JPMorgan has sued Tesla and claimed that the electric car company owes the bank $ 162 million related to a share guarantee agreement from 2014. The dispute concerns adjustments the companies made in the agreement after Tesla CEO Elon Musk 2018 “[f]unding secured »tweet and the resulting fallout.
The lawsuit was filed late Monday in the southern district of New York. Tesla did not immediately respond to a request for comment, and has disbanded its US press team.
According to the suit, which was first reported by Reuters, JPMorgan bought a number of warrants from Tesla in 201[ads1]4 – back when the company was still trying to finance the construction of the original Gigafactory.
Stock warrants give the buyer (JPMorgan, in this case) the right to buy shares in a company (Tesla) at a fixed price within a certain time window. The warranties JPMorgan bought from Tesla in 2014 were to expire in June and July 2021.
Initially, the companies agreed on a “trigger price” of $ 560.6388. If the warrants expired and Tesla’s share price was lower than this redemption price, neither company would owe the other anything. But if Tesla’s share price was above the redemption price at the expiration, JPMorgan says that Musk’s company was initially intended to hand over shares equal to the difference in these prices.
As a massive, complicated financial transaction, JPMorgan ensured that all kinds of legal protections were in place. One was a hedge against any major announcements related to mergers or acquisitions that could affect Tesla’s share price. Should something like this happen, the bank and the car manufacturer were able to agree on a new redemption price for the warrants.
Which brings us to the tweet. Musk famously tweeted on August 7, 2018 that he “considered taking Tesla private for $ 420. Financing secured. “Later that day, Tesla’s CFO, communications manager and chief lawyer wrote an e-mail to Musk that was published on Tesla’s blog explaining his announcement. Musk also tweeted that”[i]nvestor support has been confirmed. The only reason this is not certain is that it is conditional on a shareholder vote. ” Tesla’s investor relations chief also told some press that it was a “fixed offer.”
Initially, none of this was true, as everyone found out after the Securities and Exchange Commission sued Musk and Tesla over the announcement. Musk had a superficial conversation with Saudi Arabia’s public investment fund, but that was it.
Before that truth came out, however, JPMorgan saw the resulting volatility in Tesla’s stock price and decided to change the redemption price of the warrants. It lowered the price to $ 424.66 and alerted Tesla. Tesla agreed to a conference call scheduled for August 24, but withdrew at the last minute, according to the lawsuit.
On the same day, Tesla and Musk announced that they were leaving the attempt to take Tesla privately.
So JPMorgan decided once again to adjust the redemption price of the warrants. It made new calculations based on the response to the decision by Tesla and Musk to make a U-turn, and settled on a redemption price of $ 484.35.
This time, Tesla protested that no adjustment should be necessary at all because they had so quickly abandoned their private plans, JPMorgan writes in the lawsuit. The bank provided Tesla with its calculations and “held several conference calls” to explain them, saying that Tesla “did not raise any specific objections” to these explanations. After that, JPMorgan says that Tesla stopped talking to the bank for six months.
Tesla’s lawyers finally sent a letter to JPMorgan in February 2019 in which they claimed that the bank’s adjustments were “unreasonably rapid and represented an opportunistic attempt to take advantage of changes in the volatility of Tesla’s shares”. JPMorgan wrote back, “rejects all [Tesla’s] allegations », but then the two sides did not talk to each other for two years. JPMorgan made a new adjustment down to $ 96.87 in August 2020 to take into account Tesla’s share split, and says that Tesla never reacted to it either.
When the expiration dates came around this year, Tesla’s shares were already on an incredible run, and JPMorgan’s warrants were “in the money” with a significant amount, according to the lawsuit. When the bank contacted Tesla to pay, “Tesla renewed its objections to the adjustments.” Tesla settled 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 states that Tesla still owed 228,775 shares when it closed the agreement, and that these shares are worth $ 162,216,628.81 based on Tesla’s share price at the time. (Potentially worse for JPMorgan, it had secured its warrant agreement with Tesla by maintaining a short position against Tesla’s shares. As Tesla did not settle the remaining shares, the bank had to buy the same amount on the open market to cover the secured stake.)
Shortly after the lawsuit was filed on Monday, Musk continued to actively tweet in a thread he started Sunday in response to a tweet from Senator Bernie Sanders (I-VT) about taxes. “I like to dig my grave deep,” Musk said wrote.