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Everyone loved Monday’s announcement by OpenAI and Nvidia. Of course they did. You only have to carve the words artificial intelligence on to a lamp post these days and it’ll be valued at millions.
But the more I think about OpenAI and Nvidia’s plan to build 10 gigawatts of computing power, the more I worry that investors are losing their grip. Massive numbers don’t seem to register. Being left in the dark is considered normal. Checks and balances barely exist.
One criticism of the deal is that it kind of sounds like a perpetual motion machine with Nvidia investing up to $100bn in OpenAI so the latter can buy more Nvidia chips. Forking out for growth is common, though — however ick. Samsung, Intel and TSMC invested in ASML to accelerate lithography development in order to boost demand for their own products. Netflix and Amazon fund studios which make content for them. Miners support refineries to guarantee offtake.
My main issue with the deal is he scale of money involved given that Nvidia shareholders learnt about it through a press release presented as a fait accompli. Sure, the cash-for-shares swap happens in dribs and drabs as capacity is built. But for reference, $100bn would rank as a mega-deal by anyone’s standards.
I don’t care that Nvidia’s market cap is more than 40 times that. The sum is equivalent to the common equity on its balance sheet. If paid out, it’s akin to a dividend yield of 2.3 per cent. Shouldn’t equity holders have an explicit vote on such an outlay, let alone a deal we’re told is so strategic?
Most rule-setters around the world reckon not. While shareholders must be asked if management teams want to do things such as make a large acquisition or cede control, no vote is needed on capex and investment, no matter how gargantuan. Only the board needs to sign-off.
Crucially, there are exceptions. If a significant issuance of shares is required, for example. Or when an investment is in effect a reverse merger. A third reason shareholders are sometimes given a look in — and the one which rang my bell with Nvidia and OpenAI — is if a deal is with a related party.
Laws vary by jurisdiction, but accounting standards (IAS 24 under IFRS as well as ASC 850 under GAAP for American companies) agree that a related-party transaction is between any parties where there is a personal, financial or control relationship.
In other words, two companies that share the same directors, executives or major shareholders (or close family members). They could also be related if one controls the other in some way. Joint ventures can also fit the definition.
Due to potential conflicts of interest, it would seem obvious that such deals should be put to shareholders if they are substantial enough. A boardroom green light doesn’t cut it. Therefore in countries such as Britain and Australia, related party transactions over a certain size require shareholder approval.
Not so in the US. For companies listed on the New York Stock Exchange and Nasdaq, all that’s required is for their audit committees or another independent group of directors to review related party transactions “on an ongoing basis”.
But surely shareholders should have a say in the largest computing project in history, as Nvidia chief executive Jensen Huang called it this week. It sure as hell seems like it should to me.
The world’s largest public and private companies do not control the other, as such. Boy, are they related, though. “We’ve been working closely with Nvidia since the early days,” said Greg Brockman, the co-founder and president of OpenAI. Indeed, Huang hand-delivered the first DGX system to OpenAI almost a decade ago. The two companies even call the deal a “landmark” partnership, although we don’t know yet what the structure will be. But given related-party rules, you can bet it won’t be a formal joint-venture.
Shareholders, of course, do have the right to sue the board if they feel aggrieved or fight a proxy battle to replace directors. But so long as the stock prices keep rising — and Nvidia’s rose 4 per cent on the announcement — I suspect investors won’t complain even if this cosy deal worries them to some degree.
More broadly, I question whether US related-party rules remain fit for purpose given the interconnectedness of the new AI ecosystem.
At least OpenAI is private. But what about Microsoft’s shareholders, who stand to own about 30 per cent of the maker of ChatGPT when it eventually goes public? Or those of SoftBank and Oracle? The Stargate project they are backing is a $400bn investment. Almost half a trillion dollars! That’s too much for investors to take on trust.