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Approximately $162 million is owed by Tesla to JPMorgan

JPMorgan

Tesla has been sued by JPMorgan, claiming the electric carmaker owes the bank $162 million in connection with a 2014 stock warrant agreement.

As a result of Elon Musk’s “funding secured” tweet in 2018, the companies have made changes to the agreement.

In the Southern District of New York, a lawsuit was filed late Monday evening. Its US press office was dissolved, and the company did not immediately respond to a request for comment.

Reuters first reported that JPMorgan purchased warrants from Tesla in 2014 – back when the company was still looking for funding for its original Gigafactory.

In the case of JPMorgan, stock warrants give the buyer the right to buy shares at a specified price or within a specified period of time in the case of Tesla. In June and July of 2021, JPMorgan’s Tesla warrants purchased in 2014 will expire.

The parties agreed to a “strike price” of $560.6388 at the beginning of the negotiation. As long as Tesla’s stock price is less than the strike price, both companies would not owe anything to each other.

Nevertheless, JPMorgan says Musk’s company was supposed to transfer stock equal to the difference between the strike price and Tesla’s stock price at expiration, if Tesla’s stock price was higher at expiration than the strike price.

Tesla owes JPMorgan approximately $162 million

JPMorgan made sure there were all sorts of legal protections in place, since it was a massive and complicated financial transaction. There were two reasons for this: one was to protect Tesla’s stock price from announcements about mergers and acquisitions.

A new strike price could be agreed upon by the bank and automaker if such a scenario arose.

Now let’s talk about the tweet. Tesla CEO Elon Musk famously tweeted on August 7th, 2018 that he was considering taking the company private at $420. Musk later announced that funding was secured in an email that was attributed to him.

Tesla’s blog posted the email along with Musk’s announcement. On Twitter, Musk stated that investors have confirmed their support.

Tesla’s investor relations chief told some media that an offer was under consideration. There is only one reason why this is not certain: shareholder approval.”

JPMorgan

The SEC sued Musk and Tesla over this announcement, so everyone found out all of that wasn’t true. During the visit, Musk spoke briefly with the Saudi Arabian Public Investment Fund.

But JPMorgan already saw the volatility in Tesla’s stock price before the truth was revealed, so they modified their warrants accordingly. As a result, Tesla’s stock price fell to $424.66.

Several weeks before the August 24th conference call, Tesla agreed to hold a conference call but cancelled last minute.

They announced that very day that they were abandoning their bid to take Tesla private.

The strike price was therefore adjusted once again by JPMorgan. It recalculated the strike price on the basis of Tesla and Musk’s decision to do an about-face, and settled on $484.35.

According to JPMorgan in its lawsuit, Tesla “protested that no adjustment should be necessary because it had abandoned its going-private plans so quickly.” The bank explained the results to Tesla in several conference calls, and it says Tesla did not object. Tesla reportedly stopped talking to JPMorgan after that for six months.

After Tesla sent lawyers a letter in February 2019, the bank responded saying that Tesla had taken advantage of changes in volatility to adjust its loan. JPMorgan responded, rejecting Tesla’s allegations, and they didn’t speak for two years.

In August 2020, JPMorgan adjusted the price to $96.87 to account for Tesla’s stock split, and Tesla didn’t respond to it either.

Tesla’s stock was already on a massive run when the warrants came up for renewal this year and JPMorgan’s warrants were “substantially in the money,” according to the lawsuit.

Tesla refused to settle in full, the bank claims, because it triggered an “early termination” clause. Tesla did settle some shares with JPMorgan – it did not specify how many – but refused to settle in full, the bank claims.

JPMorgan estimates Tesla still owed 228,775 shares when it terminated the deal based on its stock price then. Tesla still owns those shares for $162,216,628.01.

The bank’s short position against Tesla’s stock was hedged before Tesla failed to settle the warrants. The hedged bet had to be covered by Tesla’s purchase of the same number of shares when the warrants weren’t settled.

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