A judge in the US state of Delaware has annulled a $55.8bn (£44bn) pay deal awarded to Elon Musk in 2018 by the electric car company Tesla.
The lawsuit was filed by a shareholder who argued that it was an overpayment.
Judge Kathaleen McCormick found Tesla directors, who negotiated the pay package, were “perhaps starry eyed” due to Mr Musk’s “superstar appeal” and did not fully inform shareholders.
She said the deal was “unfathomable” and ruled it should be cancelled.
The pay deal was the biggest ever in US corporate history, helping to make Mr Musk the richest person in the world. Bloomberg and Forbes estimated his net worth to be between $198bn (£162bn) and $220bn (£180bn), in November 2023.
Tesla’s package tied Mr Musk’s compensation to performance targets, such as Tesla’s share price and profitability, but he does not receive a salary.
Tesla shareholder Richard Tornetta felt the tycoon was being overpaid. Despite owning just nine Tesla shares he launched legal action calling for the award to be rescinded. He said shareholders were not given enough information about how easily Mr Musk’s performance goals would be achieved.
Following years of legal argument, a week-long trial commenced in November 2022 where Tesla directors argued the huge pay award was designed to ensure that Mr Musk, one of the world’s most dynamic entrepreneurs, would continue to dedicate his attention to the company.
As well as being the chief executive and a major shareholder of Tesla, Mr Musk owns several other companies, including the social media platform X, the rocket company SpaceX, and the brain chip firm Neuralink, dividing his time between them.
But in her 201-page ruling released on Tuesday, Judge McCormick said that incentivising Mr Musk was not the main reason for the oversized pay package. Rather, the Tesla directors had been “swept up by the rhetoric” surrounding the often controversial chief executive, she said.
Moreover, Mr Musk had “extensive ties” with members of Tesla’s compensation committee, she said, citing his 15-year business and personal relationship with committee chair, Ira Ehrenpreis.
Mr Musk was also “close friends” with another committee member, Antonio Gracias, with business dealing stretching back two decades, she said.
Board members James Murdoch and Linda Johnson Rice were not on the compensation committee but were found to have been involved in the process.
The judge said Mr Murdoch had became a friend of Mr Musk’s after he purchased a Tesla Roadster in 2006 or 2007. The pair took family holidays together to Israel, Mexico, and the Bahamas.
Judge McCormick noted Mr Musk along with his brother Kimbal, who also sits on Telsa’s board, recused themselves from “most of the meetings and all of the votes on the 2018” pay package.
But she said five of the six directors who voted on the pay package “were beholden to Musk or had compromising conflicts”.
She also said many of the documents the Tesla directors cited as proof of a fair process were “drafted, pushed out, or endorsed” by Todd Maron, Mr Musk’s divorce-attorney-turned-general-counsel. His “admiration for Musk moved Maron to tears during his deposition,” she noted.
“The Compensation Committee and Musk were not on different sides. They did not acknowledge the existence of a conflict. It was a cooperative and collaborative process,” she wrote.
Following the release of the ruling, Greg Varallo, an attorney for the Tesla shareholder Mr Tornetta, said it was a “good day for the good guys,” in an email reported by the Reuters news agency.
Mr Musk responded to the judgement with a post on X, formerly known as Twitter.
It said: “Never incorporate your company in the state of Delaware”.
“I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters,” he added. He then posted a poll asking his followers whether or not Tesla should “change its state of incorporation to Texas, home of its physical headquarters”.
Many big companies, including the likes of Tesla and Amazon, are registered in the state of Delaware, which is known for having light taxation.
Shares in Tesla were down by around 2.5% in extended New York trade. They have lost more than 20% of their value so far this year.
When Tesla put forward Mr Musk’s original 10-year pay package in 2018, it attracted widespread public attention. Several shareholder advisory groups recommended voting against the plan, saying it was overly generous.
Brian Quinn, a professor at Boston College Law School, told the BBC it was “hard to justify a transaction like this”, given Mr Musk’s influence over the board.
“He treats Tesla like his own, but even if he calls himself the ‘Techno-king of Tesla’, he is not the majority owner,” Prof Quinn added.
After selling a large chunk of his stake in Tesla to buy X, Mr Musk currently owns about 13% of the electric carmaker but has recently said he wants a bigger stake in the firm.