JPMorgan Chase & Co. is suing electric vehicle maker Tesla and seeking $162 million in payment in a dispute over a 2014 stock warrant agreement, according to a complaint filed in Manhattan federal court on Monday.
In a court filing obtained by CNBC, the multinational investment bank alleges that Telsa breached the terms of a contract it entered into regarding stock warrants which required the vehicle maker to deliver either “shares of its stock or cash to JPMorgan if, at the time the warrants expired in June and July 2021, Tesla’s share price was above the contractual ‘strike price.’”
Stock warrants give the buyer a right to purchase shares in a company at a set price at a specific date and are issued directly by the company to an investor.
JPMorgan and Tesla initially agreed to a “strike price,” of $560.6388, meaning that if the warrants expired and Tesla’s stock price was less than that strike price, neither company would owe each other anything.
But JPMorgan claims those warrants expired with Tesla’s share price above that strike price, thus, it demanded the due shares or cash from Tesla, which it claims, “flagrantly ignores its clear contractual obligation to pay JPMorgan in full.”
The Epoch Times has contacted Tesla for comment.
JPMorgan also alleges that the warrants agreement included standard provisions intended to protect both parties against the “economic effects on the warrants of announcements of significant corporate transactions involving Tesla,” such as the vehicle maker announcing it was going private.
If something like that were to happen, the bank and the automaker were able to adjust the strike price for the warrants, JPMorgan claims.
But on Aug. 7, 2018, Musk fired off a tweet stating that he was considering taking Tesla private at $420 per share and had “funding secured,” prompting the bank to reduce the strike price to maintain the same fair market value as before the announcement.
“Tesla’s August 7 announcement caused immediate and significant economic effects as the market attempted to price in the likelihood of Tesla going private and making a tender offer at $420. Those economic effects substantially decreased the value of the warrants. As required by the terms of the governing agreements, JPMorgan appropriately reduced the warrant strike price on August 15 to maintain the same fair market value as the warrants had before Tesla’s announcement,” JPMorgan said in Monday’s court filing.
Seventeen days later on Aug. 24, Tesla announced it was abandoning the going-private transaction, which increased the value of the warrants and prompted JPMorgan to again adjust the strike price to reflect the increase in the share price.
Musk was later charged with securities fraud by the Securities and Exchange Commission (SEC) who accused him of making a series of “false and misleading” tweets about potentially taking the company private. Both Tesla and Musk agreed to pay $20 million each to settle the suit. He also agreed to step down as the company’s chairman.
“Even though JPMorgan’s adjustments were appropriate and contractually required, Tesla has refused to settle at the contractual strike price and pay in full what it owes to JPMorgan,” the bank said in a complaint. “Tesla is in flagrant breach of its contractual obligations. As a result, more than $162 million is immediately due and payable to JPMorgan by Tesla.”
According to the complaint, Tesla sold the warrants to mitigate potential stock dilution resulting from a separate convertible bond sale and to lower it to make certain federal income tax deductions.
The lawsuit claims that Tesla sent a letter to JPMorgan on Feb. 13, 2019 arguing that its adjustments were “unreasonably swift and represented an opportunistic attempt to take advantage of changes in volatility in Tesla’s stock,” but that the company did not dispute the underlying calculations.
The complaint says that “in total, Tesla failed to deliver 228,775 shares of its common stock, leaving JPMorgan with an open hedge position equal to that shortfall.”