- By Mariko Oi
- Business Correspondent
A judge in the US state of Delaware has struck down a $55.8bn (£44bn) pay deal awarded to Elon Musk in 2018 by electric car company Tesla.
A partner sued for overpayment.
Judge Kathleen McCormick said the compensation was an “incalculable amount”, unfair to shareholders and the process leading to the package being approved was “deeply flawed”.
He ruled that the contract should be cancelled.
The pay deal, which was decided back in 2018, was the largest ever in US corporate history and helped make Mr Musk the world's richest man. Bloomberg and Forbes estimate his net worth between $198bn (£162bn) and $220bn (£180bn) in November 2023.
Tesla's package tied Mr Musk's compensation to performance targets such as Tesla's stock price and profitability. He doesn't get paid.
But Tesla shareholder Richard Tornetta took legal action to overturn the award, arguing the CEO was overpaid.
After years of legal wrangling, a week-long trial began in November 2022 where Tesla directors argued that the massive pay award was designed to ensure that Mr Musk, one of the world's most dynamic entrepreneurs, would continue to devote his attention to the company.
But within her 201 page judgment Published on Tuesday, Judge McCormick said Tesla directors had been “swept away by the rhetoric” surrounding Mr Musk's “superstar appeal”.
Also, Mr Musk had “extensive relationships” with Tesla executives in the process of negotiating the pay award. He cited his 15-year relationship with Ira Ehrenbreis, chairman of the compensation committee.
Mr Musk had more than 20 years of business dealings with another compensation committee member, Antonio Gracia, the judge said.
Following the verdict, Greg Varallo, a lawyer for Tesla shareholder Mr Tornetta, said in an email reported by Reuters that it was a “good day for the good guys”.
In a post on X, formerly known as Twitter, Mr Musk said: “Never incorporate your company in the state of Delaware”.
“If shareholders want to decide things, I recommend incorporating in Nevada or Texas,” he added. He then released a poll asking his supporters “whether Tesla should move its incorporation location to Texas, home of its physical headquarters.”
The judge's decision can be appealed to the Delaware Supreme Court.
Shares of Tesla fell about 2.5% in extended New York trading. They have lost over 20% so far this year.
As well as being Tesla's chief executive and major shareholder, Mr Musk also owns a number of companies, including social media platform X, rocket company SpaceX and brain chip company Neuralink.
After selling most of his shares in Tesla to buy the X, Mr Musk currently owns 13% of the electric car maker, but recently said he wanted a bigger stake in the company.
When Tesla presented Mr Musk's original 10-year pay package in 2018, it attracted widespread public attention. Several stakeholder advisory groups recommended voting against the plan, saying it was too generous.
The package is six times larger than the salaries of the top 200 U.S. CEOs in 2021, according to research firm Equilar.
Brian Quinn, a professor at Boston College Law School, told the BBC that given Mr Musk's influence, “it's hard to justify a transaction like this”.
“He treats Tesla like his own, but even though he calls himself the 'Techno-King of Tesla,' he is not the majority owner,” Professor Quinn added.
Mr Musk has also said he is concerned about Tesla's investments in artificial intelligence (AI) technology.
He said the current shareholder structure leaves Tesla vulnerable to “takeovers by dubious interests” and wants more control over its direction.
“If it's not, I'd like to build products outside of Tesla,” Mr Musk added.