A Delaware judge on Tuesday invalidated Tesla CEO Elon Musk's $56 billion (€51.1 billion) compensation package, siding with a shareholder who claimed the entrepreneur was overpaid.

A judge called the compensation "an unfathomable sum" that was not fair to shareholders, according to a court filing.

Shares of the electric carmaker fell more than 3% in after-hours trading following the release of the 200-page ruling.

What was the lawsuit about?

Chancellor Kathaleen McCormick's ruling comes more than five years after a shareholder lawsuit targeted Tesla CEO Musk and the company's directors.

They were accused of breaching their duties to the maker of electric vehicles and solar panels, resulting in a waste of corporate assets and unjust enrichment for Musk.

Lawyers for the shareholders argued that the compensation package should be voided because it was dictated by Musk and was the product of sham negotiations with directors who were not independent of him. 

What did the judge say?

Musk's pay package at Tesla is the largest in corporate America. The judge found it was negotiated by directors who appeared beholden to their headline-grabbing CEO.

"Swept up by the rhetoric of 'all upside,' or perhaps starry eyed by Musk’s superstar appeal, the board never asked the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?" wrote McCormick.

Her decision can be appealed once the parties agree on a final order and on fees for the shareholder's attorneys, which will be paid by Tesla.

What was Musk's reaction?

"Never incorporate your company in the state of Delaware," Musk wrote in a message posted on X, formerly Twitter, shortly after the decision was announced.

"I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters," he added on X later.

After his purchase of Twitter in 2022, Musk changed the company's state of incorporation from Delaware to Nevada.

Earlier this month, Musk asked Tesla's board to come up with a new compensation plan for him that would give him a 25% stake in the company. 

dh/jsi (AFP, AP, Reuters)