JP Morgan has filed a law suit against Tesla for breaching the terms of a contract that the companies signed pertaining to re-pricing the warrants. According to court filings, JP Morgan is seeking $162.2 million plus interest, attorney’s fees and expenses.
The complaint says that Tesla was supposed to deliver shares or cash, if its share price went above a contractually set strike price by a certain expiration date. According to the complaint filed in Manhattan federal court, Tesla in 2014 sold warrants to JP Morgan that would pay off if their strike price were below Tesla’s share price upon the warrants’ expiration in June and July 2021.
JP Morgan, which claims to have authority to adjust the strike price, said it substantially reduced the strike price after Musk’s August 7, 2018 tweet that he might take Tesla private at $420 per share and had funding secured, and reversed some of the reduction when Musk abandoned the idea 17 days later. Tesla’s share rose approximately 10-fold by the time the warrants expired. As such, JP Morgan said this required Tesla under its contract to deliver shares of its stock or cash.
According to Market Watch, Musk and Tesla were each fined $20 million by the Securities and Exchanges Commission (SEC) to settle fraud charges over the tweet, Musk was removed as the company’s chairman and Tesla agreed to preapprove his tweets.
The court filing stated that Tesla sold the warrants to reduce potential stock dilution from a separate convertible bond sale and to lower its federal income taxes. The bank said it had been contractually entitled to adjust the warrants’ terms following significant corporate transactions involving Tesla. But in February 2019, the electric car maker had complained that JP Morgan’s adjustments were an opportunistic attempt to take advantage of changes in volatility in Tesla’s stock, but did not challenge the underlying calculations.
JP Morgan added that Tesla failed to deliver 228,775 shares of its common stock, leaving JP Morgan with an open hedge position equal to the shortfall.