McDonald’s Corporation (McDonald’s) sued its former Chief Executive Officer, Steve Easterbrook, in August 2020 in an effort to force him to repay the $40 million in severance and equity awards provided to him when the company terminated his employment.  McDonald’s board of directors (Board) originally terminated Easterbrook’s employment without cause in November 2019, but subsequent internal investigations revealed that the Board would have had reason to terminate his employment for “Cause” based upon numerous instances of inappropriate sexual relationships with several McDonald’s employees in violation of McDonald’s policies. Termination for “Cause” would have disqualified Easterbrook from being entitled to receive severance under McDonald’s Corporation Officer Severance Plan (Severance Plan).

In the suit, McDonald’s claims that it was fraudulently induced by Easterbrook’s lies and concealment of evidence to enter into Separation Agreement and General Release (Separation Agreement) in which it was agreed that (i) Easterbrook’s employment was terminated without “Cause” and (ii) Easterbrook was entitled to his severance entitlements in McDonald’s Severance Plan.

Factual Background

McDonald’s Board fired former CEO Steve Easterbrook (Easterbrook) in November 2019 after an October 2019 internal investigation confirmed that Easterbrook had engaged in a consensual but inappropriate, non-physical personal relationship with a McDonald’s employee.  The complaint alleges that Easterbrook denied the existence of other intimate or sexual relationships with McDonald’s personnel.  The Board terminated Easterbrook’s employment without “Cause” on this basis and negotiated the Separation Agreement with him.

The suit seeks, among other things, rescission of the Separation Agreement and recoupment of all cash and stock awards granted thereunder.[1]  The Complaint states that in July 2020, McDonald’s received an anonymous report that one of its employees had engaged in a sexual relationship with Easterbrook.  A subsequent investigation was undertaken and revealed that:

  • Easterbrook had engaged in sexual relationships with at least two other McDonald’s employees (in addition to the relationship which spurred the July 2020 investigation);
  • Easterbrook had sent numerous sexually explicit photographs and videos from his work e-mail account to his personal e-mail account; and
  • He approved an extraordinary stock grant worth hundreds of thousands of dollars for one of the employees with whom he had a sexual relationship.

McDonald’s asserts that it is entitled to recover the severance payments paid to Easterbrook based on the Separation Agreement’s incorporation of McDonald’s Severance Plan, which contains what is known as a “claw-back policy:”

“[I]f the Plan Administrator determines at any time that a Participant committed any act or omission that would constitute Cause while he or she was employed by” McDonald’s Corporation, the Company “may (a) cease payment of any benefit otherwise payable to a Participant under the Plan and (b) require the Participant to repay any and all Severance Benefits previously provided to such Participant under the terms of th[e] Plan.”[2]

To demonstrate that Easterbrook’s conduct constituted “Cause” under the Severance Plan, McDonald’s will need to show that it constituted dishonesty, fraud, illegality or moral turpitude.

Easterbrook has since moved to dismiss the Complaint, arguing, among other things, that because McDonald’s had access to the explicit photographs on its servers when it conducted the first investigation, no claw-back of his severance is permitted.

Key Takeaways

Resolution of the case remains pending, but its facts and Complaint raise several important issues:

  • When the Board initially terminated Easterbrook’s employment, it had no assurance that his conduct – to the extent that they were aware of it at the time – would have cleared that high bar to constitute “Cause,” which only included dishonesty, fraud, illegality or moral turpitude. Companies would be well served to ensure that their officer severance plans and employment agreements have in-depth, broader definitions of what behavior and actions constitute “Cause” to terminate an employment relationship. These plans and agreements could also provide that the Company will not be considered to have “imputed knowledge” of a matter so as to avoid assertions such as were made by Easterbrook that McDonald’s access to his emails while negotiating his Separation Agreement negated its claw-back rights.
  • Claw-back policies can play an important role in attending to the best interests of a corporation and preserving its assets since, as in the McDonald’s case, companies may not be aware of an officer’s conduct at the time of termination.
  • Officers of Delaware corporations owe fiduciary duties to the corporation identical to the duties owed by corporate directors.[3] Despite the large body of case law on director duties, one open question is whether, or to what extent, the business judgment rule applies to officers.[4]  Directors and officers would be well served to determine whether local law allows officers to be exculpated for breaches of duties of care within the corporation’s formation or governing documents.

[1] A copy of McDonald’s verified complaint (Complaint) filed in the Delaware Court of Chancery is available at Complaint.htm.

[2] See ¶ 29 of the Complaint.

[3] See, e.g., Gantler v. Stephens, 965 A2d 695, 708-09 (Del. 2009).

[4] Complicating matters further is that some officers, like Easterbrook, are also directors, so factually determining whether a claim involves actions taken as an officer, director, or both is important in determining which duties apply. For a general discussion of Delaware law regarding officer duties and/or the business judgment rule see Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752 (Del. Ct. Ch. 2016); Ella M. Kelly & Wyndham, Inc. v. Bell, 266 A.2d 878 (Del. 1970); Palmer v. Reali, 211 F.Supp. 3d 655 (D. Del. 2016); In re Xura, Inc. Stockholder Litig., 2018 WL 6498677 (Del. Ch. Dec. 10, 2018).

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Photo of Nancy B. Bostic Nancy B. Bostic

Leader of Gray Reed’s Mergers and Acquisitions and Private Equity Practice Group, Nancy Bostic represents public and private companies and private equity funds in securities issuances, acquisitions and dispositions of assets and equity, joint ventures, recapitalizations, financings and change of control transactions valued…

Leader of Gray Reed’s Mergers and Acquisitions and Private Equity Practice Group, Nancy Bostic represents public and private companies and private equity funds in securities issuances, acquisitions and dispositions of assets and equity, joint ventures, recapitalizations, financings and change of control transactions valued at up to $3.5 billion.

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As a business lawyer and CPA, Brian  advises clients on the federal income tax consequences of a variety of transactions, including the acquisition and disposition of businesses and assets, structuring joint ventures and partnerships, and business succession planning.