Warrants give the holder the right to buy a company’s stock at a set “strike” price and date. The suit, filed in a Manhattan federal court, centers on a dispute over how JPMorgan re-priced its Tesla warrants as a result of Musk’s notorious 2018 tweet that he was considering taking the carmaker private.
It is unusual for a major Wall Street bank to sue such a high-profile client, although JPMorgan has done relatively little business with the electric carmaker over the past seven years, according to Tesla’s filings and Refinitiv data.
“We have provided Tesla multiple opportunities to fulfill its contractual obligations, so it is unfortunate that they have forced this issue into litigation,” a spokesperson for JPMorgan said in a statement.
Tesla did not respond to requests for comment.
According to the complaint, Tesla in 2014 sold warrants to JPMorgan that would pay off if their “strike” price was below Tesla’s share price when the warrants expired in June and July 2021.
JPMorgan said the warrants contained standard provisions that allowed it to adjust their price to protect both parties against the economic effects of “significant corporate transactions involving Tesla,” such as an announcement the company was going private.
Musk’s Aug. 7, 2018 tweet that he might take Tesla private at $420 per share and had “funding secured,” and his subsequent announcement 17 days later that he was abandoning the plan, created significant volatility in the share price, the bank said. On both occasions, JPMorgan adjusted the strike price “to maintain the same fair market value” as prior to the tweets.
Tesla’s share price rose approximately 10-fold by the time the warrants expired this year, and JPMorgan said this required Tesla under its contract to hand over shares of its stock or cash. The bank said Tesla’s failure to do that amounted to a default.
“Though JPMorgan’s adjustments were appropriate and contractually required,” the complaint said, “Tesla has flagrantly ignored its clear contractual obligation to pay JPMorgan in full,” the bank said.
Tesla in February 2019 complained that the bank’s adjustments were “an opportunistic attempt to take advantage of changes in volatility in Tesla’s stock,” but did not challenge the underlying calculations, JPMorgan said.
Musk’s tweets resulted in the U.S. Securities and Exchange Commission bringing civil charges and $20 million fines against both him and Tesla.
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