The ruling by Chancery Court Judge Kathaleen McCormick in the state of Delaware effectively means Mr Musk will be stripped of his $AU70 billion (US$56 billion) compensation deal.

The court ruled on the basis that Tesla’s board of directors had not proved that “the compensation plan was fair”.

The case was launched by Tesla shareholder Richard Tornetta, who was angered by Mr Musk’s pay package, the largest in public corporate history.

Mr Tornetta claimed the company’s directors breached their fiduciary duties by awarding Mr Musk a performance-based equity-compensation plan.

The electric vehicle maker’s share price fell more than three per cent in after-hours trading following the publication of the 200-page ruling.

Mr Musk reacted on Twitter writing: “Never incorporate your company in the state of Delaware.”

The entrepreneur became the richest person ever in 2022, in large part due to the stock price of his companies Tesla and SpaceX, with an estimated net worth of $395 billion.

“Was the richest person in the world overpaid? The stockholder plaintiff in this derivative lawsuit says so,” Judge McCormick wrote.

She noted the plan was the “largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude — 250 times larger than the contemporaneous median peer compensation plan and over 33 times larger than the plan’s closest comparison.”

She continued: “… the defendants bore the burden of proving that the compensation plan was fair, and they failed to meet their burden.”

Judge McCormick observed the process leading to the approval of Mr Musk’s compensation plan was “deeply flawed” because of his “extensive ties with the persons tasked with negotiating on Tesla’s behalf”.

The case hinged on whether or not Mr Musk controlled Tesla and Judge McCormick ruled he did.

The court ordered the equitable remedy of rescission, which effectively voids a contract.

More to come