A Delaware judge on Tuesday ruled that billionaire Elon Musk's $56 billion Tesla pay package could be voided, calling the compensation “an unfathomable sum” that was not fair to shareholders, according to a court filing.
“The plaintiff is entitled to rescission,” the judge said in her ruling.
The court's opinion directed Richard Tornetta, the Tesla shareholder who challenged the pay plan, to work with Mr Musk's legal team on an order enacting the judge's decision.
Mr Musk's lawyer did not immediately reply to an email seeking comment.
“Good day for the good guys,” said an email from Greg Varallo, a lawyer for Mr Tornetta.
The ruling can be appealed to the Delaware Supreme Court.
The judge, Kathaleen McCormick of Delaware's Court of Chancery, said the pay package did not meet the standard of a fair price.
“The incredible size of the biggest compensation plan ever – an unfathomable sum – seems to have been calibrated to help Musk achieve what he believed would make 'a good future for humanity',” wrote Ms McCormick in her 201-page opinion.
Tesla's agreement with Mr Musk is by far the largest compensation deal ever for an executive and it contributes a significant part of his fortune, which is one of the world's largest.
Company directors argued during a week-long trial that the company was paying to ensure one of the world's most dynamic entrepreneurs continued to dedicate his attention to the electric vehicle maker.
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Antonio Gracias, a Tesla director from 2007 to 2021, called the package “a great deal for shareholders” because he said it led to the company's extraordinary success.
Mr Tornetta's lawyers argued the Tesla board never told shareholders that the goals were easier to achieve than the company was acknowledging and that internal projections showed Mr Musk was quickly going to qualify for large portions of the pay package.
The plaintiff's legal team also argued the board had a duty to offer a smaller pay package or look for another chief executive and that they should have required Mr Musk to work full-time at Tesla instead of allowing him to focus on other projects.
The package grants stock option awards allowing Mr Musk to buy Tesla stock at heavily discounted prices as escalating financial and operational goals are met.
He must hold the acquired stock for five years.
Mr Musk qualified for all 12 tranches or performance targets in the plan. He was not guaranteed any salary.
Tesla's value ballooned to briefly top $1 trillion in 2021 from $50 billion when the package was negotiated.
Amit Batish at Equilar, an executive pay research firm, estimated in 2022 that Mr Musk's package was about six times larger than the combined pay of the 200 highest-paid executives in 2021.
In July, Tesla's directors agreed to return $735 million to the company to settle shareholder allegations brought in a separate lawsuit filed in 2020 that they overpaid themselves.
The lawsuit challenged options that were granted to directors starting in June 2017.
