## Facts

- RJR Nabisco, Inc. pursued a sale through a competitive auction during a contested leveraged buyout process involving a management-led group and Kohlberg Kravis Roberts & Co. (KKR).
- RJR’s board formed a special committee of disinterested directors to run the auction and retained Lazard Frères & Co. and Dillon Read & Co., Inc. as financial advisors.
- A group of dissident shareholders alleged the auction was skewed toward KKR and was prematurely terminated, causing acceptance of a bid allegedly more than $1 billion below what a fair process could have produced.
- The shareholders alleged the bankers advised that the final bids were financially “substantially equivalent,” despite the shareholders’ claim that the management bid was superior; alternatively, the shareholders alleged the bankers should have recommended further bidding or tie-breaking bids.
- Before suing the bankers in New York, the shareholders sued in Delaware Chancery Court against RJR’s board, the special committee, and KKR, seeking to enjoin the transaction or obtain damages; the Delaware court denied preliminary injunctive relief.
- In New York, the shareholders sued the bankers for negligent advice and sought damages for the alleged lost value.
- The bankers moved to dismiss for lack of duty to shareholders; the trial court denied dismissal and stayed the action pending developments in Delaware.

## Issues

1. Whether investment bankers retained by a board special committee to advise on an auction owed a duty of care to shareholders sufficient to support a direct negligence claim.
2. Whether the New York negligence action should be stayed pending resolution of related Delaware litigation involving overlapping facts about the auction and bids.

## Decision

- The Appellate Division affirmed denial of the motion to dismiss, holding the complaint adequately alleged a duty running from the bankers to the shareholders.
- The court affirmed the stay of the New York action pending the Delaware proceedings to reduce duplicative litigation and the risk of inconsistent factual determinations.

## Legal Principles

- A negligence claim may proceed where the pleadings support a duty based on privity or a relationship sufficiently close to privity.
- When a special committee acts as a representative for shareholders in a sale process aimed at maximizing shareholder value, agency and intended-beneficiary principles may permit shareholders to sue the committee’s financial advisors for negligent performance of advisory services.
- A New York court may stay an action in favor of related litigation in another forum when the cases substantially overlap and proceeding concurrently would risk inefficiency, duplication, or inconsistent findings.

## Conclusion

The court held that shareholders plausibly alleged they were intended beneficiaries of the special committee’s engagement of financial advisors and thus could sue the bankers for negligent advice affecting the auction outcome, while also approving a stay of the New York case pending related Delaware litigation addressing the same auction-related factual questions.


Schneider v. Lazard Frères & Co., 159 A.D.2d 291, 552 N.Y.S.2d 571 (App. Div. 1st Dep’t 1990)