A Delaware judge on Tuesday invalidated Tesla CEO Elon Musk's $56 billion compensation package, ruling that he "failed" to prove that it was fair.

Why it matters: The ruling marks a major setback for the world's richest person.

What they're saying: Musk "enjoyed thick ties with the directors tasked with negotiating on behalf of Tesla, and dominated the process that led to board approval of his compensation plan," Delaware Chancery Court Chancellor Kathaleen McCormick said in her ruling.

• "The Compensation Committee and Musk were not on different sides. They did not acknowledge the existence of a conflict. It was a cooperative and collaborative process."

The impact: Tesla shares fell by more 3% after hours and the company's market cap stood at around $600 billion Tuesday. It peaked at over $1 trillion in 2021.

• The 201-page ruling could drop Musk down to the third richest person in the world, according to Bloomberg.

Flashback: In 2018, Musk agreed to be Tesla's CEO or executive chairman and chief product officer for a decade.

• Tesla agreed to pay him 20.3 million stock options in 12 tranches that would vest as the company met more than a dozen milestones. They were estimated to be worth about $55 billion at the time.
• Those "jaw-dropping" benchmarks included growing Tesla's market value to $650 billion.
• That same year, shareholder Richard Tornetta filed a lawsuit against Musk and Tesla to rescind the pay package — arguing that it was excessive, and that the company's board breached its fiduciary duty in approving it.
• In his defense in 2022, Musk dismissed claims that he had a role in putting together the largest-ever corporate compensation deal.

The big picture: Musk's wealth, propped up by the Tesla options, amplifies his influence and enables him to take on risks like buying Twitter and running ventures like Neuralink.

What he's saying: "Never incorporate your company in the state of Delaware," Musk posted on X.

• Representatives for Tesla did not immediately respond to Axios' request for comment.

What to watch: Tesla's board may have to come up with a new proposal and it remains unclear if Musk will appeal the ruling, per Bloomberg.

Editor's note: This article has been updated with new details throughout.