By Arsheeya Bajwa

(Reuters) -Tesla on Wednesday asked its shareholders to once again approve CEO Elon Musk's record-breaking $56 billion pay that was set in 2018, but was rejected by a Delaware judge in January.

The compensation includes no salary or cash bonus, but sets rewards based on Tesla (NASDAQ:)'s market value rising to as much as $650 billion over the next 10 years. Tesla is now valued at $500.36 billion, according to LSEG data.

The re-vote comes ahead of next week's quarterly earnings for Tesla, which is grappling with weak demand as well as a reputational hit to Musk from his political leanings and antisemitic comment last year.

Musk's pay was rejected by Kathaleen McCormick (NYSE:) of Delaware's Court of Chancery, who termed the compensation granted by the board as "an unfathomable sum" that was unfair to shareholders.

The January ruling, which can be appealed, had nullified the largest pay package in corporate America.

"We do not agree with what the Delaware Court decided, and we do not think that what the Delaware Court said is how corporate law should or does work," Board Chairperson Robyn Denholm wrote in a letter included in the regulatory filing.

In seeking a re-vote, Tesla is using a section of Delaware law that allows companies to ratify actions that were technically defective such as selling stock before the board approves an increase in shares, but not always controversial.

The board's special committee said it cannot predict if the re-approval of the pay package would be proper under Delaware law, while describing its approach as "novel".

"Even if the proposal is approved, it cannot override the judge's decision, which is legally binding, at least until Musk appeals successfully," said Xu Jiang, an associate professor of business administration at Duke University.

If shareholders overwhelmingly approve the proposal for the second time, it would help Musk in his future appeal, Jiang said.

Tesla also urged its investors on Wednesday to approve its plan to move the company's state of incorporation from Delaware to Texas.

The shift could escalate a tussle between Musk, who has spoken up several times against regulators and what he considered red tape, and the state of Delaware.

Earlier this year, Musk shifted location of incorporation of his rocket company SpaceX to Texas and brain-chip startup Neuralink to Nevada from Delaware.

TESLA'S MOUNTING CONCERNS

Tesla's shares have lost more than 36% of their value so far this year as EV sales slowed down globally, after having more than doubled in 2023.

As a CEO, Musk's reputation too has taken a blow from his increasing embrace of right-wing politics and several controversies, including the endorsement of an antisemitic conspiracy theory in late 2023.

Developments such as scrapping plans for an affordable EV and deciding to cut at least 10% of its staff have also left analysts questioning the company's strategy.

"Tesla's stock has been a disaster this year as Musk and Tesla have significantly miscalculated the demand challenges in China and the overall demand weakness for EVs globally with competition rising from all areas," Wedbush analyst Dan Ives said in a research note.