The Tesla Inc. logo is displayed on a smartphone screen.

Rafael Henrique | Lightrocket | Getty Images

Tesla Inc's directors will return $735 million to the company to settle claims they grossly overpaid themselves in one of the largest shareholder settlements of its kind, according to a Monday filing in a Delaware court.

The settlement resolves a 2020 lawsuit by a retirement fund which holds Tesla stock and challenged stock options that were granted to Tesla directors starting in June 2017.

The settlement does not impact the $56 billion compensation package of Elon Musk, which is being challenged by shareholders in a separate lawsuit that went to trial last year. A ruling is expected soon in the Musk case.

The directors, including Oracle co-founder Larry Ellison, agreed to return the equivalent value of 3.1 million Tesla stock options, according to a court filing.

Tesla did not respond to a request for comment. The directors acted in good faith and in the best interests of Tesla stockholders but agreed to settle to eliminate the risk of litigation to themselves and to the company, according to a court filing.

The directors were accused of awarding themselves unfair and excessive compensation in the form of around 11 million stock options from 2017 to 2020 that the allegedly grossly exceeded norms for a corporate board.

The case was brought by the Police and Fire Retirement System of the City of Detroit in 2020 and the settlement is paid to Tesla to benefit the company, a type of case known as a derivative lawsuit. The settlement is one of the largest ever for a derivative case in the Court of Chancery, a major venue for shareholder litigation.

Tesla and Musk have a reputation for fighting lawsuits. Musk has prevailed at trial in a defamation lawsuit, a case accusing him of securities law violations and a shareholder lawsuit accusing him of coercing Tesla into buying SolarCity.

As part of the settlement, the directors also agreed to not receive any compensation for 2021, 2022 and 2023 and the board will change the way compensation is determined.

Tesla had defended against the lawsuit by arguing that the company went through almost unprecedented growth, sending the company's stock price up 10-fold. Along with that gain in stock value, stock options awarded to the directors and to Musk rose sharply in value.

Tesla had argued it used the stock options to ensure the incentives of directors were aligned with the goals of investors.