Easterbrook’s Termination and the Company’s Course of Action

The years-long employment saga involving Easterbrook dates back to October 2019, when a former McDonald’s employee alleged that Easterbrook engaged in an inappropriate relationship with that former employee. McDonald’s hired outside counsel and initiated an internal investigation. During the investigation, Easterbrook stated that he had not engaged in any other inappropriate workplace relationships. McDonald’s ultimately entered into a separation agreement with Easterbrook, effective November 1, 2019, in which it terminated him “without cause.” McDonald’s then issued a press release, which was filed as an exhibit to a Form 8-K, stating that Easterbrook left the company due to “poor judgment involving a recent consensual relationship with an employee.”²

Under the terms of his separation agreement, Easterbrook retained approximately $44 million in unvested stock options and performance-based restricted stock units — compensation that would have been forfeited had McDonald’s terminated him for cause. Easterbrook exercised some of his options between November 2019 to June 2020 and received over $9 million in net cash proceeds as a result. In April 2020, McDonald’s filed a definitive proxy statement in which the company disclosed to its shareholders its decision to terminate Easterbrook without cause and solicited shareholder approval of McDonald’s executive compensation for 2019, including the terms of Easterbrook’s separation agreement. McDonald’s notably failed to disclose that it exercised discretion in firing Easterbrook without cause, which allowed him to retain his equity-based compensation, despite determining that he violated the company’s fraternization policy. Shareholders approved the executive compensation proposal through an advisory vote.

In July 2020, McDonald’s initiated a second internal investigation after receiving an anonymous complaint that another employee was involved in an inappropriate personal relationship with Easterbrook. McDonald’s discovered evidence throughout the course of that investigation indicating that Easterbrook had, in fact, engaged in multiple inappropriate relationships with employees. The company then sued Easterbrook in the Delaware Court of Chancery for fraudulent inducement and breach of fiduciary duty, seeking to recover the compensation Easterbrook received as part of his separation package.³ Easterbrook and McDonald’s settled those claims in December 2021.

The SEC Order

The SEC charged Easterbrook and McDonald’s with multiple securities violations stemming from these events.

As to Easterbrook, the SEC found that his failure to disclose other personal relationships with employees in the internal investigation leading up to his separation violated Section 10(b) of the Exchange Act of 1934 (the “Exchange Act”) and Rules 10b-5(a), (b), and (c) thereunder, as well as Sections 17(a)(1), (2), and (3) of the Securities Act of 1933. The SEC also found that Easterbrook caused violations of Section 13(a) of the Exchange Act, which prohibits issuers from filing periodic or current reports containing materially false or misleading information. As part of the SEC’s settlement with Easterbrook, he agreed to pay $400,000 in civil penalties and to be barred from serving as an officer or director of a public company for five years.

The SEC also found that McDonald’s violated Section 14(a) of the Exchange Act and Rule 14a-3 through its disclosures relating to Easterbrook’s termination in its proxy statement. The SEC specifically took issue with the company’s failure to disclose that he would have forfeited certain equity grants as a result of his termination absent its “exercise of discretion in treating Easterbrook’s termination as without cause[.]”⁴ According to the Order, this omission violated Item 402 of Regulation S-K, which requires companies to “explain all material elements of the…compensation of the named executive officers.”⁵ The SEC declined to impose a civil penalty on McDonald’s in light of its “substantial cooperation” and the fact that it undertook remedial measures to recover value for shareholders by suing Easterbrook in the Delaware Court of Chancery.

What Does the SEC’s Order Mean for You?

The Order is instructive for both executives and issuers. For one, the Order demonstrates that public company executives must tell the full truth in internal investigations—even when doing so may have professional and personal implications. Failure to be candid may lead not only to civil enforcement by the SEC but also—like it did for Easterbrook—a breach of fiduciary duty action by an employer.

Issuers should note that this is the first time the SEC has applied Item 402 to require disclosure of a company’s discretionary decisions regarding the characterization of an executive’s termination. Item 402(j) provides that a Compensation Discussion and Analysis in a public filing must disclose the “material factors” involved in a “contract, agreement, plan or arrangement…that provides for payment(s) to a named executive officer at, following, or in connection with any termination.” More broadly, Item 402(b)(2)(xi) requires disclosure of all “material elements of the registrant’s compensation of the named executive officers,” which could include disclosure of the basis for payment in connection with termination.

In a published joint response to the Order, SEC Commissioners Hester Peirce and Mark Uyeda warned that the Order could “create[] a slippery slope that may expand Item 402’s disclosure requirements into unintended areas – a form of regulatory expansion through enforcement.”⁶ The Commissioners noted that, before this Order, most seasoned public companies have not understood Item 402 to require disclosure of a company’s discretion in terminating a named executive without cause as opposed to with cause. They also cautioned that the Order could be interpreted as expanding Item 402’s requirements to include disclosure of the underlying reasons for terminating a named executive officer, whether with or without cause.

In light of this action, public companies should consider the disclosure implications before exercising their discretion to characterize a potentially for-cause termination as “without cause.” Companies should then work closely with counsel to ensure that adequate disclosure is made regarding any discretionary executive termination and attendant separation arrangements.

¹Stephen J. Easterbrook, et al., Securities Act Release No. 11144, Exchange Act Release No. 96610, 2023 WL 143292 (Jan. 9, 2023); see also Press Release, Sec. & Exch. Comm’n, SEC Charges McDonald’s Former CEO for Misrepresentations About His Termination (Jan. 9, 2023), https://www.sec.gov/news/press-release/2023-4.

²Press Release, McDonald’s, McDonald’s Corporation Announces Leadership Transition (Nov. 3, 2019), https://corporate.mcdonalds.com/corpmcd/our-stories/article/leadership-change.html.

³See McDonald’s Corp. v. Easterbrook, No. 2020-0658-JRS, 2021 WL 351967, at *1 (Del. Ch. Feb. 2, 2021).

⁴Order at 5.

⁵Order at 6.

⁶Comm’rs Hester M. Peirce & Mark T. Uyeda, Sec. & Exch. Comm’n, Statement Regarding In the Matter of Stephen J. Easterbrook and McDonald’s Corporation (Jan. 9, 2023), https://www.sec.gov/news/statement/peirce-uyeda-easterbrook-mcdonalds-202301?utm_medium=email&utm_source=govdelivery.