The Real Story of the OpenAI Case

“Closing arguments in Elon Musk's lawsuit against Sam Altman are scheduled for Thursday.

 

Mr. Musk argues that OpenAI breached its founding contract as a nonprofit when it restructured itself as a for-profit enterprise.

 

The real story is the way the attorneys general of Delaware and California allowed it to do so. They approved a transfer of billions of dollars in charitable assets -- accumulated under public tax privilege, for public benefit -- to private shareholders, with no public accounting of the value and only a perfunctory record of the terms.

 

OpenAI was founded as a nonprofit in 2015. To attract capital, it created a for-profit subsidiary in 2019; Microsoft and others lined up to invest. To preserve the nonprofit's charitable mission, returns to those investors were capped, and profits above the cap would flow back to the charity.

 

In 2025, however, the cap was removed. The result is the largest transfer of charitable assets to private hands in American history.

 

At the time of restructuring, the for-profit subsidiary was already the world's most valuable private company, worth more than $500 billion. It's fast approaching a trillion-dollar valuation. Microsoft's stake is 27%; the nonprofit's is -- for now -- 26%.

 

When a nonprofit "converts" to a for-profit, states ordinarily require the attorney general to make sure the charitable assets are carefully accounted for and paid for by their new owners. Standard practice requires an independent appraisal, public hearings with standing for affected parties, and an independent successor foundation that receives full value for the converted assets.

 

The OpenAI restructuring had none of that. Neither attorney general held public hearings or published a valuation. Instead, they approved it with a six-page memo and a hope for the best.

 

The real loser, as ever, is the taxpayer. When OpenAI organized as a 501(c)(3), it accepted the familiar terms applying to nonprofits: The organization wouldn't pay tax on its surplus, and donors would deduct their contributions from their own taxable income. The underlying premise of the deal was that the assets accumulated under those terms must remain devoted to the charitable purpose for which the privilege was granted. In OpenAI's case, that purpose was, by its own charter, ensuring that artificial general intelligence "benefits all of humanity."

 

It's a lovely sentiment. Meanwhile, 10 years of tax-free compounding have turned hundreds of millions in deductible donations into private equity worth hundreds of billions. Taxpayers don't even know how much they've lost.

 

OpenAI's president testified that the foundation "remains a nonprofit." In name only. The nonprofit and the for-profit are controlled by the same people -- seven of the nonprofit's eight directors are voting members of the for-profit's board.

 

Nonprofit conversions are nothing new. Between 1991 and 2003, Blue Cross Blue Shield plans across the country attempted similar conversions. Some went well. Some were disastrous. California's became a success, but only after the original deal was reversed. In 1993 Blue Cross of California transferred nearly all its assets into a for-profit subsidiary -- the same move OpenAI made. The regulator initially approved a deal that valued the assets at less than 4% of their actual worth.

 

It took more than three years of public pressure, multiple hearings, a dogged legislator and a regulator willing to reverse his predecessor to force a do-over. The public eventually got back more than $3 billion -- a record at the time. The public stakes in the OpenAI case are hundreds of times as large.

 

The next "nonprofit" AI company is being structured right now. Whether the public has any meaningful claim on what comes out of it shouldn't depend on which billionaire wins in court. State attorneys general are supposed to ensure that charitable assets are used for charitable purposes. In OpenAI's case, they didn't.

 

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Ms. Chevalier is a professor of finance and economics at the Yale School of Management. Mr. Sanga is a professor at Yale Law School.” [1]

 

1. The Real Story of the OpenAI Case. Chevalier, Judith; Sanga, Sarath.  Wall Street Journal, Eastern edition; New York, N.Y.. 14 May 2026: A15.