US judge annuls Tesla's "inexplicable" $56 billion payment plan to Elon Musk.

Reuters A U.S. judge on Tuesday rejected Tesla's record $56 billion pay package for Elon Musk, calling the compensation "an inexplicable sum" that is unfair to the electric carmaker's shareholders.

Tesla's shares fell about 3% after the close of the US market the previous day, and some investors assessed that the Delaware judge's decision could lead Tesla to reshape its governance.

Tesla's board of directors has been criticized for failing to oversee its combative CEO, who has clashed with regulators and runs several other companies simultaneously.

The decision, which can be appealed, annuls the largest executive compensation package ever given by a US company. The judge ruled that the stock-based compensation was negotiated by directors who appeared to be indebted to Musk, currently ranked by Forbes magazine as the world's richest man.

"Engulfed by the 'all upside' rhetoric, or perhaps blinded by Musk's superstar appeal, the board never asked the $55,8 billion question: was the (compensation) plan really necessary for Tesla to retain Musk and achieve its goals?" wrote Judge Kathaleen McCormick.

The judge instructed the Tesla shareholder who challenged the payment plan to work with Musk's legal team to implement the decision.

The decision comes as Tesla has warned of slowing growth and the electric vehicle sector is reassessing demand. Tesla has become the world's most valuable automaker under Musk's leadership, but much of that value is based on expectations of future advancements, such as self-driving cars.

"Never register your company in the State of Delaware," Musk said on the social network X, the social media platform known as Twitter until it was bought by the billionaire in 2022.

"Good morning to the good guys," said Greg Varallo, the lawyer for Tesla shareholder Richard Tornetta, who filed the lawsuit in 2018.

MUSK COMPENSATION - "The incredible size of the largest executive compensation plan in US history—an unexplained sum—appears to have been calibrated to help Musk achieve what he believed would be 'a good future for humanity,'" McCormick wrote in his 201-page opinion.

Musk said during the week-long compensation trial in November 2022 that the money would be used to fund interplanetary travel.

"It's a way to take humanity to Mars," the billionaire said. "So Tesla can potentially help us achieve that."

Tesla's 10-year salary agreement with Musk, signed in 2018, would be worth approximately $51 billion at Tesla's closing share price on Tuesday, taking into account the cost for Musk to exercise the options.

That would represent about a quarter of his $210,6 billion fortune, as calculated by Forbes magazine, which currently puts him about $2 billion ahead of the CEO of luxury goods company LVMH, Bernard Arnault.

The decision also comes as Tesla prepares for another round of compensation negotiations with its CEO. Musk told X this month that he didn't feel comfortable leading Tesla unless he had 25% of the voting control. The billionaire owned about 13% of the company at the time and said negotiations wouldn't begin until McCormick made a decision.

"Given the way she describes the board process—through the directors' testimony—there's no way her latest demand for 25% will be approved," said Brian Quinn, a professor at Boston College Law School. "She's dead on arrival."

McCormick wrote that many of Tesla's board members, including current members Kimbal Musk, Elon Musk's brother, and James Murdoch, son of media mogul Rupert Murdoch, lacked independence because of their close personal ties to the CEO. Two of Tesla's other current directors, Robyn Denholm and Ira Ehrenpreis, demonstrated a lack of independence in decisions regarding compensation, he said.

Currently, the board has eight members, including the chief executive officer.

Ross Gerber, president and CEO of Gerber Kawasaki Wealth & Investment Management and a Tesla investor, told Reuters that the decision showed the company needs to replace at least three directors with independent members before negotiating a new compensation package for Musk.

"Essentially, Tesla's entire corporate structure was considered as if it weren't appropriate for a public company," Gerber said.

Tesla executives argued during the trial that the company was paying to ensure that one of the world's most dynamic entrepreneurs continued to dedicate his attention to the electric vehicle manufacturer. Antonio Gracias, a Tesla executive from 2007 to 2021, called the package "a great deal for shareholders."

Tornetta's lawyers stated that Tesla's board never told shareholders that the targets were easier to achieve than the company was acknowledging, and that internal projections showed Musk would quickly qualify for a large portion of the compensation package.

The plaintiff's legal team also argued that the board had a duty to offer a lower compensation package or seek another CEO, and that it should have required Musk to work full-time at Tesla instead of allowing him to focus on side projects like SpaceX and X.

Kristin Hull, founder of Nia Impact Capital and a Tesla investor, described the board of directors as subservient to Musk, a problem she says is common in other large technology companies. "This is a buddy show," she said of the situation.

The compensation package granted Musk options involving approximately 304 million shares that the billionaire can buy for about $23,33 each, well below the stock's closing price of $191,59 on Tuesday. Musk earned all 12 installments of the stock option awards as Tesla met increasingly higher financial and operational milestones.

Musk has not exercised any of the options and, when he does, he will have to hold the shares for five years before selling them, according to McCormick. The executive does not receive a salary at Tesla.

Tesla's value increased from $50 billion, when the compensation package was negotiated, to a figure briefly exceeding $1 trillion in 2021.

Amit Batish of Equilar, an executive compensation research firm, estimated in 2022 that Musk's package was about six times larger than the combined compensation of the 200 highest-paid executives in 2021.