As news of the decision broke, Tesla's share price experienced a 3% decline during after-hours trading on Tuesday.

The lawsuit was filed by Richard Tornetta, a shareholder in the electric automaker, who challenged the enormous pay package granted to Musk in 2018. The judge highlighted that this compensation plan was the largest in public corporate history, propelling Musk to become a centi-billionaire and the wealthiest person on the planet.

Under the contentious plan, Musk was offered an opportunity to acquire 12 tranches of Tesla stock options. These options would only vest if the company's market capitalization increased by $50 billion and if Tesla achieved a specific revenue target.

The presiding judge, Kathaleen McCormick, raised critical questions about the fairness of Musk's compensation, asking, "Was the richest person in the world overpaid?" McCormick determined that Tornetta had successfully proven that Musk effectively controlled Tesla, and that the process leading to the approval of his compensation was deeply flawed.

The judge discovered extensive ties between Musk and individuals responsible for negotiating on behalf of Tesla, including General Counsel Todd Maron, who had previously served as his divorce attorney. McCormick noted that Musk essentially dictated the process of setting his compensation, likening it to a self-driving journey with recalibrations along the way. The judge concluded that the outcome of this process resulted in an unfair price, prompting the plaintiff to request a recall.

As a result of the ruling, McCormick directed that the plaintiff, Tornetta, was entitled to rescission. The court ordered both parties to collaborate and submit a joint letter addressing all outstanding issues, including fees, to conclude the matter at the trial level.

Tesla CEO Elon Musk, his legal team, and Tornetta's attorney have not yet responded to requests for comment on the judge's decision. However, Musk took to social media, tweeting, "Never incorporate your company in the state of Delaware," shortly after the ruling was announced.

Judge McCormick emphasized that her verdict rested on the determination that Musk, rather than the company's board of directors and shareholders, held control over Tesla, especially in the context of setting his compensation. The judge noted Musk's significant equity stake, his influential corporate positions as CEO, Chair, and founder, and his dominant role in the process that led to board approval of the compensation plan.

Furthermore, the court concluded that Tesla and Musk's legal team failed to prove that the stockholder vote was fully informed, as the proxy statement inaccurately portrayed certain directors as independent and omitted crucial details about the process.

In a separate development earlier this month, Musk expressed his intention to secure 25% of voting control over Tesla, in addition to his current 13% ownership stake. He voiced his desire to have a significant level of influence while still allowing for the possibility of being overturned.

This landmark ruling serves as a significant setback for Musk, whose compensation package has faced scrutiny in recent years. Now, Tesla and its CEO must navigate the impact of the judge's decision and address the concerns raised about the fairness and transparency of executive compensation within the company.