A Delaware judge ruled on Tuesday to void Tesla CEO Elon Musk's 2018 compensation package, which is potentially worth up to $55.8 billion, after determining it was not negotiated unfairly.
Tuesday's ruling comes more than a year after the judge heard the trial. According to The Hill, a group of Tesla shareholders sued the tech billionaire and the company after Tesla announced the pay package, which grants Musk a 1% stake in the firm for each of the 12 stock price and performance milestones tied around the carmaker's financial growth.
Should all the milestones be achieved, which they eventually were, the bonuses could see Musk's control over Tesla rise from 21% to 28%.
Tesla Shareholders Sued Elon Musk
The shareholders argued that the massive size of the bonus was due to Elon Musk's influence on the board, controlling them to grant it to him.
On the other hand, the defendants justified the agreement as being "high risk, high reward." They also argued that the billionaire was not a controlling shareholder since he only owned less than one-third of the firm at the time.
However, Chancery Judge Kathaleen McCormick determined that Musk was a controlling shareholder with a potential conflict of interest, so the pay agreement must be subject to a more rigorous standard.
"The process leading to the approval of Musk's compensation plan was deeply flawed... Musk had extensive ties with the persons tasked with negotiating on Tesla's behalf," McCormick wrote in her 200-page decision.
McCormick labeled the pay package as the largest ever in the history of US private business, exceeding the median executive compensation at the time by over 250 times.
The judge further noted that the shareholder vote to approve the package was also unreliable because the firm misinformed shareholders. In conclusion, McCormick said the only suitable remedy was to rescind the billionaire's compensation package.
"In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit... The process arrived at an unfair price. And through this litigation, the plaintiff requests a recall," she noted.
It is still unclear how the ruling will be implemented, but Tesla can still appeal it.
Elon Musk Could Lose Spot as One of the World's Richest Person
Elon Musk reacted to the ruling on X, formerly known as Twitter, by giving business advice. "Never incorporate your company in the state of Delaware," he noted. He later added: "I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters."
As of Tuesday, Musk topped Forbes' list of the world's richest people. However, the ruling could make Musk's net worth, estimated by Bloomberg to be about $205 billion as of January 31, suffer a substantial dent.
Bloomberg reported that without the compensation plan, Musk's net worth could drop to below $154 billion, placing him down several notches on the present list of the world's wealthiest people.
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