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.

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