A significant ruling emerged from the Delaware Chancery Court on Tuesday, impacting Tesla and its CEO, Elon Musk. The court declared the $56 billion pay package awarded to Musk in 2018 as unfair, citing a lack of evidence to prove its fairness by Tesla’s board of directors.

Tesla Shares Dip Following Court Decision

The aftermath of the ruling saw Tesla’s share price decline by approximately 3% in after-hours trading. This financial reaction underscores the market’s sensitivity to legal developments involving the electric car manufacturer and its high-profile CEO.

The pay package in question, noted by the court as the largest CEO compensation in corporate history, had positioned Musk as a centi-billionaire, elevating him to the status of the richest individual globally. It proposed granting Musk 12 tranches of stock options, contingent on Tesla achieving specific market capitalization and revenue milestones.

Judge McCormick’s Ruling on Musk’s Influence over Tesla

Chancery Court Judge Kathaleen McCormick, in her extensive 200-page ruling, questioned whether the world’s richest person was overcompensated. She found that Musk exerted substantial control over Tesla, particularly concerning his compensation approval. Judge McCormick highlighted Musk’s involvement in the negotiation process, noting his connections with key management figures, including General Counsel Todd Maron, Musk’s former divorce attorney.

The Path to the Court’s Decision

In her detailed analysis, Judge McCormick concluded that the process leading to Musk’s compensation approval was deeply flawed, resulting in an unfair outcome. Consequently, she granted the plaintiff’s request for rescission of the pay package.

The ruling mandates both parties to collaborate on finalizing an order that aligns with the decision. This includes addressing issues such as legal fees and other trial-level proceedings. As of now, Musk, his legal team, and the plaintiff’s attorney have not publicly commented on the decision.

Musk’s Reaction and Ongoing Influence on Tesla

Musk, known for his outspoken nature, reacted to the ruling with a tweet advising against incorporating companies in Delaware. Despite the court’s ruling, Musk’s influence in Tesla remains significant. He recently expressed his desire to increase his voting control in the company to around 25%, a move that reflects his ongoing commitment to Tesla’s growth in AI and robotics. Musk currently owns approximately 13% of Tesla’s stock outright and also oversees X, the social media platform he owns, formerly known as Twitter.

The court’s findings raise questions about the independence of Tesla’s board members and the transparency of the process that approved Musk’s compensation. The decision underscores the importance of corporate governance and fair decision-making processes in publicly traded companies.

The outcome of this case serves as a reminder of the critical role shareholders play in corporate governance. It highlights the need for transparent and fair practices in executive compensation decisions, ensuring alignment with shareholder interests and overall corporate accountability.