JPMorgan has sued Tesla, claiming that the electric car company owes the bank $162 million related to the 2014 stock warrant agreement. The dispute centers around adjustments the company made to the agreement after Tesla CEO Elon Musk 2018 “[f]vote safe” tweet and the resulting fallout.
The lawsuit was filed Monday night 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 lawsuit, which was first reported by Reuters, JPMorgan bought a number of warrants from Tesla in 2014 – back when the company still trying to fund the construction of the original Gigafactory.
A stock warrant gives the buyer (JPMorgan, in this case) the right to buy shares in the company (Tesla) at a certain price within a certain period of time. The warrants JPMorgan purchased from Tesla in 2014 will expire in June and July 2021.
Initially, the company agreed to a “strike price” of $560,6388. If the warrants expire and Tesla’s share price is less than the strike price, neither company will owe anything else. But if Tesla’s stock price is above the strike price at expiration, JPMorgan says Musk’s company should essentially give up the same stock at the price difference.
Being a large and complex financial transaction, JPMorgan ensures there are all kinds of legal protections. One is a hedge against major merger-related announcements or purchases that could affect Tesla’s stock price. If such a thing were to happen, the bank and the automaker could agree on a new deal price for the warrants.
Which brings us to tweets. Musk famous tweet on August 7 2018 that he is “considering taking Tesla private at $420. Funding guaranteed.” Later that day, Tesla’s chief financial officer, its head of communications, and its chief attorney wrote an email attributed to Musk that was published on the Tesla blog explaining his announcement. Musk also tweeted that “[i]Investor support confirmed. The only reason this is uncertain is because it relies on shareholder votes.” Tesla’s head of investor relations also told some press that there was a “firm offer.”
Basically nothing is right, as everyone knows after Southern Musk and Tesla Securities and Exchange Commission on the announcement. Musk had a cursory conversation with Saudi Arabia’s Public Investment Fund, but that’s about it.
However, before the truth came out, JPMorgan saw the resulting volatility in Tesla’s stock price and decided to change the strike price of its warrants. That lowers the price to $424.66 and alerts Tesla. Tesla agreed to a conference call scheduled for August 24, but backed out at the last minute, according to the lawsuit.
On the same day, Tesla and Musk announced that they abandon attempts to take Tesla private.
So JPMorgan once again decided to adjust the price of the warrant deal. It made a new calculation based on responses to Tesla and Musk’s decision to make an advance change, and set the deal price at $484.35.
This time, Tesla “protested that no adjustment was necessary at all for abandoning its private plans so quickly,” JPMorgan wrote in its lawsuit. The bank gave Tesla its calculations and “held several conference calls” to explain it, and said Tesla had “no particular objection” to the explanation. After that, JPMorgan said Tesla stopped talking to the bank for six months.
Tesla’s attorneys finally sent a letter to JPMorgan in February 2019 claiming that the bank’s adjustment was “very rapid and represents an opportunistic attempt to take advantage of changing volatility in Tesla’s stock.” JPMorgan replied, “reject all [Tesla’s] charges,” but then the two sides did not speak for two years. JPMorgan made another adjustment to $96.87 in August 2020 to account for Tesla stock split, and said Tesla never responded either.
By the time the expiration date came around this year, Tesla stock was already doing great and JPMorgan’s warrants were “‘in the money’ for a substantial amount,” according to the lawsuit. When the bank contacted Tesla to cash out, Tesla “updated its objection to the Adjustment.” Tesla did settle some shares with JPMorgan – the bank did not say how much – but “refused to settle in full,” the bank claims, triggering an “early termination” clause.
JPMorgan said Tesla still owed 228,775 shares when it concluded the deal, and that the shares were worth $162,216,628.81 based on Tesla’s share price at the time. (Potentially worse for JPMorgan, JPMorgan has hedged the warrants agreement with Tesla by maintaining a short position against Tesla stock. When Tesla doesn’t settle the remaining shares, the bank must buy the same amount on the open market to cover the hedge bet.)
Shortly after the lawsuit was filed on Monday, Musk is still actively tweeting in the thread he started Sunday at response to Senator Bernie Sanders’ tweet (I-VT) about taxes. “I like to dig my grave very deep,” Musk write.