Judge voids Elon Musk's 'unfathomable' $56 billion Tesla pay package

On Tuesday, a judge in Delaware threw out Elon Musk's record-breaking $56 billion pay package for Tesla (TSLA.O), calling it an "unfathomable sum" that was unfair to shareholders. The judge said that the compensation granted by the EV maker's board was too much.

After the ruling, Tesla's stock dropped about 2% in premarket trade, and some investors hope that this decision might make Tesla change the way it is governed. People have criticized Tesla's board for not overseeing Musk, who is known for being confrontational and making headlines. Musk has also been involved in regulatory battles and manages several other companies.

The judge's decision, which can be challenged, cancels the biggest pay package in corporate America. The judge found that the share-based compensation was negotiated by directors who seemed to be too influenced by Musk, currently considered the world's richest person by Forbes magazine.

The pay agreement between Tesla and Musk, made in 2018 and spanning 10 years, would be worth around $51 billion at Tuesday's closing price for Tesla stock, considering the cost for Musk to exercise the options. This is about a quarter of Musk's $210.6 billion fortune, according to Forbes, making him wealthier than LVMH (LVMH.PA) CEO Bernard Arnault of France and his family by about $2 billion.

Kathaleen McCormick of Delaware's Court of Chancery, who made the ruling, wrote, "Swept up by the rhetoric of 'all upside,' or perhaps starry-eyed by Musk’s superstar appeal, the board never asked the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?"

McCormick instructed the Tesla shareholder who challenged the pay plan to work with Musk's legal team on implementing the decision. The decision can be appealed to the Delaware Supreme Court once the parties agree on a final order and fees for the shareholder's attorneys, which will be paid by Tesla.

This decision comes at a time when Tesla is warning of slowing growth, and the electric vehicle industry is reassessing demand. While Tesla has become the world's most valuable automaker under Musk, much of its value relies on expectations of future breakthroughs, like self-driving robotaxis.