Chancery Finds Investment Manager’s Board May Have Breached Fiduciary Duties, Aided and Abetted by the Buyer—YWCA v. Hatteras Funds

In YWCA of Rochester and Monroe Cty. v. Hatteras Funds (Mar. 27, 2026), the Delaware Court of Chancery, at the pleading stage of litigation, found that an investment manager (serving as a general partner of the master fund of a group of closed-end, registered investment funds), its controller, and its directors may have breached their fiduciary duties in connection with the sale of all of the assets of the master fund, aided and abetted by the buyer. The limited partnership agreement provided that the directors had the same duties as directors of a Delaware corporation. Four of the five directors were purportedly independent directors.

The court held that the plaintiff's allegations supported a reasonable inference that the defendants breached their fiduciary duties when: (i) to solve liquidity issues, they approved the asset sale, in which the master fund's diversified portfolio of investments was exchanged for illiquid securities of a problematic buyer, in violation of the fund's diversification policy; (ii) after the asset sale, and without informing the limited partners, they failed to pursue a dissolution plan they had contemplated as a second-step to the asset sale; and (iii) after the asset sale, they continued to pay the investment manager the same 1% management fee although it then managed only a single asset (and, moreover, allegedly did little or nothing to manage that asset). Also, the court held that the buyer may have aided and abetted the breaches of fiduciary duties by the investment manager and its controller, as the buyer, allegedly, committed that it would financially support their efforts to create new funds, which created a conflict of interest for them.

Key Points

• The decision highlights the potential for third-party buyers to have aiding and abetting liability for sell-side breaches of fiduciary duties-although there is still a high bar to establishing such claims. The court stated that, even after the "stringent" standards for aiding and abetting liability most recently set forth by the Delaware Supreme Court in Mindbody (2024) and Columbia Pipeline (20205), a third-party buyer may have aiding and abetting liability if it "create[ed] the condition giving rise to a [sell-side] conflict of interest." (Also of note, although not directly relevant to the case, the court reinforced the uncertainty it expressed in Engagesmart (2026) as to whether the Mindbody/Columbia Pipeline standards, or instead lower standards, apply to establish aiding and abetting liability when the claim is asserted against parties, such as financial advisors, who are "insiders" with respect to the process, as opposed to third-party acquirers, who are "outsiders" with respect to the process.)

• The court took a notably broad approach in considering the claims. We note the following: The court emphasized the overall factual context as alleged. Although the plaintiff pled only that the duty of care was breached, the court concluded that the alleged facts supported an inference of bad faith and therefore breach of the duty of loyalty. Although the investment manager and its controller did not submit a pleading-stage motion to dismiss the claims of breach of fiduciary duty against them, the court nonetheless addressed, at the pleading stage, whether they may have breached fiduciary duties, so that the court could decide whether the buyer may have aided and abetted such breaches. The court relied in part on "contextual factors" that, while they may not have been sufficient to impugn the outside directors' "independence," may have "explained" why the directors took certain actions. One such factor was that they "could expect to serve on new funds that [the Controller] and the Investment Manager formed."

• The court concluded that the directors' fiduciary duties were imposed not only contractually but also under equitable principles-which made the aiding and abetting claim possible. While the limited partnership agreement imposed fiduciary duties contractually, the court stressed that the directors also had fiduciary duties under equitable principles. The limited partnership agreement did not follow the usual path of having an entity with a board of directors act as the general partner, but instead provided for the general partner to delegate its rights and powers to a board of directors. With the delegation of rights and powers, fiduciary duties followed under equitable principles-the "duties follow[ed] [the] delegation [and then were] tailored by the LPA," the court wrote. With equitable fiduciary duties established, the aiding and abetting claim was possible. (The court stated that there cannot be a claim of aiding and abetting a contractual breach. We note that a claim of tortious interference-with-contract can be asserted against a party who participates in a breach of contractual fiduciary duties, but that claim is based on narrower duties, is subject to affirmative defenses, and is more difficult to establish than a claim of aiding and abetting breaches of equitably-imposed fiduciary duties.)

• The court, when evaluating claims at the pleading stage, may demand less specificity for claims where the limited partner-plaintiff's access to partnership information was severely limited. The court acknowledged that the plaintiff's claim that the buyer's commitment to support the investment manager's new funds was "conclusory." The court stated that it "need not credit conclusory allegations," but that it "must take into account the extent to which information is in the defendants' exclusive control." Pleading-stage specificity was not required, the court held, given that the plaintiff was unable, under the limited partnership agreement and the Delaware Limited Partnership Act, to access more detailed information, and that the plaintiff had used the limited information it could access to plead allegations that supported a reasonably conceivable claim.

Background. The master fund, a Delaware limited partnership (the "Master Fund"), used a fund of funds structure in which affiliated feeder funds raised capital and channeled it into the Master Fund. The Master Fund's limited partnership agreement (as required by the Investment Company Act) prohibited the fund from having 25% or more of the value of its total assets invested in the securities of any one issuer (the "Diversification Policy"). Each feeder fund had the same governance structure as the Master Fund-with the same investment manager (the "Investment Manager") being its general partner and investment advisor; the same board of directors (the "Board" or the "Directors"); and the same Diversification Policy. Under the limited partnership agreements, each general partner had to delegate its managerial authority over the fund to the Board; the Directors owed the same fiduciary duties as directors of a Delaware corporation; and, rather than being fully exculpated for breaches of the duty of care, the Directors (as required under the Investment Company Act) had liability for gross negligence. The Board was comprised of four outside directors (the "Outside Directors") and the Investment Manager's controller (the "Controller").

The Master Fund experienced a lengthy period of success, with assets under management growing dramatically-which was followed by a lengthy period of withdrawal requests, with AUM ultimately falling by half and the Investment Manager having no prospect of obtaining performance fees for years to come. The Investment Manager decided to wind down the Master Fund and start over with a new fund. To achieve that goal, it sold all of the Master Fund's assets (i.e., its diversified portfolio of investments) (the "Asset Sale") to a firm that provided advice to funds facing liquidity issues (the "Buyer"), in exchange for preferred units in the Buyer (the "Preferred Units"). The Preferred Units were illiquid unless and until the Buyer chose to engage in a public offering or merger with a public company. Eighteen months after the Asset Sale, the Buyer completed a de-SPAC transaction (the "De-SPAC Transaction") that converted the Preferred Units into publicly traded common stock. In the following months, the Buyer wrote off most of its goodwill, and its stock price plummeted (ultimately trading for pennies). At the time of the litigation, the Master Fund still had not sold any of the Buyer's shares, and its AUM had fallen by 98%, with the feeder funds' investors bearing those losses. The Master Fund continued to pay the Investment Manager its annual fee equal to 1% of AUM, which yielded over $10 million for the Investment Manager.

The plaintiff, an investor in one of the feeder funds, brought a double-derivative suit on behalf of the Master Fund. Vice Chancellor J. Travis Laster declined the defendants' motion to dismiss the plaintiffs' claims (other than a claim against the Buyer's CEO). In a follow-on decision in the case (issued Mar. 31, 2026), the court (providing an extensive explication of the principles governing double-derivative suits and demand futility) ruled that, notwithstanding that the Outside Directors constituted a supermajority of the Board, demand on the Board to bring the litigation was excused based on demand futility. Therefore, the suit will proceed to trial.

Discussion

The allegations relating to the Asset Sale supported a reasonable inference of breach of fiduciary duties. The court noted, first, that the Asset Sale, although not a sale of the company or merger, was a "fundamental transaction"-as it "would fundamentally change not only the assets the Master Fund held, but also how it operated and what would produce its success." The Master Fund, instead of holding a diversified portfolio of investments, would hold just one illiquid security; and success would depend on the expertise of the Buyer rather than the Investment Manager. The court stated: "Delaware cases have drawn inferences of gross negligence when directors approved fundamental transactions without adequate deliberation, without receiving meaningful due diligence, and in reliance on information provided by an interested party."

Here, allegedly, the Directors approved the Asset Sale at a single meeting; did not receive a fairness opinion nor consult with outside advisors; and relied solely on the Investment Manager, which may have been self-interested because of the Buyer's alleged promise to support its future funds. Further, the Asset Sale resulted in the Directors' "conscious[ly] violat[ing]" the Diversification Policy. Moreover, "[r]ed flags aplenty waved around the Buyer." The Buyer was a startup company, with no track record and no near-term expectations of turning a profit; its financial statements showed that goodwill accounted for almost all of its total assets, and that the goodwill had resulted from a series of interested transactions with its former parent; the Buyer's CFO had resigned over concerns that the CEO had used the interested transactions to misappropriate funds; four outside directors had resigned from both the boards of the Buyer and its parent after objecting to the interested transactions; two successive audit firms for the Buyer had terminated their engagements; and the Buyer's parent was under SEC investigation relating to consolidating its financial statements with the Buyer's and the basis for the goodwill valuation.

The court rejected the Outside Directors' defenses that they had (i) relied on the Investment Manager as an expert, and (ii) made a rational business decision. First, the Directors argued that they had relied on the Investment Manager as an expert. The court stressed, that this defense is available only to "impartial" fiduciaries relying on impartial experts. Here, the plaintiff adequately alleged that the Investment Manager and its Controller were interested, not impartial. Second, the Directors argued that they had made a rational business judgment to turn to the Buyer for a short-term liquidity solution. The court wrote: "From that perspective, the Asset Sale looks irrational. It did not provide any short-term liquidity to the Master Fund, instead locking the fund into an even more illiquid investment." Also, the investment was not necessarily short term, because only a merger or sale of the Buyer would trigger a conversion of the Preferred Units into liquid shares, and the Directors and the Investment Manager had no control over if or when that would happen. "In the meantime," the court wrote, "the Master Fund violated the Diversification Policy and rendered itself dependent on a Buyer and its CEO who were festooned with red flags."

The allegations also supported a reasonable inference of bad faith and thus breach of the duty of loyalty-although the plaintiff had not asserted a duty of loyalty claim. Because the limited partnership agreement (as required by the Investment Company Act) preserved liability for breach of the duty of care, the plaintiff had asserted only that the Directors acted with gross negligence. The court stated, however, that the plaintiff's allegations about the Asset Sale supported "an inference of gross negligence in the sense of recklessness" that "could rise to the level of bad faith" and thus support a claim of breach of the duty of loyalty.

The allegations relating to the dissolution plan also supported a reasonable inference of breach of fiduciary duties. Although the Directors approved the Asset Sale as the first step in a plan to dissolve the funds, after the Asset Sale they did not pursue the dissolution plan. Instead, the Master Fund simply held the Preferred Units and, even after the De-SPAC Transaction, the Directors "inferably continued to do nothing," while the Master Fund's only investment lost 98% of its value. Also, the Directors allowed the Investment Manager to send communications to investors that were "inferably misleading." The court stated that, once the Directors approved the dissolution plan, they had an obligation either to take meaningful steps to pursue it or to abandon it and let the investors know. The court rejected the Directors' defense that they had delegated responsibility for the dissolution plan to the Investment Manager. "A board can of course delegate responsibilities, but at some point, delegation becomes abdication, and a board breaches its fiduciary duties by abdicating its duties to oversee the business and affairs of an entity. The [Directors] inferably crossed that line."

The allegations relating to the management fee also supported a reasonable inference of breach of fiduciary duties-but only "barely" and "only because of the context surrounding the [Directors'] inferably conscious inaction." The plaintiff argued that the Outside Directors "acted recklessly by knowingly permitting the Investment Manager to continue to reap the Annual Fee while doing nothing." The court noted that hiring and compensation decisions like this typically are accorded judicial deference under the business judgment rule. But in this case, the court stated, the Directors allowed the Master Fund to pay the Investment Manager $10 million after the Asset Sale, and during that time the Investment Manager only had to monitor a single investment. Moreover, the Investment Manager had "done nothing with" that investment. "That's a lot of money for zero activity," the court wrote. "When presented with a disparity this great, a court can justifiably infer that matters may be amiss sufficient to warrant proceeding past the pleading stage," the court wrote, noting that the claim was asserted in a Complaint that "as a whole depict[ed] Outside Directors who ha[d] been asleep at the switch."

The court-putting aside whether the Outside Directors were "independent" or not-took into account that they benefitted from continued association with the Controller and the Investment Manager. The court, while not deciding the independence issue at the pleading stage, took into account "contextual factors" that heightened its skepticism with respect to the Outside Directors' actions. Specifically, the court noted that the Outside Directors, who had no affiliations with the fund complex other than their directorships, "have served in their positions for decades and benefit from their association with [the Controller] and the Investment Manager," and "could expect to serve on new funds that [the Controller] and the Investment Manager formed." The court wrote: "Regardless of whether those interests would be sufficient to call into question the independence of the Outside Directors, they suggest a reason why the Outside Directors may have turned a blind eye" to certain matters. The decision thus may suggest that, at least where the alleged factual situation is egregious, the court may effectively continue to take a holistic approach in evaluating independence-related issues-whether in the non-corporate context (where the new presumption of independence set forth in the 2025 amendments to the DGCL do not apply) or in the corporate context with respect to rebuttal of the statutory presumption.

The allegations supported a reasonable inference that the Buyer aided and abetted the fiduciary breaches of the Investment Manager and its Controller. The Investment Manager and its Controller did not submit a pleading-stage motion to dismiss the claims against them. Nonetheless, the court addressed whether they may have breached fiduciary duties, so that the court could decide whether the Buyer may have aided and abetted such breaches. The court noted that in USACafes (1991), the court held that allegations that an acquirer offered financial incentives to a general partner to cause it to disregard its duties to the limited partnership were sufficient to support a claim for aiding and abetting against the buyer. Pointing to the alleged commitment of the Buyer in this case to support funding for future funds created by the Investment Manager and its Controller, the court wrote: "The same is true here, even under the more stringent standard [set forth in Mindbody and Columbia Pipeline]." "[A]lthough an offeror may attempt to obtain the lowest possible price for stock through arm's-length negotiations with the target's board, it may not knowingly participate in the target board's breach of fiduciary duty by extracting terms which require the opposite party to prefer its interests at the expense of its shareholders," the court wrote.

The allegations did not support a reasonable inference that the Buyer aided and abetted the fiduciary breaches of the Outside Directors. The court wrote: "Under Columbia Pipeline, a bidder who has not colluded or conspired with its negotiating counterpart, who does not create the condition giving rise to a conflict of interest, who does not encourage his counterpart to disregard his fiduciary duties or substantially assist him in committing the breach, does not aid and abet the breach." The Complaint, the court wrote, "does not contain any allegations suggesting that the Buyer…contributed to the Outside Directors' breach."

Practice Points

• Directors managing a registered fund must be mindful that, depending on the fund's structure, fiduciary duties may arise from various sources-the Investment Company Act, the fund's governing documents, and/or equitable principles. YWCA highlights that consciously violating the fund's fundamental investment policies may constitute a breach of fiduciary duties.
• Directors considering a fundamental transaction should proceed deliberatively; identify and address conflicts of interest; conduct appropriate due diligence; and not rely solely on information provided by an interested party. Directors should, when appropriate, consider whether to consult with outside advisors and whether to obtain a fairness opinion. If a sale is being considered, they should consider how and to what extent the sale will achieve their specific objectives. If, for example, liquidity is sought, but the transaction will result in the fund receiving illiquid securities, the reasons for proceeding in any event should be identified. If the potential buyer presents "red flags," directors should consider them and, if it decides to proceed in any event, should identify its reasons for doing so notwithstanding the red flags and should seek to mitigate the concerns the red flags raise. A record of the board's conscientious deliberations (such as in meeting minutes) should be established contemporaneously. Generally, more fulsome minutes, reflecting the issues considered and the reasons for the board's conclusions, tend to be more protective for directors than bare-bones minutes.
• If directors approve a plan (such as a dissolution plan), they should not change or abandon it without careful review and consideration. They should know, and establish a record of, their reasons for changing or abandoning the plan; consider whether they must inform the limited partners; and, if abandoning the plan, consider whether a different plan should be adopted to further the objectives they had when they adopted the plan.
• If directors approve a fundamental transaction that reduces the investment manager's duties-they should consider what, if any, changes would be appropriate with respect to management of the partnership, including whether the investment manager's fee should be reduced.
• Buyers should be mindful that "side deals" can create sell-side conflicts of interest that can lead to potential aiding and abetting liability. A buyer's commitment to an investment manager to support the creation of new funds may create a conflict for the investment manager with respect to the sale transaction. By creating the conflict, the buyer, depending on the facts and circumstances, may be subject to liability for aiding and abetting sell-side directors' breaches of fiduciary duties.
• Drafters should consider interpretive issues relating to "gross negligence" and "recklessness." In YWCA, the court noted that the Delaware Supreme Court has interpreted "gross negligence" and "recklessness" as different types of conduct-with recklessness not just a higher degree of negligence but akin to intentional infliction of harm. In the context of business entities, however, the court stated, Delaware cases have consistently interpreted "gross negligence" to "encompass recklessness," in the sense of a conscious disregard of known duties or a decision that is "so grossly off-the-mark as to amount to reckless indifference or a gross abuse of discretion." In a footnote, the court observed that, where parties decide to preserve liability for both gross negligence and recklessness, an interpretive issue arises as to whether they intended a distinction between the two.
• In the event of litigation by a limited partner, a partnership must consider how much information to provide. To the extent there is not a requirement to provide information, the partnership should keep in mind that the court may grant leeway to a limited partner, with respect to the specificity of its claims, where its access to information was very limited.

This communication is for general information only. It is not intended, nor should it be relied upon, as legal advice. In some jurisdictions, this may be considered attorney advertising. Please refer to the firm's data policy page for further information.