An Illinois appeals court recently upheld the trial court’s dismissal of a derivative action brought against Aon based upon its alleged practice of collecting “contingent commissions.” Sherman, et al., v. Ryan et al., No. 1:07-2944 (Ill. App. Ct. May 20, 2009).
Several shareholders of insurance broker Aon filed suit on behalf of the company against members of its board of directors, including Aon chief Patrick Ryan, alleging that the board had breached its fiduciary duty to Aon by approving contingent commission compensation practices. The derivative suit was originally filed in February 2005 and amended several times, the last of which was the Third Amended Complaint filed on January 17, 2007. The Third Amended Complaint was dismissed by the trial court with prejudice on September 21, 2007 for failure to demonstrate that the required pre-suit demand was futile.
The Illinois appeals court rejected the derivative plaintiffs' claim of demand futility, finding:
- there was no demonstrated likelihood of liability arising from the allegations pled;
- the only individual directors named in both the Aon securities class action and the derivative complaint were Ryan and Michael O’Halleran, leaving the remaining members of the 14-member board disinterested;
- there was no evidence that Aon founder Ryan effectively controlled the board and its decision-making;
- the plaintiffs had failed to show that the board had any knowledge of the wrongfulness or unlawfulness of the contingent commission practices;
- Ryan’s “apology” in an earlier regulatory settlement and class action suits filed in 1999 were insufficient to put the board of directors on notice that the practice was unlawful, especially where Aon had ceased the practice before the first regulatory suit was brought (and long before the plaintiffs filed their Third Amended Complaint); and
- finally, the 1999 class action complaints were not “red flags” that should have made the board aware of the impropriety of accepting contingent commissions.
The court also affirmed the dismissal of the individual counts in the derivative complaint (i.e., bad faith breach of fiduciary duty, abuse of control, gross negligence and gross mismanagement, breach of contract, waste of corporate assets, and unjust enrichment) based on the inadequacy of the Third Amended Complaint.