PRIORITY 9: JUDICIAL
Executive Summary
The Delaware Court of Chancery has allowed duty-of-loyalty claims to survive against outside directors who approved a fundamental transaction in a single meeting, without outside advisors, in conscious violation of the fund’s diversification policy, and then did nothing while the fund lost 98 percent of its value. The ruling confirms that demand futility can excuse a supermajority-independent board when contextual factors reveal a shared incentive to look away; a buyer who creates the sell-side conflict faces aiding-and-abetting liability. Boards overseeing managed assets or fiduciary-delegation structures should act before the next audit committee cycle.
Signal at a Glance
Source: YWCA of Rochester and Monroe Cty. v. Hatteras Funds, Delaware Court of Chancery, Vice Chancellor J. Travis Laster, opinions dated March 27 and March 31, 2026.
Key findings: Duty-of-loyalty claims survive at the pleading stage. Demand excused despite a supermajority-independent board. Third-party buyer faces aiding-and-abetting liability for creating the sell-side conflict, even under the more stringent post-Mindbody standard. Case proceeds to trial.
Deep Dive
The Signal
Vice Chancellor Laster declined to dismiss fiduciary-duty claims against the outside directors of Hatteras Funds, a Delaware limited partnership structured as a closed-end fund of funds. The directors approved the sale of the fund’s entire diversified portfolio for illiquid preferred units in a buyer that carried visible red flags at the time of closing: a CFO resignation over alleged misappropriation, four former outside directors who had resigned over interested transactions, two successive audit-firm terminations, and an active SEC investigation. The board acted at a single meeting, obtained no fairness opinion, consulted no outside advisors, and relied entirely on the investment manager, which allegedly had a direct financial incentive to complete the sale.
The court’s March 31 follow-on opinion excused demand despite the outside directors constituting a supermajority of the board. The mechanism: directors had served for decades, benefited from association with the investment manager’s controller, and “could expect to serve on new funds” the controller formed. That contextual interest was sufficient to explain the board’s inaction regardless of whether it formally impugned independence under the 2025 DGCL amendments. The case proceeds to trial.
The Evidence
The case is a double-derivative suit by a limited partner on behalf of the master fund. The limited partnership agreement provided that directors owed the same fiduciary duties as directors of a Delaware corporation; the court held those duties also arose independently under equitable principles, which made the aiding-and-abetting claim against the buyer legally viable. On the buyer’s liability, the court applied USACafes (1991) and confirmed that the more stringent standard from Mindbody (2024) and Columbia Pipeline (2025) does not protect a buyer who “create[s] the condition giving rise to a conflict of interest.” The alleged promise to support the investment manager’s future funds satisfied that threshold.
On delegation: after approving a dissolution plan as a second step to the asset sale, the directors did nothing to pursue it, allowing the fund’s sole remaining investment to lose 98 percent of its value. The court: “A board can of course delegate responsibilities, but at some point, delegation becomes abdication.”
Strategic Implication
Defensive Risk
Outside directors on any board where fiduciary authority has been delegated to a director-level body face a specific new exposure: a court may infer duty-of-loyalty breach from gross negligence allegations where the factual record is egregious, even if the plaintiff pled only a duty-of-care claim. Directors with long-tenured relationships with a controlling investment manager or general partner face demand-futility risk that the 2025 DGCL independence presumption does not cover, because the court located the incentive in “contextual factors” rather than formal independence analysis. Before the next audit committee charter review: commission outside counsel to audit the deliberation record on any fundamental transaction approved in the last 24 months, checking whether a fairness opinion was obtained, whether outside advisors were consulted, and whether minutes document engagement with counterparty red flags.
Offensive Advantage
The court’s deliberation checklist is now on the record in plain language: deliberate carefully, identify and address conflicts, conduct independent due diligence, do not rely solely on information from an interested party. Boards that adopt that checklist formally as a written resolution or charter amendment tied to the definition of “fundamental transaction” have a documented governance posture that distinguishes them from the Hatteras pattern in any future demand-futility or Caremark analysis. Institutional shareholders running proxy-cycle governance screens in 2026 are looking for exactly this kind of procedural differentiation. A board that can point to a formally adopted fundamental-transaction oversight protocol is ahead of that scrutiny.