A Delaware judge ruled on Tuesday that Elon Musk is not eligible for the landmark compensation package granted by Tesla's board of directors, which could be valued at over $55 billion.

Chancellor Kathaleen St. Jude McCormick has finally delivered her ruling, more than five years after a shareholder lawsuit was filed against Tesla CEO Musk and the company's directors.

Judge Strikes Down Elon Musk's Tesla Pay Package

Allegations have been made against them for failing to fulfill their responsibilities towards the manufacturer of electric vehicles and solar panels, leading to a misuse of company resources and benefiting Musk unfairly, as per AP News.

The lawyers representing the shareholder contended that the compensation package should be invalidated due to its alleged connection to Musk and the questionable negotiations with directors who lacked independence from him. According to sources, it has been alleged that shareholders were provided with misleading and incomplete disclosures in a proxy statement, leading to their approval of the matter.

Defense attorneys argued that the pay plan was negotiated by an independent compensation committee and included ambitious performance milestones that were criticized by certain Wall Street investors. Furthermore, they emphasized that the plan was approved by shareholders, even though it was not legally required in Delaware.

Furthermore, it was contended that Elon Musk's status as a controlling shareholder was questionable due to his ownership stake being less than one-third of the company at that point.

However, Musk responded to the ruling on X, the social media platform formerly known as Twitter that he owns, by providing some business advice. "Avoid incorporating your company in Delaware," he advised.

During the trial testimony in November 2022, Musk refuted any involvement in dictating the terms of the compensation package or attending meetings where the plan was discussed by the board, its compensation committee, or the working group that assisted in its development.

McCormick concluded that due to Musk's position as a controlling shareholder and the potential conflict of interest, the pay package needed to meet a higher standard. The package includes stock option awards that enable Musk to purchase Tesla stock at significantly reduced prices as financial and operational targets are achieved.

The acquired stock must be held for a period of five years. Musk successfully met all 12 tranches or performance targets in the plan. He did not have a guaranteed salary. The ruling will draw attention to Tesla's upcoming round of compensation negotiations with the CEO.

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Tesla's Previous Aggreement

In 2021, Tesla's value skyrocketed to over $1 trillion, a staggering increase from its previous valuation of $50 billion when the package was negotiated. In addition, the ruling follows Musk's recent reaffirmation of his intention to obtain 25% voting control of Tesla.

Musk made the decision to sell a significant portion of his Tesla shares. His intention behind this move was to acquire Twitter. However, Musk expressed his unease about continuing to lead Tesla unless he maintained 25% of the voting control.

This sentiment was shared in a post on X back in January. At the time, the billionaire held approximately 13% ownership of the company. In 2022, Amit Batish from Equilar, a research firm specializing in executive pay, made an estimation that Musk's package was approximately six times greater than the total compensation of the top 200 highest-paid executives in 2021.

In July, Tesla's directors reached an agreement to reimburse $735 million to the company. This settlement was made in response to shareholder allegations from a lawsuit filed in 2020, which claimed that the directors had excessively compensated themselves. According to The Guardian, a legal action was taken against the options that were granted to directors beginning in June 2017.

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