A Delaware judge tossed out Elon Musk's record-breaking $56 billion Tesla pay package on Tuesday, calling the compensation granted by the EV maker's board "an unfathomable sum" that was unfair to shareholders.

Shares of Tesla dropped about 3 percent in extended trade, and some investors seized on the ruling in hopes it might prompt Tesla to overhaul its governance.

The Tesla board has been criticized as failing to provide oversight of its combative, headline-making CEO, who has fought regulators and led several other companies at the same time.

The ruling, which can be appealed, nullifies the largest pay package in corporate America. The judge found the share-based compensation was negotiated by directors who appeared beholden to Musk, currently ranked by Forbes magazine as the world's richest person.

"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 Kathaleen McCormick of Delaware's Court of Chancery.

McCormick directed the Tesla shareholder who challenged the pay plan to work with Musk's legal team on an order implementing the decision. It can be appealed to the Delaware Supreme Court once the parties agree on a final order and on fees for the shareholder's attorneys, which will be paid by Tesla.

The decision comes as Tesla warns of slowing growth and the electric vehicle industry is re-evaluating demand. Tesla has become the world's most valuable automaker under Musk, but much of that value is based on expectations of future breakthroughs, such as self-driving robotaxis.

"Never incorporate your company in the state of Delaware," Musk said in a post on X, the social media platform he bought in 2022.

"Good day for the good guys," said an email from Greg Varallo to Reuters, an attorney for Tesla shareholder Richard Tornetta, who brought the lawsuit in 2018.

(With input from Reuters)