Investment bank giant, JPMorgan, has sued Tesla for $162.2m, accusing Elon Musk’s electric car company of “flagrantly” breaching a 2014 contract related to warrants signed in 2014.
The warrants give the holder the right to buy a company’s stock at a set “strike” price and date. JPMorgan has approached a Manhattan federal court in connection with the dispute, where the bank has claimed that it had to re-price its Tesla warrants because of Musk’s notorious 2018 tweet.
In 2014, Tesla sold its warrants to JPMorgan that would pay off if the agreed “strike price” was below the car company’s share price once the warrants expired in June and July 2021. But Musk's 2018 tweet changed everything. Because of that tweet, JPMorgan had to make adjustments to the value of the warrants. And when Musk changed his mind about privatising the company a few weeks later, JPMorgan had to make adjustments again.
“We have provided Tesla multiple opportunities to fulfil its contractual obligations, so it is unfortunate that they have forced this issue into litigation,” a spokesperson for JPMorgan said in a statement.
The options agreement meant that if Tesla’s share price was at or above the strike price of $560 on the day the warrants expired in June and July 2021, it would owe JPMorgan the difference between the share price on that date and $560.
So, given that Tesla’s stock was worth more than $600 by June this year, JPMorgan stood to make a decent profit.
Although JPMorgan made a decent profit because of the 2014 Tesla's deal, it is asking for an extra $162.2 million because it argues that the warrants contained standard provisions that allowed it to adjust the strike price downwards to protect itself against the economic effects of “significant corporate transactions involving Tesla”.
The bank has pointed out that Musk’s decision to take Tesla private at $420 a share was a significant moment, because at that point the shares were priced at $341.99.
With a buyout price set at $420, JPMorgan could not reach its strike price of $568 and therefore would not make any money. Accordingly, JPMorgan adjusted the strike price downwards, therefore increasing the chance of profit.
JPMorgan alleged that Tesla has failed to hand over the agreed amount of its stock or cash and hence, violated the agreement. Tesla’s failure to do that amounted to a default, the bank has claimed. “Though JPMorgan’s adjustments were appropriate and contractually required, Tesla has flagrantly ignored its clear contractual obligation to pay JPMorgan in full,” the bank said in a statement.
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