Mr Musk was placed under investigation by the Securities and Exchange Commission (SEC)for securities fraud after tweeting that he had “funding secured” to take Tesla private.
SEC officials and Tesla staff had agreed a provisional settlement to the dispute.
The agreement would have seen Mr Musk step-down as chairman of Tesla for two years, whilst remaining chief executive.
However last Thursday, on Mr Musk’s instructions, Tesla’s board pulled out of the deal.
Mr Musk had threatened to resign immediately if the board agreed to the settlement.
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He also insisted the Tesla board release a statement offering him support.
The board complied saying they had “full confidence in Elon. His integrity and his leadership of the company”.
However, Mr Musk and the company were forced to backtrack after the value of Tesla shares was slashed in response.
On Friday they lost nearly 14 percent of their value.
In response, Tesla resumed negotiations with the SEC, and the next day agreed to an even harsher settlement.
The terms of the deal were changed meaning Mr Musk would now be banned from working as Tesla chairman for three years rather than two, whilst fines were doubled to $20million each.
This deal was confirmed on Friday.
Professor John Coffee Junior, a legal expert at Columbia Law School, commented: “Rejecting such a favourable settlement is proof that he needs monitoring.
“He didn’t have a legal leg to stand on, and I’m sure his lawyer told him that.
“But he got very touchy about not being able to proclaim his innocence.”
Mr Musk must now resign as Tesla chairman within 45 days.