What Will Happen to Tesla Short Sellers if the Company Goes Private?

The recent news of Elon Musk's intention to take Tesla private has raised significant concerns, particularly regarding the implications for short sellers. The company's decision to go private at $420 per share and the lack of clear funding details have sparked debates and potential lawsuits. This article aims to unravel the consequences for Tesla's short sellers and explore the possible ramifications.

Elon Musk's Untimely Tweet and Funding Controversy

The saga began with Elon Musk's tweet: “Funding secured” for Tesla's privatization. However, the tweet came as a surprise to the Tesla Board of Directors, with no clear indication of where the funding would come from. This is a serious breach of business ethics at a public company and raises important questions about transparency.

After several days, no clear information has emerged regarding the source of funds for the privatization. This lack of transparency and the absence of proper funding support have led many to suspect that the claim might have been premature and may not be true. If so, it could be a major violation of the Securities and Exchange Commission (SEC) rules.

Short Sellers and Their Potential Losses

Short sellers, who bet against Tesla's stock, could find themselves in a precarious position if the company decides to go private at $420 per share. One of the significant risks in short selling is the possibility of having to buy back the borrowed stock at a higher price than the initial transaction.

Given the large number of shares sold short (31 million), there is a significant risk of price volatility. If the number of shares sold short exceeds the available supply of shares in a private transaction, the price could spike above $420, forcing short sellers to incur substantial losses. In this scenario, the short sellers could face significant financial losses, potentially in the billions of dollars.

The Legal Landscape: Potential Lawsuits and Damages

In light of the uncertainty surrounding the privatization announcement, it seems likely that short sellers will pursue legal action against Elon Musk. The lawsuits could aim to force Musk to compensate for any losses incurred as a result of his Tweet. The damages could be substantial, given the massive investment in short positions by numerous investors.

Procedural Implications for Short Sellers

The procedural implications for Tesla's short sellers if the company does go private are significant. When a short position is sold, the obligation is to buy the stock back at the declared price on the day of the privatization. For short sellers holding a position, the following steps may occur:

Notification: Brokers are likely to contact short sellers in advance to notify them to close their position before the market close. Auto-Close: Brokers may automatically close the position, but short sellers can opt to wait until the payout date. Buying Back the Shares: If short sellers choose to hold the position, they will need to buy the shares back at the declared privatization price, incurring a loss if the price is higher than the price at which they made the initial transaction.

Short sellers should communicate with their brokers to ensure that their positions are handled according to their wishes, whether they opt to close early or wait for the payout date.

In conclusion, the proposed privatization of Tesla at $420 per share poses significant risks for short sellers, who could face substantial financial losses. The legal landscape also suggests that short sellers may pursue compensatory action through legal means. The procedural steps involved are clear, but navigating these steps correctly is crucial for minimizing potential losses.