Tesla has been sued by JPMorgan, which claims it owes the bank $162 million in relation to a 2014 stock warrant arrangement. The disagreement revolves around changes made to the agreement as a result of Tesla CEO Elon Musk’s “[f]unding secured” tweet in 2018 and the ensuing backlash.
The complaint was filed in the Southern District of New York late Monday. Tesla has eliminated its US press staff and has not responded to a request for comment.
According to the claim, JPMorgan acquired a number of warrants from Tesla in 2014, while the firm was still seeking to fund the building of the initial Gigafactory, as originally reported by Reuters.
Stock warrants provide the buyer (in this example, JPMorgan) the right to buy shares in a firm (in this case, Tesla) at a predetermined price within a specified time frame. JPMorgan acquired warrants from Tesla in 2014 that were slated to expire in June and July 2021.
Initially, the firms agreed on a $560.6388 “strike price.” Neither firm would owe the other anything if the warrants expired and Tesla’s stock price was less than the strike price. However, JPMorgan claims that if Tesla’s stock price was higher than the strike price at expiration, Musk’s business was obligated to hand over stock equivalent to the difference in the two values.
Because this was such a large and intricate financial transaction, JPMorgan made certain that all legal safeguards were in place. One was to protect Tesla’s stock price in the event of any major mergers or takeover announcements. If anything similar happened, the bank and the manufacturer might work out a new striking price for the warrants.
That leads us to the tweet. On August 7th, 2018, Musk famously tweeted that he was “considering taking Tesla private at $420.” “Funding has been secured.” Tesla’s top financial officer, head of communications, and chief legal prepared an email ascribed to Musk later that day, which was published on the company’s blog and explained Musk’s announcement. “[i]nvestor support is verified,” Musk added in a tweet. The only reason this isn’t clear is because it’s up to a shareholder vote.” Tesla’s investor relations director also told the press that a “strong offer” had been made.
But, as everyone discovered after the Securities and Exchange Commission sued Musk and Tesla over the statement, none of that was true. Musk spoke briefly with Saudi Arabia’s Public Investment Fund, but that was the end of it.
JPMorgan recognized the consequent volatility in Tesla’s stock price and decided to change the strike price of its warrants before the truth was revealed. It dropped the price to $424.66 and informed Tesla of the change. According to the lawsuit, Tesla agreed to a conference call on August 24th but cancelled at the last minute.
Tesla and Musk revealed the same day that their attempt to take Tesla private had failed.
As a result, JPMorgan decided to change the strike price of the warrants once more. It recalculated based on the reaction to Tesla and Musk’s decision to reverse course, and came up with a strike price of $484.35.
According to JPMorgan’s complaint, Tesla “protested that no modification should be necessary at all because it had so rapidly abandoned its going-private aspirations.” The bank provided Tesla with its estimates and “had many conference calls” to explain them, according to the bank. Tesla “did not raise any particular criticism” to those explanations, according to the bank. Tesla then ceased communicating with JPMorgan for six months, according to JPMorgan.
In February 2019, Tesla’s attorneys wrote to JPMorgan, stating that the bank’s revisions were “unreasonably quick” and “marked an opportunistic attempt to take advantage of movements in Tesla’s stock volatility.” JPMorgan responded by “rejecting all of [Tesla’s] charges,” but the two parties didn’t communicate for the next two years. JPMorgan adjusted the price to $96.87 in August 2020 to account for Tesla’s stock split, but Tesla claims it never reacted.
According to the lawsuit, by the time the expiration dates came around this year, Tesla’s shares had already gone on an extraordinary run, and JPMorgan’s warrants were “much in the money.” Tesla “renewed its objections to the Adjustments” when the bank approached them about cashing out. JPMorgan did settle some shares with Tesla — the bank did not indicate how many — but the bank alleges Tesla “refused to settle in full,” triggering a “early termination” condition.
Tesla owes JPMorgan 228,775 shares when the contract was cancelled, according to JPMorgan, and those shares are worth $162,216,628.81 based on Tesla’s stock price at the time. (To make matters worse, JPMorgan had hedged its Tesla warrant arrangement by keeping a short position in Tesla’s shares.) When Tesla failed to settle the remaining shares, the bank was forced to cover the hedged bet by purchasing the equivalent number of shares on the open market.)
Musk was still tweeting shortly after the complaint was filed on Monday, in a thread he started on Sunday in response to a tweet on taxes from Senator Bernie Sanders (I-VT). Musk wrote, “I prefer to dig my grave really deep.”