On Friday, OpenAI announced its strategy to convert its for-profit division into a Delaware public benefit corporation (PBC), a move designed to enhance its capital-raising capabilities in the competitive artificial intelligence sector, particularly against major players like Google.
This new corporate model seeks to make OpenAI more appealing to investors while still committing to support an associated charitable organization.
Competitors, including Anthropic, have also embraced the PBC framework to align the pursuit of societal benefits with the generation of shareholder value.
Understanding Public Benefit Corporations
PBCs, like traditional corporations, operate for profit, but they are legally obligated to further designated public benefits, which can encompass social and environmental objectives.
Delaware paved the way for PBCs by revising its corporate laws in 2013, leading to 19 publicly traded PBCs by December 2023, based on research from Jens Dammann at the University of Texas.
According to OpenAI’s recent blog post, the existing structure is described as “a for-profit, controlled by the non-profit, with a capped profit share for investors and employees.” Under the new setup, the non-profit organization will hold shares in the for-profit entity, paralleling external investors, while the for-profit will finance the charitable aims of the non-profit.
“The PBC will lead and oversee OpenAI’s business operations, while the non-profit will appoint a leadership team to focus on charitable efforts in areas like healthcare, education, and science,” the post stated.
Comparative Analysis of PBCs and Other Corporate Models
Non-profit corporations differ significantly from PBCs; they do not possess shareholders and reinvest all profits back into their missions rather than distributing them to individuals.
Furthermore, PBCs do not benefit from special tax breaks or advantages, whereas non-profits can often avoid federal income taxes provided they fulfill specific conditions.
Challenges Associated with PBCs
The designation of a corporation as a benefit entity does not assure that profit will be subordinate to its mission. The law mandates that the board of directors must “balance” mission fulfillment with profit motives, noted Ann Lipton, a corporate law professor at Tulane Law School.
Delaware law obliges companies to report their advancements toward these objectives to shareholders, who ultimately influence how closely a PBC adheres to its mission, Lipton explained.
“The primary advantage of adopting the benefit form over other corporate structures lies in the public declaration of intention. However, this does not carry substantial enforcement strength,” she added.
Legal experts further assert that publicly traded PBCs may face greater risks of takeover, with potential bidders arguing that the company’s priorities regarding profits or public benefits may clash with their own goals.
Examples of Existing Public Benefit Corporations
OpenAI’s competitors, such as Anthropic and Elon Musk’s xAI, have also transitioned to the PBC model.
Allbirds, based in San Francisco, is a PBC known for its sustainable footwear and apparel crafted from natural materials.
Kickstarter operates as a New York-based PBC, providing a global crowdfunding platform dedicated to fostering creative projects.
Patagonia, a California-based retailer of outdoor clothing and gear, has channeled over $230 million into environmental initiatives, according to its official site.
Warby Parker, a New York eyewear manufacturer and retailer, supports its “Buy a Pair, Give a Pair” initiative to assist individuals in need.
© Thomson Reuters 2024
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