SEC Charged McDonald’s For Public Disclosure Violations Related To The Board’s Exercise Of Discretion Respecting The Former CEO’s Termination And Charged The Former CEO For Fraud
On January 9, 2023, the Securities Exchange Commission (“SEC”) issued a cease-and-desist order (“the Order”) against McDonald’s Corporation (the “Company”) and the Company’s former CEO Stephen Easterbrook related to Easterbrook’s departure. The SEC’s order alleged that the Company failed to disclose in a Form 8-K that it exercised discretion in terminating Easterbrook “without cause,” and allowed him to retain more than $40 million in equity-based compensation that would have been forfeited if the company had terminated him “for cause;” and further alleged that Easterbrook withheld information about his relationships with Company employees in an internal investigation. Without admitting or denying the findings, the Company and Easterbrook consented to the entry of the Order. See In re Easterbrook & McDonald’s Corp., No. 3-21269 (Jan. 9, 2023).
According to the SEC’s allegations, the Company retained counsel to conduct an internal investigation after a former employee alleged that Easterbrook engaged in an inappropriate personal relationship with the former employee which violated the Company’s Standards of Business Conduct. During an interview of Easterbrook by the Company’s outside counsel on October 22, 2019, Easterbrook maintained that he had not engaged in an inappropriate relationship with any other Company employees besides the former employee making the allegation. After the investigation concluded, the Company’s Board formally determined that Easterbrook violated company policy, which gave the Company the basis to terminate Easterbrook “for cause.” If Easterbrook had been terminated “for cause,” his unvested stock options and PRSUs, valued at more than $40 million, would have been forfeited. Despite the Board’s determination that Easterbrook violated company policy, it elected not to terminate him “for cause.”
On October 29, 2019, the Board gave Easterbrook a draft separation agreement, requiring Easterbrook to disseminate a letter to Company employees, and allowed him to review a press release related to his conduct. Both the letter and the press release describe Easterbrook’s conduct as a “single” inappropriate relationship, a fact that Easterbrook allegedly knew was untrue and did not correct. Easterbrook and the Company entered into the separation agreement, valued at roughly $47 million, on November 1, 2019, which stipulated that Easterbrook’s termination was “without cause.” The Company filed the press release with its Form 8-K three days later.
In April 2020, the Company filed its Proxy Statement, disclosing that Easterbrook was terminated “without cause” and that Easterbrook continued to maintain his equity-based compensation. The Company did not disclose that, absent the Board’s discretion in treating this termination as “without cause,” Easterbrook would have forfeited his unvested options and PRSUs. Because of this disclosure failure, the SEC charged the Company with violating Section 14(a) of the Exchange Act and Exchange Act Rule 14a-3.
In July 2020, according to the SEC’s allegations, the Company discovered Easterbrook did engage in other inappropriate relationships contrary to the information that he provided during the internal investigation. The SEC concluded that Easterbrook, in his capacity as an officer of the Company, withheld information regarding these other relationships during the internal investigation, and made several misrepresentations or omissions through his review of the press release and company-wide letter, the Company’s public filings, and his own public statements. As a result, the SEC charged him with violating Sections 10(b) and 13(a) of the Exchange Act, Sections 17(a)(1)-(3) of the Securities Act, and Exchange Act Rules 10b-5(a)-(c), 12(b)-20 and 13(a)-11.
After learning of these relationships, the Company sued Easterbrook to recover the compensation he received by way of his separation agreement. Eventually, the Company and Easterbrook reached a settlement agreement, in which Easterbrook must pay the Company his cash severance, prorated bonus, specific proceeds from the sale of securities that came from his exercise of options and PRSUs, attorney’s fees and all outstanding equity and awards.
Ultimately, the SEC declined to impose a financial penalty on the Company due to its cooperation during the investigation and its remedial measures, including filing suit against Easterbrook and eventually recovering the compensation he received under the separation agreement. For his part, Easterbrook agreed to pay a $400,000 civil penalty and is subject to a five-year officer-and-director bar.
This action indicates that the SEC expects disclosure in proxy statements and other SEC filings that outline the rationale for a board’s decision to exercise discretion in connection with the termination of an executive officer, particularly when the decision-making implicates compensation.