In a decisive blow to Tesla’s leadership, Delaware Chancellor Kathaleen McCormick has once again rejected Elon Musk’s controversial $55.8 billion pay package, delivering a significant setback to the electric vehicle giant and its high-profile CEO.

The court’s ruling on Monday emphatically denied Tesla’s attempt to restore Musk’s compensation plan through a shareholder vote. McCormick identified critical flaws in the company’s ratification strategy, including what she termed “material misstatements” in documents presented to shareholders.

“The large and talented group of defense firms got creative with the ratification argument, but their unprecedented theories go against multiple strains of settled law,” McCormick wrote in her scathing legal opinion.

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Musk’s defiant response

Immediately following the verdict, Musk took to his social media platform X to express his disagreement. “Shareholders should control company votes, not judges,” he proclaimed, signaling his intent to continue fighting the decision.

Tesla has confirmed it will appeal the verdict, maintaining that the compensation package is justified given the company’s unprecedented success.

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The court’s ruling also addressed the attorney fees, awarding $345 million—significantly less than the $5.6 billion initially requested by the plaintiff’s legal team. This reduction underscores the court’s scrutiny of the case’s financial aspects.

Background of the compensation dispute

The compensation package, originally approved by shareholders in March 2018, was designed to reward Musk for Tesla’s remarkable growth. However, shareholder Richard Tornetta challenged the plan, alleging that the board failed in their fiduciary duties and that Musk effectively dictated his terms.

During the 2022 trial, Musk argued that Tesla investors are among the “most sophisticated in the world” and capable of monitoring management. He highlighted the company’s transformation from an industry underdog to a market leader, particularly with the success of the Model 3.

The Delaware Court of Chancery, which handles approximately two-thirds of Fortune 500 company registrations, has once again demonstrated its commitment to stringent corporate oversight. Musk’s response has been provocative, with him reposting calls for companies to relocate from Delaware.

As Tesla prepares its appeal, the tech and automotive industries will be watching closely. The outcome could set a precedent for executive compensation and board independence in major corporations.

The saga continues, with potential implications far beyond Musk and Tesla, touching on fundamental questions of corporate governance, shareholder rights, and executive compensation.