Tesla files counterclaim against JPMorgan in Elon Musk tweet lawsuit
A lawsuit that evolves around a tweet by Elon Musk has seen some development today, as Tesla Inc has filed a counterclaim against the plaintiff – JPMorgan Chase Bank.
This is a breach of contract action to recover over $162 million allegedly immediately due and payable by Tesla to JPMorgan. JPMorgan and Tesla entered into a series of warrant transactions, which required Tesla to deliver 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 warrants did expire with Tesla’s share price above that strike price. JPMorgan demanded the due shares or cash, but Tesla has ignored the demand. JPMorgan has brought this action to enforce its right to payment.
On August 7, 2018, Tesla’s CEO Elon Musk announced what JPM sees as a significant corporate transaction via Twitter. He tweeted “Am considering taking Tesla private at $420. Funding secured.”
In the weeks that immediately followed the August 7 announcement, Tesla made additional statements and took various additional actions confirming it was considering a going-private transaction, including hiring advisors and forming a special committee of its board. Although the SEC later revealed—in a securities fraud complaint alleging that Mr. Musk’s tweets were false —that there had never been a firm offer to take Tesla private, that was not known at the time.
Rather, 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. JPMorgan reduced the warrant strike price on August 15 to maintain the same fair market value as the warrants had before Tesla’s announcement.
On August 24, 2018, Tesla reversed course and announced it was abandoning the going-private transaction. Tesla’s second announcement increased the value of the warrants, and thus required a second adjustment under the governing agreements—this time a strike price increase that reversed some, but not all, of the initial reduction. Other than a subsequent (mechanical) adjustment triggered by Tesla’s 5-to-1 stock split in 2020, the resulting strike price remained the same until the warrants expired in June and July 2021, when Tesla’s stock price was well above both the original and adjusted strike prices.
Tesla has refused to settle at the contractual strike price and pay in full what it owes to JPMorgan. As a result, JPM claims that more than $162 million is immediately due and payable to JPMorgan by Tesla.
Today, however, Tesla responded to the claims made by JPM and filed a counterclaim against the plaintiff.
According to Tesla, “JPM’s manipulation of the Strike Price was entirely self-serving and in breach of the parties’ agreement”.
Tesla insists that Musk never announced a take-private proposal, and, less than three weeks after the initial tweet, he confirmed that no offer would be forthcoming. Despite this, JPM did not reverse its initial “adjustment” of the Strike Price, as any reasonable party would have done at that time.
According to Tesla, JPM’s self-dealing was commercially unreasonable and carried out in bad faith at the expense of Tesla. Although JPM purported to assume that the Warrants would exhibit reduced volatility from August 2018 forward, this assertion had no support in contemporaneous market data or common sense, Tesla says.
Tesla argues:
“JPM dealt itself a pure windfall, drastically reducing the price it would ultimately pay Tesla for shares in connection with the Warrants, on the pretext that Tesla was on the verge of going private. But Mr. Musk never announced a take-private proposal, and, less than three weeks after the initial tweet, he confirmed that no offer would be forthcoming. Despite this, JPM did not reverse its initial “adjustment” of the Strike Price, as any reasonable party would have done at that time”.
According to Tesla, after it disputed JPM’s demand for additional shares based on the reduced Strike Price, JPM retaliated by inflating its already wrongful demand even further.
Tesla says that the parties’ contract provided that all shares deliverable pursuant to the Warrants were to be valued as of their originally scheduled delivery dates, which were the Warrants’ contractual settlement dates in June and July of 2021.
Instead, JPM waited until August 2021—following a substantial runup in Tesla’s share price—to value the shares at issue, and on that basis demanded $162.2 million in cash from Tesla. Tesla accuses JPM of making a “blatantly overreaching cash demand” that extends its pattern of willful disregard for the requirements of the parties’ agreement.
Tesla claims it is entitled to a declaration that JPM breached the governing agreements, dismissal of the Complaint, and an order awarding damages, attorney’s fees, and other relief.