idea behind public benefit corporations is that they impose a constraint on their board to balance profit maximization, a public benefit stated in the company’s charter, and the concerns of people impacted by its conduct.

“It’s a bit of a paradigm shift,” says Professor Dammann. However, it’s essential to distinguish between a PBC and a nonprofit. “The key characteristic of a nonprofit is what we call a non-distribution constraint, meaning if a nonprofit makes a profit, they can’t distribute it to their shareholders,” Professor Dammann explains. “If you form a public benefit corporation, there’s no such non-distribution constraint. At its heart, a PBC is still a for-profit corporation.”

Why is OpenAI pursuing a PBC structure?

Primarily, a PBC structure would allow OpenAI to operate without the non-distribution constraint. However, there may be other considerations at play. OpenAI hasn’t publicly stated this, but some employees believe a PBC structure could protect the company from a hostile takeover if it were to go public. A Financial Times report quoted a source within the company as saying that a PBC structure would provide a “safe harbor” if a rival firm attempted to buy the company.

The specific threat OpenAI likely wants to safeguard against is the Revlon doctrine, named after a 1986 Delaware Supreme Court case. The Revlon doctrine holds that if a publicly traded corporation in Delaware faces a takeover attempt, the board must sell to the highest bidder under certain conditions. The underlying rationale is that a for-profit company’s sole function is to generate profits, so the board is forced to make the choice that returns the most money to shareholders.

“We don’t know for sure, but we’re fairly confident that the Revlon doctrine doesn’t apply to public benefit corporations,” says Professor Dammann. Theoretically, PBC boards may have the flexibility to reject a takeover bid if they believe the buyer won’t adhere to the company’s social values. However, this remains a hypothetical defense, as it has not been litigated.

“We need to raise more capital”

OpenAI has publicly stated that it needs to secure more investment and that its current structure is hindering this process. “We once again need to raise more capital than we’d imagined,” OpenAI wrote in December, two months after securing $6 billion in new venture funding. “Investors want to back us, but at this scale of capital, they need conventional equity and less structural complexity.”

To understand what OpenAI means by “structural complexity,” it’s necessary to examine the company’s history. In 2019, when OpenAI originally created its for-profit arm, it implemented a unique “capped-profit” structure. The company limited investor returns to 100x, with excess returns going to the nonprofit. However, in 2023, The Economist reported that the company changed its cap to increase by 20 percent per year starting in 2025. At present, OpenAI does not expect to be profitable until 2029 and has accumulated around $5 billion in losses last year.

“A stronger nonprofit supported by the for-profit’s success”

OpenAI’s nonprofit arm currently has two primary functions: controlling the for-profit side’s business and developing “safe and broadly beneficial AGI.” According to the company, its current structure does not allow its nonprofit arm to “easily do more than control the for-profit.” If it were relieved of this responsibility, OpenAI suggests its nonprofit could focus on charitable initiatives and become “one of the best-resourced nonprofits in history.”

However, Professor Dorff argues that control of OpenAI is crucial to the company maintaining its mission. The move to reorganize the for-profit as a PBC is not controversial, but the proposal to change the nature of the nonprofit’s ownership interest in the for-profit is. “You can’t just do that,” says Professor Dorff. “The assets of the nonprofit must remain dedicated to the purpose of the nonprofit.”

One more thing

The laws governing PBCs are not very effective in ensuring companies stick to their social purpose. “The legal constraints aren’t very strict,” Professor Dammann says. “The problem with a very broad public benefit is that it’s not so constraining anymore. If you’re dedicated to a very broad version of the public good, then you can always defend every decision, right?”

According to Jill Fisch, professor of Business Law at the University of Pennsylvania Law School, “The dual goal of profit and public purpose doesn’t really tell you how a company is going to manage those objectives.” Professor Dorff adds that what matters in PBC governance is the private arrangements, such as the company’s certificate of incorporation, shareholder agreements, and bylaws, which can provide mechanisms to ensure the company sticks to its social purpose.

What happens next?

Elon Musk’s recent $97.4 billion bid to buy the nonprofit’s assets complicates OpenAI’s plan. The nonprofit is not obligated to sell its assets to Musk under Revlon or any other doctrine. However, as part of OpenAI’s reorganization plan, the for-profit will need to compensate the nonprofit for its independence. Musk’s bid may be an attempt to inflate the price of this transaction.

OpenAI faces a ticking clock, with less than two years to free its for-profit from control of the nonprofit under the terms of its latest investment round. If it fails to do so, the $6.6 billion it raised will become debt.