Background
The Young Women’s Christian Association of Rochester and Monroe County (YWCA) is an investor in Hatteras Core Alternatives TEI Institutional Fund, L.P. (the TEI Institutional Feeder Fund), a Delaware limited partnership that in turn invested in Hatteras Master Fund, L.P. Both entities share the same board of directors, and an affiliate of Hatteras Investment Partners, LP—whose majority owner and CEO is David B. Perkins—served as general partner of each fund. The funds’ limited partnership agreements imposed on directors the same fiduciary duties owed by directors of a Delaware corporation and preserved liability for gross negligence.
After the Hatteras Master Fund’s assets under management fell by half, the board approved the sale of all of the Master Fund’s assets to a start-up advisory firm in exchange for preferred units in that firm—without seeking unitholder approval and without obtaining the supermajority approval required under the fund’s diversification policy before concentrating more than 25% of assets in a single issuer. Eighteen months later, the buyer completed a de-SPAC transaction that converted the preferred units into publicly traded common stock at $8 per share; the stock subsequently fell to pennies after the buyer wrote off most of its goodwill.
The YWCA filed a double-derivative action in the Court of Chancery on behalf of the Master Fund, asserting claims arising from the asset sale. The defendants moved to dismiss under Court of Chancery Rule 23.1, arguing that the YWCA lacked standing because the TEI Institutional Feeder Fund held only a 48% (less than majority) interest in the Master Fund, and that demand was not futile because outside directors constituted a supermajority of the board. The Court of Chancery denied the motion to dismiss in a March 31, 2026 opinion, holding that double-derivative standing does not require majority ownership and that demand futility was adequately pleaded because a majority of directors faced a substantial risk of liability.
The Court’s Holding
The Delaware Supreme Court refused the defendants’ application for interlocutory review of the Court of Chancery’s denial of the Rule 23.1 motion to dismiss. Exercising its discretion under Supreme Court Rule 42 and giving due weight to the Court of Chancery’s own assessment, the Supreme Court concluded that the application did not meet the strict standards for certification. It found that exceptional circumstances warranting interlocutory review were absent and that the potential benefits of an immediate appeal did not outweigh the inefficiency, disruption, and probable costs such an appeal would cause.
The Court of Chancery had previously denied the defendants’ application for certification on the same grounds—finding that its Rule 23.1 ruling rested on well-settled principles of double-derivative standing, did not resolve a novel question of law, and that none of the Rule 42(b)(iii) factors (including first-impression legal questions, conflicting decisions, jurisdictional controversy, or considerations of justice) supported certification. The Supreme Court’s refusal to accept the interlocutory appeal leaves the Court of Chancery’s standing and demand-futility rulings intact and the litigation proceeding on the merits.
Key Takeaways
- A minority investor in a feeder fund may have double-derivative standing to sue on behalf of a master fund even without majority ownership, provided demand futility is properly pleaded at the relevant entity levels.
- Where the same directors serve on both the feeder fund and the master fund boards, a single demand-futility analysis may satisfy the pleading requirement at both levels.
- The Delaware Supreme Court will deny interlocutory certification where the Court of Chancery’s ruling applies well-settled derivative litigation principles and no Rule 42 factors favor immediate review.
- Fund structures that concentrate decision-making in a shared board and common general partner may face heightened exposure to double-derivative claims when a transaction harms the downstream entity.
Why It Matters
This decision has practical significance for managers of multi-tiered Delaware limited partnership fund structures—particularly feeder-fund/master-fund arrangements. By leaving intact the Court of Chancery’s ruling that minority ownership of a feeder fund does not categorically bar double-derivative standing, the Supreme Court signals that investors need not hold a controlling stake to pursue derivative claims on behalf of a downstream fund. Fund managers and general partners who sit on shared boards across fund tiers face the risk that demand futility may be satisfied by a single analysis when the same directors oversee both entities.
The refusal of interlocutory review also underscores the high bar Delaware courts apply before allowing mid-litigation appeals of procedural threshold rulings. Defendants seeking to avoid discovery and trial through interlocutory certification must demonstrate more than a close or novel legal question—they must show genuine exceptional circumstances and concrete benefits that outweigh the costs of disrupting the proceedings below.