Jan. 9, 2023
We are unable to support the charges against McDonald’s Corporation (“McDonald’s”) for failing to disclose sufficient information regarding the termination of its former CEO, Stephen Easterbrook, in its 2020 proxy statement. The Order casts McDonald’s, the victim of Mr. Easterbrook’s deception, as a securities law violator through a novel interpretation of the Commission’s expansive executive compensation disclosure requirements.
The Commission’s Order finds, among other things, that McDonald’s violated Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-3 thereunder because the company failed to provide the disclosure required by Item 402(b) and (j)(5) of Regulation S-K. Item 402(b) requires companies to disclose all material elements of compensation of named executive officers. Item 402(j) requires disclosure of material factors regarding agreements that provide for payments to a named executive officer in connection with his or her termination. The Order states that McDonald’s violated the aforementioned paragraphs of Item 402 by failing to disclose its use of discretion in treating Mr. Easterbrook’s termination as “without cause” (as opposed to “with cause”) after finding that Mr. Easterbrook violated the company’s Standards of Business Conduct. The Order states that the exercise of discretion by McDonald’s allowed Mr. Easterbrook’s stock options and performance-based restricted stock units to continue to vest, which would not have occurred if the termination were “with cause.” We have concerns that this action creates a slippery slope that may expand Item 402’s disclosure requirements into unintended areas – a form of regulatory expansion through enforcement.
The Commission adopted the current version of Item 402(b) and (j)(5) in 2006. The 2006 amendments to Item 402 introduced a principles-based disclosure regime for executive compensation, primarily in a new Compensation Discussion and Analysis (“CD&A”) section. Over the past sixteen-plus years, the Division of Corporation Finance staff has provided many interpretations and issued numerous comment letters that have helped guide companies’ compliance with, and understanding of, these principles-based disclosure requirements. By the time that McDonald’s and other companies were preparing their 2020 proxy statements, an industry practice for drafting the CD&A section had developed. Most seasoned public companies share a prevailing view of what the industry practice is for Item 402’s principles-based disclosure requirements. Providing disclosure pursuant to Item 402(b) and (j)(5) based on the facts in this action appears to fall outside of this industry practice.
This action is also a case of first impression. We are unaware of prior Commission or staff actions or positions applying Item 402 in the way that the Order does. Additionally, the Order can be read to suggest that the underlying reasons for why the company decided to terminate a named executive officer “without cause” instead of “with cause,” and vice versa, need to be disclosed under Item 402. Such “hiring and firing discussion and analysis,” however, is beyond the rule’s scope. A principles-based disclosure rule does not need to expressly describe every possible factual permutation that falls within its scope; however, it also does not provide the Commission with a blank check to find violations when disclosures outside of the rule’s ambit are not made. Industry practice for complying with Item 402 has developed over many years, so to spring a novel interpretation through an enforcement action is not a reasonable regulatory approach. If the Commission intends to expand a settled disclosure requirement, the Commission or its staff should publicly articulate its views through rulemaking or formal guidance so that companies understand the requirement before the Commission starts enforcing it.
 Additionally, the Commission could issue a report of investigation pursuant to Section 21(a) of the Securities Exchange Act of 1934.