A Delaware judge has delivered a groundbreaking blow to Tesla and its CEO Elon Musk, declaring the record-breaking $56 billion pay package awarded to Musk as "an unfathomable sum" that unfairly disadvantaged shareholders.

The decision, which can be appealed, wipes out the largest pay package in corporate America.

In the aftermath of the ruling, Tesla's shares experienced a 3% drop in extended trade, with investors eyeing the possibility of a governance overhaul. Critics have long argued that Tesla's board failed to provide adequate oversight of Musk, known for his combative nature and headline-making antics.

Musk's vision for interplanetary

During the week-long compensation trial in November 2022, Musk justified the colossal pay package by stating that the funds would be used to finance interplanetary travel, particularly the ambitious goal of reaching Mars.

The judge, Kathaleen McCormick, questioned whether such an extravagant plan was necessary for Tesla's success and shareholder value.

The ruling comes at a critical juncture for Tesla as the electric vehicle industry re-evaluates demand, and the company itself warns of slowing growth. Tesla, under Musk's leadership, has become the world's most valuable automaker, but concerns about the company's future breakthroughs, including self-driving technology, are now in focus.

Musk's demand

Elon Musk's recent demand for 25% voting control, as revealed on his social media platform X, may face significant challenges in light of the judge's ruling. Legal experts suggest that given the judge's critique of the board's decision-making process, Musk's demand is likely "dead on arrival."

With the judge pointing out the lack of independence among several Tesla board members, calls for a restructuring of the board are gaining momentum. Some investors believe that at least three directors with independence should replace current members to negotiate a new pay package for Musk.

During the trial, Tesla directors argued that the massive pay package was essential to ensure Elon Musk's continued dedication to the company. However, critics contend that the board failed to inform shareholders about the attainability of goals and internal projections, raising questions about the transparency of the compensation decision.

Elon Musk's 10-year pay agreement, signed in 2018 and worth approximately $51 billion at the Tuesday closing price for Tesla stock, now stands nullified by the court's decision. This marks a significant development in the landscape of CEO compensation and corporate governance.