Nvidia's plan to invest up to $100 billion in OpenAI for a massive 10-gigawatt computing project has raised significant questions about corporate governance and shareholder oversight. The deal, announced via a press release, proceeded without a direct vote from Nvidia's shareholders, highlighting a gap in U.S. regulations concerning large-scale corporate investments.
Key Takeaways
- Nvidia plans to invest up to $100 billion in OpenAI to build 10 gigawatts of computing power.
- Nvidia shareholders were not given a vote on the deal, which was approved solely by the board of directors.
- The investment is equivalent to Nvidia's entire common equity and a potential 2.3% dividend yield.
- The deal highlights differences in governance rules, as similar transactions in the UK or Australia would likely require shareholder approval.
- The close, long-standing relationship between Nvidia and OpenAI raises questions about whether the deal should be classified as a related-party transaction.
A Landmark Deal Announced Without a Shareholder Vote
Nvidia and OpenAI recently announced a partnership to construct a computing infrastructure with 10 gigawatts of power. The project is backed by a potential investment of up to $100 billion from Nvidia, which in turn would supply the necessary chips for OpenAI's expanding artificial intelligence models.
While the announcement was met with market enthusiasm, causing Nvidia's stock to rise by 4%, it also brought attention to a critical aspect of corporate governance. The decision was presented to shareholders as a completed action, approved by the board without requiring a direct vote from the company's owners.
This approach is standard practice for capital expenditures in the United States, where board approval is typically sufficient for such investments, regardless of their size. However, the sheer scale of this commitment has initiated a debate on whether existing rules are adequate for the massive capital flows in the AI industry.
Investment by the Numbers
The proposed $100 billion investment represents a significant figure, even for a company with Nvidia's multi-trillion dollar market capitalization. The sum is equivalent to the total common equity on Nvidia's balance sheet. If this amount were distributed to shareholders, it would equate to a dividend yield of approximately 2.3%.
Navigating Corporate Governance Rules
In most global markets, shareholder approval is mandatory for major corporate actions like large acquisitions or changes in company control. However, capital investments and strategic partnerships, even those valued in the tens of billions, generally do not require a shareholder vote. The decision-making power rests with the board of directors.
The Role of Related-Party Transactions
An important exception to this rule involves "related-party transactions." These are deals between companies that have a pre-existing financial, personal, or control relationship, such as shared directors, executives, or significant shareholders. Due to the potential for conflicts of interest, these transactions often face stricter scrutiny.
Accounting standards like ASC 850 in the U.S. and IAS 24 internationally provide a clear definition for such relationships. In jurisdictions like the United Kingdom and Australia, large-scale related-party transactions must be put to a shareholder vote. In the U.S., however, the requirement is less stringent; companies listed on the NYSE and Nasdaq need only have their audit committees or another independent board group review these deals.
A Long-Standing Partnership
The relationship between Nvidia and OpenAI is deep-rooted. Greg Brockman, co-founder and president of OpenAI, has stated, "We’ve been working closely with Nvidia since the early days." This history was famously highlighted when Nvidia CEO Jensen Huang personally delivered the first DGX system to OpenAI nearly a decade ago. While the two companies do not have a formal control structure over one another, their long-term collaboration and mutual dependence place them in a closely related category.
The AI Ecosystem's Unique Challenges
The partnership between Nvidia and OpenAI is structured to facilitate growth for both entities. Nvidia's investment provides OpenAI with the capital to purchase its advanced chips, thereby driving revenue back to Nvidia. This circular investment model is not entirely new; similar strategies have been used in other industries to accelerate development and guarantee demand.
"We’ve been working closely with Nvidia since the early days."
Examples of this practice include:
- Semiconductors: Samsung, Intel, and TSMC invested in ASML to speed up lithography technology, which in turn boosted demand for their own products.
- Entertainment: Netflix and Amazon regularly fund production studios to create exclusive content for their streaming platforms.
- Mining: Mining companies often support refineries to secure a buyer for their raw materials.
However, the unprecedented scale of investments in AI infrastructure is testing the limits of traditional governance frameworks. The Nvidia-OpenAI deal is just one example. Another massive undertaking is the proposed $400 billion "Stargate" project, reportedly backed by Microsoft, SoftBank, and Oracle, which would also involve immense capital outlays without direct investor votes.
Future Implications for Investors and Regulation
As long as stock prices continue to climb, shareholders may remain content with the current level of oversight. The 4% jump in Nvidia's stock following the announcement suggests that investors currently trust the board's strategic decisions. However, the lack of a formal voting mechanism on such a transformative project raises questions about accountability if market conditions were to change.
The interconnected nature of the AI industry, where major players are simultaneously partners, competitors, and investors in one another, complicates the application of existing rules. Microsoft, for instance, is a major partner of OpenAI and is expected to own approximately 30% of the company upon a potential public offering. This web of relationships suggests that U.S. regulations regarding related-party transactions may need re-evaluation to keep pace with the evolving technology landscape.
The central issue is whether entrusting boards with half-trillion-dollar decisions without explicit shareholder consent remains a sustainable model as the AI investment boom continues to accelerate. For now, market performance is the primary metric of approval, but calls for greater transparency and shareholder involvement are likely to grow louder.