Elon Musk, the chief govt of Tesla, suffered a surprising rebuke Tuesday when a Delaware decide voided the pay bundle that helped make him a billionaire many instances over and the world’s wealthiest human being.

In a call that solid a harsh mild on the conduct of Mr. Musk and Tesla’s board of administrators, Chancellor Kathaleen St. J. McCormick of the Delaware Courtroom of Chancery mentioned the chief govt had successfully overseen his personal compensation plan with the assistance of compliant board members.

“The method resulting in the approval of Musk’s compensation plan was deeply flawed,” the decide mentioned. She ordered that the contract that gave Mr. Musk “the biggest potential compensation plan within the historical past of public markets” be voided, and advised events within the case to work out how Mr. Musk would return extra pay.

Some compensation specialists mentioned the choice would ship a warning to different corporations that awarded their high executives very massive pay packages.

“It’s an extremely essential resolution as a result of it establishes that there’s such a factor as extreme compensation,” mentioned Sarah Anderson, international economic system undertaking director on the Institute for Coverage Research, a progressive analysis group.

When it devised the inventory choices bundle in 2018, Tesla’s board mentioned Mr. Musk could be paid provided that the corporate produced distinctive outcomes and its inventory worth soared.

However a gaggle of Tesla shareholders challenged the bundle, which ended up giving Mr. Musk the correct to accumulate about 304 million Tesla shares at a preset worth of $23.34 a share if the corporate achieved sure income, revenue and share worth targets.

The bundle, which was break up into 12 separate grants every tied to its personal purpose, is price about $51.1 billion at Tesla’s closing share worth on Tuesday. Mr. Musk achieved all 12 targets, however below phrases of his bundle, he has to carry on to these shares for not less than 5 years earlier than promoting them.

Greg Varallo, a lawyer who represented Tesla shareholders, mentioned the shares could be canceled. That might considerably scale back Mr. Musk’s wealth and his stake in Tesla, which stands at about 13 % after he bought shares to finance his acquisition of Twitter, the corporate he renamed X.

“The courtroom’s laborious work will redound on to the good thing about Tesla traders, who will see the dilution from this gargantuan pay bundle erased,” Mr. Varallo, a associate at Bernstein Litowitz Berger & Grossmann, mentioned in an electronic mail.

Tesla didn’t instantly reply to a request for remark.

“By no means incorporate your organization within the state of Delaware,” Mr. Musk mentioned in a submit on X.

The choice, which may be appealed to the Delaware Supreme Courtroom, is more likely to gas critics of Tesla who say there are too few checks on Mr. Musk’s conduct. The corporate’s eight-seat board contains a number of shut buddies of Mr. Musk and his brother, Kimbal. Many board members owed a lot of their private wealth to Mr. Musk, and he successfully dictated his personal pay bundle, Chancellor McCormick mentioned.

“Within the remaining evaluation,” she wrote, “Musk launched a self-driving course of, recalibrating the velocity and course alongside the way in which as he noticed match. The method arrived at an unfair worth.” The pay bundle was not essential to retain Mr. Musk nor inspire him as a result of he already owned Tesla shares price tens of billions of {dollars}, Chancellor McCormick mentioned.

Info given to shareholders earlier than they voted to approve the bundle was “materially poor,” she mentioned.

The lawsuit, which led to a trial in November 2022, took on added significance after Mr. Musk’s acquisition of Twitter that October. He confronted widespread criticism for spending time attempting to overtake Twitter whereas Tesla’s shares slumped and its progress slowed amid rising competitors. One justification for Mr. Musk’s pay bundle at Tesla was that it was a approach of holding him targeted on constructing vehicles.

The choice additionally raises questions on how Tesla’s board will take care of a requirement by Mr. Musk this month for a good larger stake within the firm. Mr. Musk mentioned he wanted to personal 25 % of Tesla to keep away from takeovers and have sufficient management of the corporate because it develops robots and different synthetic intelligence expertise.

If his calls for are usually not met, Mr. Musk mentioned, he’ll pursue unspecified ventures outdoors Tesla. The corporate’s board, which is led by Robyn Denholm, has not responded publicly to his demand for an even bigger stake within the firm.

In his testimony through the trial, Mr. Musk prompt that his impression on the automobile business justified his pay. “Tesla has had an immense impact on the world,” he mentioned. “Not simply that Tesla is making electrical autos — we now have been actually the principle cause why the remainder of the automobile business has moved towards sustainable, electrical autos.”

When the bundle was introduced, Tesla was nonetheless struggling to supply massive numbers of vehicles, and few believed Mr. Musk would earn all of the shares. Backers of the plan additionally famous that he bought nothing if its efficiency hurdles weren’t surpassed. They mentioned it could inspire him to make Tesla a number one automaker.

However Chancellor McCormick wrote that Mr. Musk already had a 22 % stake in Tesla earlier than the bundle, and that these shares would go up in worth if the corporate did nicely.

“This possession stake gave him each incentive to push Tesla to ranges of transformative progress,” she mentioned.

Executives at Compensia, the consulting agency that helped devise the bundle, didn’t reply to a request for remark.

The case was heard in Delaware as a result of Tesla, like many corporations, is included there. After it grew to become X, Twitter included in Nevada final yr. It was beforehand included in Delaware.

“Individuals have moved out of there as a result of they don’t just like the rulings of the judges,” mentioned Carl Tobias, a legislation professor on the College of Richmond, referring to Delaware. “However most individuals think about it the gold customary.”