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McConkey v. AON Corporation

July 23, 2002


Before Judges Eichen, Lintner and Parker. On appeal from the Superior Court of New Jersey, Law Division, Essex County, L-8457- 97.

The opinion of the court was delivered by: Eichen, J.A.D.

Argued January 8, 2002

Plaintiff Philip J. McConkey brought this action alleging that in 1996 he was fraudulently induced by defendant Alexander & Alexander Services, Inc. (A&A), an international insurance brokerage company to leave his position with Ross & Company (Ross), an insurance brokerage company in Montclair, to accept a position at A&A as its Director of Insurance Services Practice for Greater New York. Seven months later, A&A was acquired by defendant Aon Corporation (Aon). *fn1 A short time later, plaintiff was terminated. Plaintiff sought to recover compensatory and punitive damages from A&A, Frank Zarb, A&A's former Chairman of the Board and Chief Executive Officer, and Aon. *fn2

The case was tried to a jury which found defendants liable in fraud and awarded plaintiff $2,638,000 in past economic damages, $400,000 in future economic damages, $2,000,000 for emotional distress, and $5,000,000 in punitive damages. The trial judge granted defendants' motion for judgment notwithstanding the verdict (JNOV) with respect to the emotional distress damage award. The judge also ordered a new trial on past economic damages subject to an offer of remittitur to $663,000 for those damages, which plaintiff accepted, leaving in place a total award of $6,063,000.

Defendants appeal asserting that the judge erred in (1) not dismissing the fraud claim; (2) allowing plaintiff to rely on benefit-of-the-bargain damages; and (3) upholding the jury verdict on punitive damages.

Plaintiff cross-appeals contending that (1) the judge misapplied the standard applicable to a motion for a new trial in reducing the past economic damages; and (2) the judge erred in granting a JNOV on plaintiff's emotional distress damages.

Preliminarily, we are obliged to point out our limited role on review of a jury's verdict: It is to accept as true all evidence supporting the verdict and to draw all reasonable inferences in its favor wherever reasonable minds could differ. Harper-Lawrence, Inc. v. United Merchants & Mfrs., Inc., 261 N.J. Super. 554, 559 (App. Div. 1993) (citing Dolson v. Anastasia, 55 N.J. 2, 5 (1969)). With that principle in mind, these are the relevant facts.

Plaintiff is a former New York Giants professional football player and graduate of the United States Naval Academy. His high profile, as well as his work as a television football commentator, helped plaintiff form contacts in the business community. After he retired from football, at the end of the 1989 football season, plaintiff took a training course, passed the test to sell insurance, and took a position with Ross.

Toward the end of 1995, A&A began to aggressively pursue plaintiff in an effort to recruit him. At that time, A&A was the second largest insurance brokerage firm in the United States; Aon was the fifth largest. *fn3

While working for Ross, plaintiff had created a substantial "book of business," *fn4 and his future at Ross was promising, with ownership of a portion of Ross a real possibility.

In November 1995, Rick Bernard from Risk and Insurance Resources, Inc., an executive recruiting firm, told plaintiff that a large insurance brokerage company, later identified as A&A, had expressed interest in hiring him. Although McConkey told Bernard he was not interested, Bernard and John Dougan, Bernard's boss, called McConkey numerous times during the end of 1995 and early 1996 urging him to consider the opportunity. In 1996, after McConkey became aware that A&A wanted him to run A&A's greater New York division in the "middle market area," *fn5 his interest grew. However, McConkey had concerns about rumors that A&A might be acquired by another insurance brokerage firm, which he raised with the recruiter Dougan.

Dougan spoke with Larry Burk, who was then the president and CEO of the North American operations of A&A, and Burk told Dougan that Frank Zarb, A&A's Chairman of the Board, and Elliot Cooperstone, former A&A Chief Operating Officer had told him on many occasions that A&A was absolutely not going to be sold to another company. In March 1996, Burk met with McConkey and McConkey reiterated his concerns regarding the rumors that A&A might be taken over. Burk responded that the rumors were not true, insisting that A&A was "the predator and not the prey," implying that A&A was the one buying companies and was not going to be bought. According to Burk, *fn6 during A&A's efforts to recruit McConkey, he, as well as Zarb and Cooperstone, assured plaintiff that the plan was not to sell A&A and repeated the mantra that A&A was "the predator, not the prey." Indeed, Burk told plaintiff that A&A desired to purchase Ross if acceptable terms could be worked out. Despite these assurances, plaintiff was still concerned about the rumors and wanted to see Zarb to obtain his assurances regarding these rumors. Zarb had become A&A's Chairman of the Board in June 1994.

On April 17, 1996, plaintiff met with Zarb in Zarb's office in the company's New York headquarters, and told him about his rising status at Ross, his "ownership potential" there, and that he was "worried" about the rumors that A&A was seeking to sell itself or merge with another company in a way that would alter the structure of the company. Specifically, plaintiff asked Zarb if there were "any facts" at all, "if there was a scintilla of evidence of truth to these rumors."

Plaintiff testified that Zarb responded: "those rumors are started by our competition to bring us down. They are totally unfounded. We're the predator and not the prey. We're going to grow this business and become number one again and a leader in the industry." In addition, Zarb told McConkey A&A wanted plaintiff's region to grow by $30 to $50 million. Satisfied with Zarb's assurances, plaintiff decided to accept the position. Plaintiff stated that he "[a]bsolutely" relied on what Zarb told him in deciding to take a position with A&A.

Zarb stated in a deposition that he had no recollection of ever speaking to plaintiff personally or on the telephone. However, at trial, Zarb acknowledged that he might have met with plaintiff and made comments during their brief meeting because those days a lot of people asked questions about A&A's corporate strategy.

In a letter dated May 3, 1996, Burk offered McConkey the position of "Director of Insurance Services Practice for Greater New York" with A&A, and plaintiff signed the letter confirming his acceptance. In accordance with the letter, McConkey's compensation included a base monthly salary of $17,500, a "normal" benefits package, and eligibility for participation in an annual incentive plan and a long-term incentive plan. A&A used a figure of 20% of base salary to calculate benefits, so on an annual basis, base salary and benefits had the value of $252,000 per year. Under the annual incentive plan, plaintiff's target was $100,000, pro-rated based upon the date of employment. The letter explains:

This target is based upon the achievement of specified objectives which will be formalized as soon as possible after your start date. The components in your incentive plan will include, but not necessarily be limited to, Revenue Growth, Profit and certain Recruitment Targets. Bonus payouts are subject to approval by the Management Committee and/or Board of Directors. According to the A&A Inc. Incentive Plan the bonus payout will be 15% in 2 year restricted A&A stock and 85% in cash. *fn7 On May 15, 1996, McConkey started working for A&A.

Under the long-term incentive plan covering the period of 1996 through 1999, the letter provides:

The plan hurdle is to achieve at least $5 million of operating income over the period. If we achieve that level, you will earn 6% of the operating income produced. If we achieve $5.5 million of operating income, you will earn 8% of the operating income. And if we achieve $6.5 million or more of operating income, you will earn 10%. These figures are based on the assumption that you can grow the current $6.7 million base of business to $13 million in 1999 along with a steady improvement in margin up to 20% in 1999.

McConkey calculated that if those targets were reached, he would have received a lump sum of $3 to $5 million at the end of 1999. Like Zarb, Dougan stated that Burk told him that A&A was looking to grow the middle market in the greater New York region by $30 to $50 million. However, Ed Kiessling, plaintiff's supervisor at A&A, stated that the projected growth of $30 to $50 million was intended for all greater New York operations, not just plaintiff's middle market segment.

McConkey understood that he was an at-will employee who could be fired at any time and that nothing in the letter or documents created an employment contract or fixed term of employment. However, he assumed that if he did his job, he would not be fired. He was thirty-eight years old when hired and hoped to stay with A&A for the rest of his working career. He believed that A&A viewed him as a long-term employee because the May 3, 1996 letter included long-term compensation through 1999.

McConkey testified that he engineered an opportunity for A&A to buy Ross and information was exchanged, but A&A never made a serious offer to purchase the company. *fn8 Although he had been told that A&A wanted to purchase companies like Ross so A&A could grow, not long after he started working with A&A he saw signs that just the opposite was true. According to McConkey, he spent the majority of his time trying to cut the budget and shrink the company rather than help it grow.

While working for A&A, plaintiff tried to boost the morale of his staff by stating that rumors of a sale were unfounded and started by the competition to bring A&A down. On many occasions, he repeated the phrase Zarb told him that A&A was "the predator, not the prey." During his time working for A&A, plaintiff told over 500 people, including employees, clients, and potential clients, that the rumors were untrue.

In the meantime, the minutes of Aon's Board reflect that beginning in January 1995, defendant Aon was developing a strategy to acquire A&A. Specifically, the minutes of the meeting of March 17, 1995 reflect that Patrick G. Ryan, Chairman of the Board and CEO, had an informal discussion with Zarb in January 1995 concerning their respective views on consolidation. According to Ryan, in the spring of 1995 Zarb was interested in a merger of the respective brokerage business of Aon and A&A. Ryan advised Aon's Board that the company was preliminarily exploring the acquisition of A&A. According to Ryan, at the end of 1995, Aon had sold two life insurance companies and had cash proceeds from those sales of $1.37 billion available for acquisitions.

The January 1996 minutes of Aon's Board meeting show a renewed interest by Aon in acquiring A&A. Ryan testified that Aon's interest in a transaction was revived in January 1996 because A&A's stock price had dropped. Aon's Board minutes show that as of March 15, 1996, Aon was actively pursuing "a transaction" with A&A as reflected by evaluations being performed by investment bankers from Lazard Freres of A&A's financial condition. Those minutes state that the general sense of the Board was that Aon should continue to explore "the transaction," but a final determination would not be made until due diligence had been completed and an actuarial analysis had been prepared. Ryan testified that at least as of March 1996, the Aon Board still wanted him to actively explore the possibility of acquiring A&A.

In late March and early April 1996, Ryan and Zarb met informally to discuss the possibility of a business transaction between A&A and Aon. At that time, although Aon's Board determined that the price of A&A's stock was "way too high" to proceed further, Aon's people still were looking at A&A's confidential financial information, including contingent liabilities from A&A's earlier acquisition of Schere Drake, a troubled London insurance company plagued by debt for which A&A had become liable (referred to as A&A's "black hole").

Zarb testified that from January to May 1996 there was never a request or offer to buy A&A by anyone. Zarb admitted he met informally with Ryan during that period, but claimed there were no negotiations and no intense reviews. Zarb claimed that Ryan knew that A&A was an acquirer at that time, and he denied discussing any transaction in which Aon would buy A&A in a partial or all-cash purchase of A&A's stock. According to Zarb, A&A had acquired a number of companies during the period from 1995 to 1996. *fn9 Zarb further described a meeting with Ryan in July or August 1996, where Ryan made a one-page offer for Aon to buy A&A which Zarb discounted out of hand. The minutes of Aon's Board meeting on September 20, 1996 noted that Zarb had refused to take an unsigned letter from Aon mentioning a price pursuant to which Aon might proceed with further negotiations for the possible purchase of A&A.

By November 1996, the price of A&A's stock had fallen further, allegedly as a result of A&A losing its bid in September 1996 to acquire Bain Hogg, a competing insurance brokerage firm which Aon had succeeded in acquiring. At that point, because A&A was much more affordable and reasonable in value than it had been, Aon made a formal offer to acquire A&A. On December 6, 1996, A&A's Board considered for the first time the possible sale of A&A to Aon and instructed Zarb to continue discussions with Aon. Terms of a draft merger agreement were finalized on December 9 and 10, 1996, and the agreement was executed on December 11, 1996.

Cooperstone, the CEO of A&A at the time of the sale, stated that Zarb did not tell him that he was inclined to accept an offer to sell A&A until December 1996. Cooperstone was extremely disappointed and surprised because this was a departure from the plan in place since he had arrived at the company. A&A had spent $30 to $40 million to upgrade technical ability, which would not have been done if a sale had been anticipated.

In conjunction with the ultimate purchase of A&A by Aon, A&A filed a proxy statement on December 16, 1996. The 159-page proxy statement stated in part: "From January to May of 1996" Aon's Chairman and Zarb "discussed a possible business combination," including both a merger and a sale. With the exception of Aon, no company "provided an indication of interest in ... acquiring [A&A]."

The proxy statement provides a summary of Aon's takeover of A&A:

During 1994, 1995 and 1996, the Chief Executive Officers of the Company [A&A] and of Aon discussed from time to time the possibility of a business combination involving Aon and the Company. Throughout this period, each Board of Directors was kept informed of the discussions. During the past two years the Company communicated with five other insurance brokerage companies concerning various forms of possible business combinations. The most recent of these communications took place approximately eleven weeks ago. Three of the five companies signed confidentiality agreements with the Company; however, none of the five companies engaged in a detailed due diligence investigation of the Company or agreed to mutual due diligence, and none of the five companies provided an indication of interest in merging with, being acquired by or acquiring the Company. Approximately twelve months ago a special committee of the Board of Directors of the Company, made up of six outside directors, was formed and since then has met from time to time to consider possible business combinations.

Credit Suisse First Boston worked with the Company throughout this two year period concerning possible business combinations and was formally retained by the Company on December 6, 1996.

The discussions between the Company and Aon began during the Spring of 1994, at which time the company was also engaged in discussions with American International Group, Inc. ("AIG") regarding the significant investment that AIG ultimately made in the Series B Preferred Stock of the Company. At that time, the Board of Directors of the Company concluded that the investment by AIG and the recruiting of a new chief executive officer were in the best interests of the Company's stockholders and should be pursued.

Further discussion of a business combination between Aon and the Company resumed in the Spring of 1995. At that time, a confidentiality agreement between the two companies was executed and confidential information was shared. The conversations in the Spring of 1995 principally concerned a possible stock-for-stock transaction. Representatives of the Company and Aon met from time to time in connection therewith to explore such a transaction as well as to discuss the financial and other prospects of the Company and of Aon. In addition, because of the right of AIG to require a repurchase of the Series B Preferred Stock in connection with a change-in-control of the Company at a substantial premium to its liquidation value, Mr. Patrick G. Ryan, Chairman, President and Chief Executive Officer of Aon, discussed the possibility of such a transaction with Mr. Maurice R. Greenberg, Chairman of the Board, Chief Executive Officer and President of AIG. (Subsequent to the Spring of 1995, Messrs. Ryan and Greenberg had conversations from time to time.) The discussions concerning the possible transaction terminated in May of 1995 when the Company and Aon concluded that the two companies were not likely to agree on financial terms.

From January to May of 1996 and again in July and August of 1996, Mr. Ryan and Mr. Frank G. Zarb, former Chairman, President and Chief Executive Officer of the Company, discussed a possible business combination, including the possibility of an all-stock merger or an all or partial-cash acquisition by Aon of the outstanding equity securities of the Company. During the Summer of 1996, the confidentiality agreement between the two companies was reconfirmed and confidential information was furnished to Aon by the Company. Each time the conversations were terminated when the parties concluded that the two companies were not likely to agree on financial terms. In the Fall of 1996, Mr. Ryan and Mr. Zarb continued to discuss from time to time the possibility of a business combination. On November 24, 1996, Messrs. Zarb and Ryan met in New York City and discussed the possible business combination. Mr. Ryan indicated to Mr. Zarb that Aon would prefer to pursue an all-cash transaction assuming that a satisfactory arrangement could be made with AIG and that a reasonably acceptable valuation of the Company could be agreed upon between Aon and the Company. Thereafter, Messrs. Ryan, Greenberg and, for the initial period of the ...

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