From Muppet Wiki

At the height of the Chicken Dance Elmo craze , McDonald's issued a special toy for children under three featuring Elmo in his chicken suit.

Unlike the plush it was based on, it was a PVC figure with legs similar to a bobble head doll, enabling it to "dance".

This toy was not part of a regular Happy Meal promotion, but rather was just available as an alternative toy for children under the age of three for an extended period of time. It was part of an assortment of Fisher Price toys which are specially created for McDonald's.