On 3 November 2019, McDonald's Corporation announced the departure of its president and chief executive officer, Steve Easterbrook, in post since March 2015. According to the press release, the board of directors had concluded that he had violated company policy and shown poor judgment by engaging in a recent consensual relationship with a member of staff. Chris Kempczinski, president of McDonald's USA, succeeded him.
A negotiated departure “without cause”
During the internal investigation of October 2019, when asked whether he had had any other relationships with members of staff, Steve Easterbrook said he had not, according to the Securities and Exchange Commission (SEC), the US securities regulator.
The dismissal, effective on 1 November 2019, was described in the separation agreement as a termination “without cause”. The agreement provided for twenty-six weeks' severance pay, a pro-rated 2019 bonus and the continued vesting of his stock options. McDonald's valued the whole package at 47,534,341 dollars, of which 43,999,937 dollars in options and performance shares. According to the SEC, a dismissal “for cause” would have made him forfeit his unvested equity. According to the Delaware Court of Chancery, the board wanted to “minimise disruption” and feared litigation with an uncertain outcome.
McDonald's complaint before the Court of Chancery
After an anonymous tip-off received in July 2020 and a second internal investigation, McDonald's sued its former CEO before the Delaware Court of Chancery on 10 August 2020. The complaint asserted that he had “concealed evidence and lied”, that he had had relationships with three other members of staff in the year preceding his dismissal, that he had deleted material from his phone and that he had approved, for the benefit of one of these individuals, a share award worth several hundred thousand dollars.
The company relied on breach of fiduciary duty and fraud (“fraud in the inducement”). It sought damages or the rescission of the agreement, with repayment of the sums and shares paid out. Steve Easterbrook argued that McDonald's knew, or should have known, since the material was on its own servers. On 2 February 2021, Vice Chancellor Slights denied his motion to dismiss: this argument, he wrote, could be raised at trial.
The December 2021 settlement
On 16 December 2021, McDonald's announced a settlement: according to the company, Steve Easterbrook had returned shares and cash with a current value of more than 105 million dollars, and the lawsuit was permanently dropped. According to the SEC, he repaid his severance pay, his bonus and part of the proceeds from his sales of shares, and gave up all of his outstanding equity awards. He stated:
“During my term as chief executive, I sometimes failed to uphold McDonald's values and to discharge some of my responsibilities as the company's leader. I apologise for this to my former colleagues, to the board of directors, and to the company's franchisees and suppliers.”Steve Easterbrook, McDonald's press release, 16 December 2021 - translated from English
The SEC penalises the former CEO, not the company
On 9 January 2023, the SEC issued an order concerning Steve Easterbrook and McDonald's. It found that, during the 2019 investigation, he had not disclosed other relationships with employees and had withheld information, knowing, or being bound to know, that this would affect the information provided to investors. It found a violation of the anti-fraud provisions of federal securities law.
Without admitting or denying these findings, he agreed to a civil penalty of 400,000 dollars and a five-year bar from serving as an officer or director of a company subject to SEC reporting requirements. Disgorgement and interest, set at 52,728,069 dollars, were deemed satisfied by the sums already returned to McDonald's.
The company was faulted for not telling shareholders that it had exercised discretion in characterising the dismissal as “without cause”, which had allowed its former CEO to keep about 44 million dollars of equity. No penalty was imposed on it, on account of its cooperation and its efforts to recover these sums. Two commissioners, Hester Peirce and Mark Uyeda, dissociated themselves from this part of the order, seeing McDonald's as “the victim” of its former executive's deception.
In Delaware, a duty of oversight for officers
Shareholders, including Teamsters union funds, also brought a derivative action, on behalf of the company, against nine directors, Steve Easterbrook and David Fairhurst, global head of human resources from 2015 until his dismissal for misconduct in 2019. The claims against Steve Easterbrook were dismissed, as McDonald's had given up any action against him in 2021.
The plaintiffs accused David Fairhurst of allowing a culture tolerant of sexual harassment to develop and of knowingly ignoring red flags. He replied that the duty of oversight defined for directors by the Caremark case law did not apply to officers. On 26 January 2023, Vice Chancellor Travis Laster rejected this argument:
“This decision makes clear that corporate officers are bound by a duty of oversight.”Delaware Court of Chancery, 26 January 2023 - translated from English
This duty is in principle exercised within each officer's area of responsibility, and its breach requires bad faith. The judge declared the claim admissible, at a stage where the alleged facts are taken as true without having been adjudicated. On 1 March 2023, however, he dismissed the claims against the directors: the choice of a dismissal “without cause” was, in his view, a matter for the board's judgment, even if “reasonable minds may disagree”. According to two law firms, an order issued the same day also dismissed the claims against David Fairhurst, as the shareholders had not first referred the matter to the board of directors.
The case thus carried the question of control, often raised between the head of a network and its franchisees, to the very top of the company.