What’s next in the legal battle over Elon Musk’s $100 billion pay deal

The ruling presents a dilemma for Tesla’s board of directors, who had warned that Musk’s pay package as CEO is vital to keep the serial entrepreneur’s attention on the carmaker at a time when electric-vehicle sales are under pressure.

Musk responded to the ruling, saying shareholders and not judges should control company votes.

The value of the pay package, which fluctuates based on Tesla’s stock price, has more than doubled from early this summer, with shares in the electric-car maker rallying in recent weeks.

The company’s board now has limited options in how to respond to the ruling with little hope of a quick payday for Musk, whose 2018 compensation package has been tied up in litigation for years.

What can Tesla do now?

Tesla said Monday it plans to appeal. It has 30 days to file such an action with the Delaware Supreme Court, but legal experts say the company faces a protracted legal battle with a small possibility of success.

The EV maker’s legal arguments will also be narrower than at the initial trial. The appellate court only in rare cases will re-examine the key facts of the case, including whether shareholders were misled by the board of directors when they first approved the package in 2018, legal experts say.

Tesla’s lawyers can argue that Chancellor Kathaleen McCormick’s ruling misinterpreted the law, didn’t properly handle ratification or that the $345 million in legal fees awarded to the plaintiff’s attorneys was too high. The plaintiff’s lawyers originally asked for a sum worth $5.6 billion in Tesla stock, which prompted thousands of shareholders to send letters to the court objecting to the fee and ruling.

Does this mean Musk doesn’t get paid?

This is where things get murkier for Musk and Tesla. The company hadn’t sought to renegotiate a pay deal with Musk, which the board of directors identified as a risk to Tesla.

“Mr. Musk has not received compensation in nearly six years," the board wrote in a proxy filing. The company said the absence of a pay structure for Musk “could affect his incentive to continue devoting time and energy to Tesla."

Tesla’s board has said that the court’s rejection of the 2018 compensation deal would mean that the company may have to negotiate a new plan of a similar size, but at a higher cost to shareholders.

Earlier this year, Tesla’s accounting team estimated it could cost the company more than $25 billion to reissue an equally-sized pay package, depending on the timing of such a deal. Tesla board chair Robyn Denholm has also said the company has “alternatives" it could consider but those would affect shareholders negatively.

If an appeal fails, board directors could craft a fresh compensation package for Musk subject to laws in Texas, Tesla’s new legal home. Shareholders voted to move its incorporation from Delaware to the southern state in June, at the same time they ratified Musk’s pay package for the second time. Any future legal disputes over his compensation would then go through Texas’ new business court, which started hearing cases for the first time in September.

Why did Tesla create an unorthodox compensation deal for Musk?

Tesla said the pay plan was structured to reward Musk with lucrative stock options if the company hit growth targets over a decade. When the deal was approved by shareholders, many observers said the targets were ambitious. They included developing a prototype for the Model X SUV and growing the company’s market capitalization to $650 billion—more than 10 times what the company was worth at the time.

Ahead of the 2018 vote, Tesla’s board said the growth milestones were designed to be difficult to achieve, and that the rewards were lucrative to reflect the challenge. “Our aspirations may appear ambitious to some, and impossible to others, and that is by design," directors wrote in a letter to shareholders in 2018.

Musk hit the last of the targets in 2022, which would have granted him options to purchase over 300 million shares in the carmaker.

The options’ exercise price is tied to the value of Tesla’s shares on Jan. 19, 2018, which was around $23 after stock splits. Tesla’s share price has surged to over $300 a share since then, meaning Musk’s award has gained billions of dollars in value—at least on paper. He has yet to exercise the options.

At trial, Tesla board members said that they had been concerned that Musk’s attention was being drawn away from the carmaker. One former board member likened the structure of the deal, where Musk would receive stock options in tranches in return for hitting each target, to “dopamine hits."

A serial entrepreneur, Musk’s attention has been divided between the carmaker and his other ventures in space exploration, artificial intelligence and social media. In recent weeks, Musk added to his list of responsibilities, agreeing to help President-elect Donald Trump cut government regulations and spending through a proposed Department of Government Efficiency.

Why did the judge rule against Tesla?

In her initial ruling in January, McCormick threw out the compensation package, calling the process surrounding its creation “deeply flawed." Board members failed to act independently in negotiating the pay deal, McCormick wrote. “In fact, there is barely any evidence of negotiations at all," she wrote.

McCormick also called the size of the award “an unfathomable sum" and said the record-setting amount was an unfair price for Musk’s services.

After the initial ruling, Tesla decided to hold a second shareholder vote in June on Musk’s pay. In proxy filings ahead of that vote, Tesla attached the judge’s 200-page opinion striking down the package in an attempt to address her criticism that shareholders didn’t have all the information ahead of the first vote.

Lawyers representing Tesla’s side in the suit said 72% of voting shareholders supported Musk’s pay package, despite the court’s objections, referring to the process as “one of the most well-informed stockholder votes in Delaware history."

Why did she reaffirm that ruling?

McCormick ruled this week that a fresh show of support didn’t mean that the first vote—upon which the case was premised—wasn’t flawed. The judge also called out “multiple, material misstatements" about her ruling in Tesla’s proxy filing that alone would have rendered the second vote insufficient as a means to overturn the judgment.

Legal experts had expected Tesla to face a difficult task in convincing McCormick to rescind her initial opinion, because there was little precedent for what the company was asking.

Ultimately, Tesla was asking for a do-over in lieu of penalties, the experts said.“Think of it this way, if you rob a convenience store and get arrested for it, you can’t say, ‘Well I shouldn’t go to jail because I’m going to give everything back’," said Renee Zaytsev, a partner at Boies Schiller Flexner who isn’t involved in the case.

Becky Peterson contributed to this article.

This explanatory article might be updated periodically.

Write to Sean McLain at sean.mclain@wsj.com and Erin Mulvaney at erin.mulvaney@wsj.com