JPMorgan says that Tesla owes the bank about $162 million. JPMorgan is said to have sued Tesla, with claims that the electric car company is owing the bank the sum of $162 million, which is related to a 2014 stock warrant agreement.
The dispute was said to center around the adjustments the companies made to the agreement following the Tesla CEO Elon Musk’s 2018 “[f]unding secured” tweet and the resulting fallout.
The lawsuit was filed late Monday in the Southern District of New York. Tesla was said to not respond immediately to a request for comment, and also disbanded its US press team.
JPMorgan Says Tesla Owes the Bank $162 Million
Giving the suit that was reported by Reuters, JPMorgan purchased a number of warrants from Tesla back in 2014 when the company was still making plans to fund the construction of the original Gigafactory.
The Stock warrant gives the buyer (the person of JPMorgan, in this case) the right to purchase shares in the company (Tesla) at a set price that is within a certain window of time. The warrant was bought by JPMorgan from Tesla in the year 2014 and was set to expire in June and July of 2021.
At the start, the companies agreed to a “strike price” of about 560.6388. If the warrants expired and Tesla’s stock price was less than that strike price, neither company would owe the other.
But if the stock price of Tesla’s was above the strike price at expiration, JPMorgan says Musk’s company was ultimately supposed to hand over its stock equal to the difference of those prices.
JPMorgan Could Change the Price of the Warrants
According to the verge, JPMorgan could have the price of the warrants changed if tesla announced a merger or acquisition. Since it was a massive, complicated financial transaction, JPMorgan took the necessary measures by making sure there were all sorts of legal protections put in place.
One of which was a hedge against any big announcements that is related to the mergers or buyouts that could affect Tesla’s stock price. If something like that were to come along, the bank and the automaker were able to agree on a new strike price for the warrants.
Musk Tweeted About Tesla Being Private
Let’s start with the tweet. Musk notably tweeted on August 7th, 2018 that he was “considering taking Tesla private at $420. Funding secured.”
Later that same day, the chief financial officer, its head of communications, and the chief lawyer of Tesla wrote an email attributed to Musk which was published on Tesla’s blog explaining his announcement.
Basically, none of that was true, still, as everyone has found out after the Securities and Exchange Commission sued Tesla and Musk over the announcement. Musk had a cursory conversation with Saudi Arabia’s Public Investment Fund, but that was it.
Musk was also said to have tweeted that “[i]nvestor support is confirmed. The 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.”
Tesla Backed Out of Agreement – JPMorgan Says Tesla Owes the Bank $162 Million
Afore that truth came out, all the same, JPMorgan saw the resulting volatility in Tesla’s stock price and decided to make amend on the strike price of its warrants. It lowered the price to about $424.66 and also notified Tesla.
Tesla initially agreed to a conference call that was scheduled for August 24th, but later backed out at the last minute, according to the filed lawsuit.
That same day, Tesla and Musk made an announcement that they were abandoning the attempt to take Tesla private.
So JPMorgan once again decided to make adjustments on the strike price of the warrants. It made new calculations that were based on the response to the decision made by Tesla and Musk to do an about-face and settled on a strike price of $484.35.
Tesla Allegedly Ghosted JPMorgan
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. After that, JPMorgan says Tesla stopped talking to the bank for 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.
Tesla Renewed Its Objections to the Adjustments
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
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.)
Shortly after the suit was filed on Monday, Musk was still actively tweeting in a thread he started Sunday in response to a Senator Bernie Sanders (I-VT) tweet about taxes. “I like to dig my grave real deep,” Musk wrote.