A Delaware Chancery Court judge has shot down Tesla (TSLA) CEO Elon Musk's $55.8 billion executive pay package. Yahoo Finance Legal Reporter Alexis Keenan explains this ruling at a time when Musk is pushing for more influence within Tesla.

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Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

BRAD SMITH: Elon Musk back in the spotlight. A Delaware judge ruling that the Tesla founder is not entitled to his $55.8 billion pay package from 2018. Calling it not entirely fair.

Let's bring in "Yahoo Finance's" Alexis Keenan to give us the details here. Alexis, what have we found here?

ALEXIS KEENAN: Yeah. So not entirely fair. And this is a special standard that the Delaware Chancery Court is able to apply. It's a heightened standard that shifts the burden and puts it onto the Board of Directors at Tesla to show that they did go through a fair process with regard to the price of Musk's compensation, as well as the process for how they got there.

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So this was a derivative suit. It was brought by Tesla shareholders in Delaware Chancery Court. They allege that the Board of Directors breached their fiduciary duty when they came up with this compensation package by okaying, what they said was, excessive performance-based compensation.

That, of course, was all in the form of equity, still unexercised, undistributed to Elon Musk. The judge said that the board didn't meet this burden. And wrote that the members of the compensation committee at Tesla that they testified to a lack of negotiation over arriving at these figures.

The judge also applied, like I said, this heightened standard for transactions. And these are when the transactions between the board and an executive that they are talking with an executive with a controlling stake in the company. So that's what brings this heightened standard into play here.

The judge also noted here that Musk's personal relationships with board members and the general counsel were not fully disclosed to shareholders, when they voted on this package. And it's important here to note that the Chancery Court, it's a special court. It's a court of equity. And it has really broad discretion in order to remedy what they see as breaches of fiduciary duties.

So it's going to get a lot of attention in corporate circles here because this is one of the first times, if not the first time, that the Delaware court is establishing that there's such a thing called excessive compensation or putting a lot of guardrails around what that really means. Also, in response to this decision, Musk tweeting out that he recommends not even incorporating in Delaware and instead going to Nevada or to Texas, where he's already established relationship with his various companies. Guys?

SEANA SMITH: Clearly communicated his frustrations on X. No surprise there. Alexis Keenan, thanks so much for breaking that down for us.