Monday, November 22, 2021

JP Morgan Sued Elon Musk’s Tesla For Breach Of Contract: How Did I Predict It? - Lécia Vicente (Guest Post)

Friend-of-the-BLPB Lécia Vicente sent along the following post, which I thought our readers might find interesting, especially in light of the blog's prior posts on Elon Musk and his conduct (including those from Ann and me, like this one--citing to many others--and that one).  Enjoy!  Comment, as desired.  I have my own comments, which I will share in due course.

And (in this week of giving thanks) I offer gratitude to Lécia for bringing this post to us!  (You may remember that she guest blogged with us last December--almost a year ago.  Where did the time go?)

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On November 6th 2021, Elon Musk polled his Twitter followers to determine if he should sell 10% of his stake in his company, Tesla. He wrote, “[m]uch is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock. Do you support this?”

On November 8th 2021, two days after Musk’s tweet, I tweeted the following question, "[c]an Musk actually be sued if he doesn’t follow through on his pledge to sell?” Initially, I was more concerned about securities law. Based on Musk’s tweets, shareholders might be misled to sell, meaning that Musk could be sued for misrepresentation. Similar scenarios of securities fraud involving Tesla and Elon Musk have happened before. In addition, Musk’s tweets could trigger claims of breach of contractual duties. A week after my tweet, on November 15th 2021, JP Morgan filed a complaint against Tesla for breach of contractual duties. I guess I predicted it.

Specifically, in JP Morgan Chase Bank, National Association, London Branch v. Tesla, Inc, JP Morgan is suing for the Tesla CEO’s tweet on August 7th 2018 when he stated “Am considering taking Tesla private at $420. Funding secured.” This statement came from the chair of Tesla’s board of directors and controlling shareholder. While the tone and seriousness of the announcement is debatable, JP Morgan took it seriously. Seriously enough to sue.

On February 27th 2014 and March 28th 2014, JP Morgan entered a series of agreements with Tesla in which JP Morgan would buy Tesla stock warrants at a specified “strike price.” Additionally, the warrants maintained an adjustment clause in case of an announcement of a significant corporate transaction involving Tesla, such as an acquisition. The purpose of the adjustment clause was to protect the parties from adverse economic effects. The 2021 Warrants expired between June and July 2021.

As explained in the complaint, in a Form 8-K filed on November 5th 2013, Tesla identified Elon Musk’s personal Twitter account “as a source of material public information about the company” and encouraged investors to review that account. The complaint also stated that:

Because the tweet violated NASDAQ rules requiring at least 10 minutes’ advance notice before a listed corporation publicly disclosed a going-private transaction, NASDAQ temporarily halted trading in Tesla’s stock following Mr. Musk’s tweet, evidencing that the exchange considered the tweet to constitute an announcement by the company itself.

After Mr. Musk’s tweet, Tesla’s Chief Financial Officer, its head of communications, and its General Counsel drafted an email—attributed to Mr. Musk—detailing the going-private plan. The email was sent to Tesla employees and published the same day on both Mr. Musk’s Twitter account and Tesla’s blog (which Tesla had also designated as a source of material public information about the company). In the email, and in a series of tweets responding to his Twitter followers, Mr. Musk elaborated on his plans to take Tesla private. He concluded in a tweet that “Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote.”

That same day, in response to various inquiries from research analysts, Tesla’s head of investor relations confirmed that Mr. Musk’s tweet signified a “firm offer” to take Tesla private that was “as firm as it gets.” Specifically, she wrote in response to press inquiries about the tweet:

  • “I can only say that the first Tweet clearly stated that ‘financing is secured.’ Yes, there is a firm offer.”
  • “[A]part from what has been tweeted and what was written in a blog post, we can’t add anything else. I only wanted to stress that Elon’s first tweet, which mentioned ‘financing secured’ is correct.”
  • “The very first tweet simply mentioned ‘Funding secured’ which means there is a firm offer. Elon did not disclose details of who the buyer is . . . .  I actually don’t know [whether there is a commitment letter or a verbal agreement], but I would assume that given we went full-on public with this, the offer is as firm as it gets.”

It turns out that Elon Musk’s announcement of an acquisition was false. However, JP Morgan and all the banks that had entered similar contracts with Tesla, namely Goldman Sachs, did not know that at the time of the announcement. Still, JP Morgan adjusted the terms of the 2021 Warrants as a result of Tesla’s announcement of acquisition and, later, its abandonment of the transaction on August 24th 2018. JP Morgan considered that such adjustments were contractually required. Tesla refused to settle and pay in full what JP Morgan claimed Tesla owed as a result of the adjustments. JP Morgan ended up suing Tesla for $162,216,628.81, to be precise, for breach of contractual duties.

So, did Elon Musk’s tweet on August 7th 2018 constitute an announcement of an acquisition? Was it a “firm offer” to enter into a contract?”

Interestingly, JP Morgan’s complaint resonates with Johnson v. Capital City Ford, a case decided by the Louisiana Court of Appeal, in 1955. In Johnson v. Capital City Ford Co., the Court had to determine whether a unilateral declaration of will like an advertisement constituted a firm offer. Capital City Ford found itself with a surplus of 1954 Fords. To get rid of them, the company placed an advertisement in the local newspaper, the gist of which was “[c]ome in, buy a 1954 Ford and, when the new models come in, we will let you trade in the 1954 model for a 1955 model at no extra charge.”

In response to the announcement, Johnson went to Capital City’s lot, picked out a 1954 model, and bought it. When the new models arrived a short time later, Johnson returned to the Capital City lot and demanded a trade. Capital City refused, claiming that the advertisements “were not intended as offers, but merely as invitations to come in and bargain.”

The Court advanced the following major premises: (1) A newspaper advertisement may constitute an offer, acceptance of which will consummate a contract and create an obligation in the offeror to perform according to the terms of the published offer. (2) An offer to be effective, need not be addressed to determinate offerees; it can, instead, be addressed to the public at large. (3) Whether a particular advertisement is an offer, rather than an invitation to make an offer or enter negotiations, depends on “the legal intention of the parties and the surrounding circumstances.” (4) If the meaning of a declaration of will is doubtful or uncertain due to “want of explanation” that the declarer should have given or from “any other negligence of fault of his,” then “the construction most favorable to the other party shall be adopted.”

The Court held the advertisement was an offer. To a reader, the wording of the advertisement denoted a bona fide offer, and it was certain and definite enough to constitute a legal offer. If Capital City Ford really intended the advertisement not as an offer but as an invitation to make an offer, it should have said something to that effect. The advertisement created a risk of uncertainty through its ambiguous statements. Therefore, the onus was on Capital City Ford to clear up the ambiguity. Since the company did not do so, the Court construed the advertisement against Capital City.

In Johnson v. Capital City Ford, the Court applied another case R. E. Crummer & Co v. Nuveen et al. (1945). In Crummer & Co v. Nuveen, the US Court of Appeals for the Seventh Circuit had to decide if a notice published in a regular paper circulated among municipal bond dealers was a mere solicitation for offers to sell the bonds or an offer to purchase them. The notice reads as follows:

For the convenience of bondholders who may wish to surrender their bonds, the Board […] has arranged to provide funds for the purchase of the above described bonds at par and interest to December 1, 1941. Holders may send their bonds to the Manufacturers Trust Company for surrender pursuant to such terms.

The plaintiff was the owner and holder of $458,829 principal amount of the bonds, dated June 1st 1940 and due June 1st 1970. The defendants arranged with the Manufacturers Bank of New York (“Bank”) to deposit funds necessary to cover all such bonds presented for payment pursuant to the terms of the notice. The plaintiff, in reliance on the notice, delivered its bonds to the Bank on December 11th 1941. However, the Bank refused to pay the principal amount as provided by the notice. The plaintiff attempted to sell the bonds to other parties at par, but the bid for them was substantially less than par resulting in damages of $35,000. The defendants moved to dismiss the complaint on the grounds that the notice was merely a solicitation for offers to sell the bonds and not an offer to purchase them.

The US Court of Appeals maintained:

We cannot believe that the ordinary business man could be expected to read the advertisement as an invitation to send bonds from wherever he might be to New York on the chance that when they got there the advertiser would accept his offer to enter into negotiations for the purchase of the bonds. Rather, we think the wording of the advertisement is such as to show "an intent to assume legal liability thereby." [emphasis added].

In other words, the US Court of Appeals considered the notice as an offer to purchase bonds and not a mere solicitation for offers to negotiate the sale of bonds.

The agreements JP Morgan entered with Tesla included an announcement event protection clause. An “announcement event” is contractually defined in the agreements as follows:

(i)        The public announcement of any Merger Event or Tender Offer or the announcement by the Issuer of any intention to enter into a Merger Event or Tender Offer,

(ii)       the public announcement by Issuer of an intention to solicit or enter into, or to explore strategic alternatives or other similar undertaking that may include, a Merger Event or Tender Offer or

(iii)      any subsequent public announcement of a change to a transaction or intention that is the subject of an announcement of the type described in clause (i) or (ii) of this sentence (including, without limitation, a new announcement relating to such a transaction or intention or the announcement of a withdrawal from, or the abandonment or discontinuation of, such a transaction or intention) (in each case, whether such announcement is made by Issuer or a third party);

provided that, for the avoidance of doubt, the occurrence of an Announcement Event with respect to any transaction or intention shall not preclude the occurrence of a later Announcement Event with respect to such transaction or intention. 

Did Tesla’s CEO manifest a plain and clear intention to make a firm offer to sell his stock? Were his tweets mere invitations to negotiate rather than firm offers? Was there consideration or any sort of reward if the potential offerees satisfied specified requirements? Was his August 7th 2018 tweet a promise to enter contracts to sell stock?

Potentially, Musk's tweet could be seen as an offer to sell his stock to his Twitter followers if it gave the public the right to acquire Tesla’s stock when Tesla sold them. In this scenario, if those who accepted the offer paid for the stock when it was sold, then a contract would have been formed. In addition, Musk’s tweet could be seen as a promise to sell stock. In this case, offerees have a right to demand that Musk sell the stock. If this is a promise Musk did not intend to keep, then the SEC can understandably view it as a false statement.

More important than Elon Musk’s behavior is the actions as a result from his tweet on August 7th 2018. Why did he do it? It is doubtful that the tweet was originally intended as an offer to sell stock. It is not clear if Tesla’s CEO’s intention was to have his Twitter followers contact him with an acceptance and form a contract. That investors feel strongly about Elon Musk’s tweets is not surprising. As Jeremy Grantham said in a 2019 interview to CNBC news channel, Tesla “is an extreme demonstration of growth.”

The bottom line is that there is space to explore what substantiates an offer-via-tweet in the context of corporate transactions such as initial public offerings, takeovers, mergers and acquisitions. Even if one concludes Musk did not provide a firm offer, the contractual terms of JP Morgan and Tesla’s 2021 Warrants help expand this interesting area of contract law.

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Thank you to Nathan B. Oman, Rollins Professor of Law and Co-Director of the Center for the Study of Law and Markets at William and Mary Law for comments and fruitful interaction on this issue via Twitter.

https://lawprofessors.typepad.com/business_law/2021/11/jp-morgan-sued-elon-musks-tesla-for-breach-of-contract-how-did-i-predict-it-l%C3%A9cia-vicente-guest-post.html

Ann Lipton, Contracts, Joan Heminway, Securities Regulation | Permalink

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