JPMorgan sued Tesla, claiming that the electric vehicle company owes it $162 million in relation to a 2014 stock warrant arrangement. The dispute centers around adjustments the companies made to the agreement following Tesla CEO Elon Musk’s 2018 “[f]unding secured” tweet and the resulting fallout.
The lawsuit was filed in the Southern District New York on Monday. Tesla did not respond to a request to comment immediately and has disbanded the US press team.
According to the suit, first reported by Reuters, JPMorgan purchased a number of warrants from Tesla in 2014 — back when the company was still trying to fund the construction of the original Gigafactory.
Stock warrants allow the buyer (JPMorgan in this instance) to purchase shares in a company (Tesla), at a fixed price and within a specified time. JPMorgan purchased warrants from Tesla in 2014. They will expire in June and Jul 2021.
Initially, the companies agreed to a “strike price” of $560.6388. If the warrants expired and Tesla’s stock price was less than that strike price, neither company would owe the other anything. But if Tesla’s stock price was above the strike price at expiration, JPMorgan says Musk’s company was basically supposed to hand over stock equal to the difference in those prices.
JPMorgan ensured that there were all the legal protections necessary for this complex financial transaction. One was a hedge against any big announcements related to mergers or buyouts that could affect Tesla’s stock price. If such an event were to happen, the bank was able to reach an agreement with the automaker on a new strike amount for the warrants.
This brings us to the tweet. Musk famously tweeted on August 7th, 2018 that he was “considering taking Tesla private at $420. Funding secured.” Later that day, Tesla’s chief financial officer, its head of communications, and its chief lawyer wrote an email attributed to Musk that was published on Tesla’s blog explaining his announcement. Musk also tweeted that “[i]The confirmation of nvestor support has been made. Only reason why this is not certain is that it’s contingent on a shareholder vote.” Tesla’s investor relations head also told some press that there was a “firm offer.”
However, the Securities and Exchange Commission sued Musk and Tesla for the announcement. Musk had a cursory conversation with Saudi Arabia’s Public Investment Fund, but that was it.
Before that truth came out, though, JPMorgan saw the resulting volatility in Tesla’s stock price and decided to amend the strike price of its warrants. It reduced the price to $424.66, and notified Tesla. According to the lawsuit Tesla agreed to a conference calling scheduled for August 24, but pulled out at last minute.
Musk and Tesla also announced that they had abandoned the plan to take Tesla private on the same day.
JPMorgan again decided to adjust warrant strike prices. Based on the responses to the Musk and Tesla decisions, JPMorgan made new calculations and settled for a strike price at $484.35.
This time, Tesla “protested that no adjustment should be necessary at all because it had so quickly abandoned its going-private plans,” JPMorgan writes in its lawsuit. The bank gave Tesla its calculations and “held several conference calls” to explain them, and says Tesla “did not provide any specific objection” to those explanations. JPMorgan stated that Tesla stopped speaking to the bank after six months.
Tesla’s lawyers eventually sent a letter to JPMorgan in February 2019 claiming that the bank’s adjustments were “unreasonably swift and represented an opportunistic attempt to take advantage of changes in volatility in Tesla’s stock.” JPMorgan wrote back, “rejecting all of [Tesla’s] allegations,” but then the two sides didn’t talk for two years. JPMorgan made another adjustment down to $96.87 in August 2020 to account for Tesla’s stock split, and says Tesla never responded to that either.
By the time the expiration dates came around this year, Tesla’s stock was already on an incredible run and JPMorgan’s warrants were “‘in the money’ by a substantial amount,” according to the suit. When the bank contacted Tesla to cash out, Tesla “renewed its objections to the Adjustments.” Tesla did settle some shares with JPMorgan — the bank did not say how many — but “refused to settle in full,” the bank claims, so it triggered an “early termination” clause.
JPMorgan says Tesla still owed 228,775 shares when it terminated the deal, and that those shares are worth $162,216,628.81 based on Tesla’s stock price at the time. (Potentially worse for JPMorgan, it had hedged its warrant agreement with Tesla by maintaining a short position against Tesla’s stock. When Tesla didn’t settle the remaining shares, the bank had to buy the same amount on the open market to cover that hedged bet.)
Musk was tweeting shortly after the suit was filed Monday in a thread he started on Sunday in response to a tweet by Senator Bernie Sanders (I-VT). “I like to dig my grave real deep,” Musk wrote.
Source: The Verge
