It has been an atypically dramatic news cycle for the sometimes-stodgy business pages. OpenAI – the company behind ChatGPT – was all over the news the week before Thanksgiving after its board of directors decided to fire the company’s co-founder and CEO, Sam Altman. Altman then very publicly accepted a position at Microsoft, which led to nearly all of OpenAI’s employees threatening to leave the company if Altman was not reinstated. A few days later, the company announced that Altman would return, but the board of directors would change.
While it’s tempting to make light of the saga – for example, wondering whether the decision to fire Altman was itself generated by ChatGPT – it’s more interesting to use the story as an example of what happens when a company’s entity structure and corporate governance documents no longer align with the business. The OpenAI board fired the company’s CEO without notice because the bylaws allowed it to take such an action.
OpenAI has a complex governance structure. The company began as a nonprofit corporation, which later formed a for-profit subsidiary to facilitate investment in the company. According to wired.com, this structure allowed four directors to have the power to fire the company’s CEO because the company’s bylaws authorized a majority of the board’s members to act without notice or a meeting.
It’s not unusual for a company’s bylaws to authorize its governors to act without notice or a meeting. For example, the Washington Business Corporations Act provides, at RCW23B.08.210(1), that “[u]nless the articles of incorporation or bylaws provide otherwise, corporate action required or permitted by this title to be approved at a board of directors’ meeting may be approved without a meeting if the corporate action is approved by all members of the board. The approval of the corporate action must be evidenced by one or more written consents describing the corporate action being approved, executed by each director either before or after the corporate action becomes effective, and delivered to the corporation for inclusion in the minutes or filing with the corporate records.”
The Washington Nonprofit Corporation Act allows a nonprofit board to take action without a meeting by unanimous consent, unless the corporation’s bylaws provide otherwise. Similarly, the Washington Limited Liability Company Act allows an LLC’s company agreement to provide for action by consent of the LLC’s members without a meeting.
Allowing a company’s board to take a necessary action without having to follow formal notice requirements for a meeting when all the board members agree is efficient. It is also efficient to allow a company’s board to take action without the unanimous consent of all of the members so that a minority interest can’t prevent the company from moving forward with an action that the majority of the board approves. However, the OpenAI story illustrates the risk a company takes in overprioritizing efficiency in decision-making by authorizing actions by consent without a meeting when not all the board members are in agreement. This story also shows why it is important for a company to periodically review its bylaws and other corporate governance documents and, potentially, amend these documents so that they are a good fit for the company as it exists in the present moment.
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