MOU ZHENG LAW FIRM
(Reuters) – In both style and substance, JPMorgan Chase Bank and Tesla Inc have radically different conceptions of their $162 million dispute over warrants that the
electric carmaker sold to the bank in 2014.
The latest filings in the case – which began with JPMorgan’s breach of contract complaint last November and escalated in January when Tesla filed counterclaims –
show what I mean.
JPMorgan advised U.S. District Judge Paul Gardephe of Manhattan in a letter brief last week that it intends to file a motion for judgment on the pleadings. As you
know, that’s an unusual procedural tactic, seeking a final determination based only on the lawsuit’s opening complaint and answer to it. But JPMorgan’s lawyers at
Davis Polk & Wardwell told the judge that this is the rare case that can be decided on admitted facts and long-established contract law precedent.
In the bank’s telling, Gardephe can determine without any discovery how that precedent applies to its 2014 warrants contracts, which required Tesla to deliver shares
to JPMorgan in 2021 if the company’s stock was trading over the contractual strike price. The contracts gave JPMorgan the authority, as the “calculation agent,” to
adjust the terms of the deal in the event of significant corporate transactions, including the announcement of a merger or tender offer. And according to JPMorgan,
when Tesla’s then CEO Elon Musk tweeted in 2018 that he was thinking about taking the company private at $420 per share, his tweet (and the company’s subsequent
formation of a special committee to consider the going-private proposal) was, as a matter of law, an announcement event.
So, the bank told the judge, the only question for him is whether JPMorgan made a commercially reasonable decision to adjust the strike price, first in response to the
going-private furor Musk prompted with his tweet and then again when Tesla nixed the idea.
New York law interprets that standard broadly, JPMorgan argued in last week’s letter brief, and Tesla’s counterclaims failed to allege that the bank took commercially
unreasonable action when it recalculated the strike price.
“There is no need to waste the court’s or the parties’ time and resources with discovery and trial when Tesla has not presented any plausible factual theory that
would defeat JPMorgan’s $162 million damages claim,” the bank said.
Davis Polk’s letter described the case in matter-of-fact language, portraying it as an easily resolved, plain-vanilla contract dispute.
But Tesla’s lawyers at Quinn Emanuel Urquhart & Sullivan, in a vivid and accusatory response filed on Tuesday, said it’s anything but. The Quinn filing talks about a
“brazenly self-serving” scheme by JPMorgan to wrest an “improper windfall” from Tesla, on top of the billions of dollars of shares the automaker delivered to the
bank when the 2014 warrants expired. Tesla said that JPMorgan’s brief, which Quinn described as “riddled with mischaracterizations,” in fact demonstrates why the
carmaker is entitled to discovery to prove its allegation that JPMorgan acted in bad faith.
Tesla counsel Alex Spiro of Quinn and JPMorgan lawyer Lawrence Portnoy of Davis Polk declined to offer statements in response to my email queries about the bank’s
planned motion for judgment on the pleadings and Tesla’s response.
You can tell from Tesla’s counterclaims why it is so eager to obtain discovery from JPMorgan. The carmaker, as my colleague Jonathan Stempel reported in January,
posits a baroque theory of the case, in which high-ranking JPMorgan executives saw the warrants deal as an opportunity to exact revenge against Tesla and Musk for
icing JPMorgan out of profitable finance and underwriting assignments. (The Wall Street Journal reported in November on a purported feud between Musk and JPMorgan CEO
Jamie Dimon, noting that JPMorgan has not worked on any Tesla deals or securities offerings since 2016.)
Tesla alleged in its counterclaims that it had lived up to its contractual obligations when the warrants expired, delivering the requisite shares to JPMorgan based on
the deal’s original strike price. The bank’s demand for nearly 230,000 additional shares – and then, after a subsequent run-up in Tesla’s share price, for $162
million – was “an act of retaliation against Tesla,” the carmaker said. None of the other banks that had entered warrants contracts with Tesla, the countersuit
said, viewed Musk’s 2018 going private tweet as an excuse to adjust the strike price.
JPMorgan has denied Tesla’s accusation of a revenge plot. And in last week’s letter brief previewing a motion for judgment on the pleadings, the bank said the
carmaker’s assertion that JPMorgan was acting out of spite or scheming for a windfall was irrelevant as a matter of law.
It’s not bad faith, the bank said, to act in your own interest in exercising contract rights. Tesla was required to allege not just that JPMorgan’s strike-price
adjustment turned out to benefit the bank but that the method of adjustment was commercially unreasonable.
Tesla, of course, said in Tuesday’s response that it had adequately alleged deficiencies in JPMorgan’s methodology for recalculating the strike price. It also said
that JPMorgan’s good faith is not a matter of law but a factual question that cannot be decided on the pleadings.
Gardephe will likely schedule a hearing for both sides to weigh in before he decides whether to entertain formal briefing on JPMorgan’s proposed motion to end the
case without any more ado. Since both sides opted to answer the other side’s allegations rather than file dismissal motions, discovery will start up if the judge is
not receptive to the bank’s unusual strategy. We’ll see whose style – and substance – wins out.
