In a detailed, 55-page opinion issued on March 31, 2026, Vice Chancellor Laster denied the defendants’ motion to dismiss a derivative action challenging a disastrous asset sale by the Hatteras Master Fund. In Young Women’s Christian Association of Rochester and Monroe County v. Hatteras Funds, LP, et al., C.A. No. 2024-1264-JTL (Del. Ch. Mar. 31, 2026), the Court addressed important questions about derivative standing for feeder fund investors and the application of the demand futility standard under Court of Chancery Rule 23.1.

Background

The Hatteras Master Fund was once a $624 million fund-of-funds vehicle that offered investors access to diversified alternative investments. After its 2013 peak, however, years of investor withdrawals steadily eroded the fund’s assets under management. By the time the investment manager began pursuing a wind-down, AUM had fallen by more than half and the manager’s annual fees had dropped to approximately $3.9 million. Rather than winding down the fund in an orderly manner, the fund’s directors approved a sale of substantially all of the fund’s assets to Beneficient, a financial services company. The plaintiff alleges that the directors approved this transaction without obtaining the supermajority unitholder approval required to depart from the fund’s fundamental diversification policy, without giving investors adequate disclosure about the transaction, and without allowing investors to redeem their investments before the transaction closed.

The plaintiff, the YWCA of Rochester and Monroe County, is a nonprofit organization that has been invested in one of the Hatteras feeder funds since 2012. The YWCA brought this derivative action on behalf of the Master Fund against the fund’s directors — David B. Perkins, H. Alexander Holmes, Steven E. Moss, Gregory S. Sellers, and Thomas Mann — as well as Beneficient and its executive chairman, Bradley K. Heppner.

The Rule 23.1 Challenge

The defendants moved to dismiss on two principal grounds. First, they argued that the YWCA lacked standing to bring a derivative suit because it invested through a feeder fund that held only a 48% interest in the Master Fund. Second, the defendants contended that the YWCA failed to satisfy Rule 23.1’s requirement that a derivative plaintiff either make a pre-suit demand on the board or demonstrate that such a demand would have been futile.

As I have previously discussed, under Delaware law, demand is excused as futile if the plaintiff pleads particularized facts creating a reasonable doubt that at least half of the board members were unable to impartially consider the demand — whether because a director received a material personal benefit from the challenged transaction, faces a substantial likelihood of liability, or lacks independence from someone in one of those categories.

The Court’s Analysis

Vice Chancellor Laster rejected both arguments. On the standing question, the Court articulated two distinct paths to double-derivative standing: what it termed the “Double-Futility Test” and the “Demand-Plus-Control Test.” Under the Double-Futility Test, a plaintiff establishes standing by showing demand futility at both the feeder fund and master fund levels — with no minimum ownership threshold required. Under the Demand-Plus-Control Test, a plaintiff shows demand futility at the first-tier level plus the first-tier entity’s control over the second-tier entity. Critically, the Court explained that in the limited partnership context, majority equity ownership does not equate to control — control vests in the general partner regardless of its equity stake. The defendants’ insistence on a majority ownership requirement was, in the Court’s words, “trebly wrong.”

On demand futility, the Court’s analysis drew on its Rule 12(b)(6) Decision issued just days earlier, which had already held that the complaint states non-exculpable claims against the outside directors. Because those claims survived the motion to dismiss, the outside directors face a substantial threat of liability that disables them from impartially evaluating a demand. And because the feeder fund and master fund share the same board, the analysis needed to be conducted only once.

Key Takeaways

This opinion is noteworthy for several reasons. First, it provides a comprehensive doctrinal framework for double-derivative standing in the fund-of-funds structure — organizing prior authorities into a clear analytical taxonomy that practitioners who advise alternative investment vehicles should study closely. Second, the opinion reinforces that directors who approve a challenged transaction and face a substantial risk of liability cannot be expected to impartially evaluate a demand arising from that very transaction. For fund sponsors and directors, this case is a reminder that fiduciary obligations do not diminish simply because asset values have declined or because a transaction is framed as a wind-down or strategic alternative.