JPMorgan, Tesla say no meaningful settlement discussions in Musk tweet lawsuit
JPMorgan Chase Bank NA, London Branch and defendant Tesla, Inc have filed a joint letter with the New York Southern District Court regarding a lawsuit that hovers around a tweet by Elon Musk.
The parties say they are willing to consider reasonable settlement offers, but to date the parties have not had meaningful settlement discussions.
JPMorgan brought this action to recover over $162 million immediately due and payable by Tesla to JPMorgan.
On February 27, 2014 and March 28, 2014, Tesla sold to JPMorgan a series of stock warrants expiring in 2021 pursuant to Agreements, which required Tesla to deliver, at its election, either shares of its stock or cash to JPMorgan if, at the time the Warrants expired, Tesla’s share price was above the contractual “strike price.” The Agreements also included standard provisions intended to protect the Parties from the economic effects on the warrants of announcements of significant corporate transactions involving Tesla (“Announcement Events”).
On August 7, 2018, an Announcement Event occurred when Tesla’s CEO, then- Chairman, and largest shareholder, Elon Musk, announced via Twitter, “considering taking Tesla private at $420. Funding secured.”
Tesla subsequently confirmed the accuracy of the tweet and its consideration of a going-private transaction. Tesla’s stated intention to explore and consider a going-private transaction constituted an Announcement Event under the Agreements. JPMorgan, as Calculation Agent, had broad and sole discretion to adjust the terms of the Warrants for the economic effects of the Announcement Event on the Warrants, subject only to the requirement that its determinations “be made in good faith and in a commercially reasonable manner.”
In accordance with the contract and consistent with its standard practice, JPMorgan determined that the strike price of the Warrants had to be reduced from $560.6388 to $424.66 to maintain the same fair value as they had before Tesla’s August 7 Announcement Event, and made that adjustment and modified its hedge positions on August 15.
After the close of trading on August 24, 2018, Tesla published a blog post announcing that Tesla was abandoning the going-private proposal. JPMorgan treated Tesla’s August 24 announcement as it was contractually required to—as a new Announcement Event—and determined that increasing the strike price to $484.35 was the appropriate adjustment to maintain the same fair value that the Warrants had before that second Announcement Event. It modified its hedge positions the same day as this second adjustment, August 29.
When the Warrants expired “in the money” in June and July 2021, Tesla settled at the original strike price (as adjusted only for Tesla’s 5-to-1 stock split) and refused to settle in full at the adjusted strike price. In total, Tesla failed to deliver 228,775 shares of its common stock. JPMorgan timely noticed Tesla’s Events of Default and exercised its right to set an Early Termination Date for August 2, 2021.
In calculating the Early Termination Amount, JPMorgan valued the undelivered shares at $162,216,628.81, based on the average price of $709.07 per share that JPMorgan paid to acquire replacement shares on the open market. Tesla failed to pay that amount when due on August 5, and is liable for the full Early Termination Amount, as well as pre-judgment interest and indemnification of JPMorgan’s costs and attorneys’ fees.
Tesla has filed a counterclaim in this lawsuit. As alleged in the Counterclaim, JPMorgan’s actions were unjustifiable and irreconcilable with any potential economic effect of Musk’s tweet on the warrants, based on contemporaneous market data.
According to Tesla, JPMorgan took these actions in a commercially unreasonable manner, exploiting Mr. Musk’s tweet in bad faith as a pretext to deprive Tesla of the benefit of its bargain. No bank other than JPMorgan asserted that Mr. Musk’s tweet was an Announcement Event under the terms of the warrants. Moreover, even if JPMorgan were correct that an Announcement Event occurred, JPM breached the contract, which required it to terminate the warrants rather than make commercially unreasonable adjustments.
Tesla claims that JPMorgan’s actions breached its duties as Calculation Agent for the stock warrants. JPMorgan’s purported claims and defenses, Tesla says, cannot justify its attempt to extract a commercially unreasonable windfall at Tesla’s expense.
The parties are set to participate in an initial pretrial conference on April 14, 2022.