On January 9, 2023, a divided U.S. Securities and Exchange Commission (the “SEC”) determined that McDonald’s Corporation and former McDonald’s CEO, Stephen J. Easterbrook violated the federal securities laws by failing to disclose information about Easterbrook’s termination from the company in disclosures to investors. Both parties were issued cease-and-desist orders and Easterbrook agreed to pay a $400,000 fine and adhere to a five-year officer and director ban without admitting or denying the agency’s claims. McDonald’s paid no fine in light of its cooperation with the SEC’s investigation. 

The SEC’s order is a result of the events that surrounded Easterbrook’s departure from McDonald’s. In November 2019, McDonald’s terminated Easterbrook following a determination that he violated company policy by engaging in a consensual relationship with an employee. Easterbrook represented that he engaged in such a relationship with only that employee at the time of McDonald’s initial internal investigation. 

In a press release and subsequent SEC filings, including an 8-K and a proxy solicitation, McDonald’s announced that it had terminated Easterbrook “without cause” for engaging in a relationship with “an employee” and that it entered into a separation agreement with Easterbrook allowing him to continue to vest in (rather than forfeit) approximately $44 million of equity awards. The proxy solicitation also failed to disclose absent the company’s exercise of discretion in treating Easterbrook’s termination as without cause, Easterbrook would have forfeited unvested options and other compensation. 

In July 2020, McDonald’s learned that Easterbrook had, in fact, engaged in other undisclosed relationships with multiple employees in violation of company policy. McDonald’s sued Easterbrook a month later to recover the compensatory payments he received in connection with the separation agreement. In December 2021, the parties reached a settlement whereby Easterbrook agreed to forfeit his outstanding equity awards and repay approximately $105 million of cash severance, prorated bonus, certain proceeds that resulted from his exercise of equity awards, and attorney’s fees incurred by McDonald’s.

In its ruling, the SEC found that Easterbrook violated Section 10(b) of the Exchange Act and Exchange Act Rules 10b-5(a), (b), and (c) as well as Securities Act Sections 17(a)(1), (2), and (3). The agency determined that Easterbrook knew or was reckless in not knowing that his failure to disclose the additional company policy violations prior to his termination would influence McDonald’s disclosures to investors related to his departure and compensation.

The SEC also found that McDonald’s violated Section 14(a) of the Exchange Act and Exchange Act Rule 14a-3 by failing to meet the requirements of Item 402 of Regulation S-K. According to the agency, McDonald’s failed to disclose (1) that it used discretion in treating Easterbrook’s termination as without cause despite concluding that he violated company policy, and (2) that absent the company’s exercise of discretion, Easterbrook would have forfeited his unvested equity awards on account of the violation of company policy.

Key Takeaways

Boards should be cognizant of this ruling when considering the facts surrounding, and deliberating various alternatives for, executive officer terminations. This order provides insight into the current Commission’s view concerning public company disclosure obligations relating to such executive termination deliberations. Given this order, a majority of current Commission appears to believe that the disclosure of all material elements of an executive’s compensation under Item 402(b) includes an explanation of factors regarding any separation agreements. Here, McDonald’s failed to adequately disclose such factors because investors were unaware of the process leading to and the exercise of discretion by the company to treat Easterbrook’s termination as without cause.  

Further, the order highlights the SEC’s focus on cooperation. Unlike Easterbrook, McDonald’s itself paid no penalties in light of what the SEC called its “substantial cooperation to the Commission’s staff throughout its investigation, including by voluntarily providing relevant documents and testimonial information that was otherwise not required to be produced in response to the staff’s requests; providing briefings to the staff that highlighted critical facts and key documents; and promptly making the company’s officers, directors, and other senior managers available for interviews and testimony.” The Commission also cited McDonald’s “affirmative remedial steps to recover value for its shareholders by suing Easterbrook in the Delaware Court of Chancery, seeking and ultimately recovering the compensation Easterbrook received pursuant to the Separation Agreement and General Release.”

Finally, this order reflects the SEC’s growing interest in recovering compensation from executives.  In October 2022, the SEC adopted new clawback rules that require public companies to adopt, disclose and comply with a written policy to recover erroneously awarded incentive-based compensation from executives. Taken together, these actions suggest that executive compensation regulation will be at the forefront of the agency’s future enforcement efforts. 

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