## Facts

- Daniel E. Heffernan was a director and 6.7% shareholder of GNB Holdings, Inc., and GNB Inc. was its wholly owned subsidiary.
- Holdings prepared SEC registration materials for a contemplated public offering, but later pursued a private control transaction instead.
- Pacific Dunlop (through an acquiring entity later renamed Pacific Dunlop GNB Corporation) purchased control of Holdings via a stock purchase agreement, ultimately increasing ownership to about 92%.
- The stock purchase agreement incorporated previously prepared SEC-related materials and concerned disclosures about corporate liabilities, including environmental liabilities.
- Heffernan sold his 6.7% stake to Pacific and ceased serving as a director.
- Pacific later sued Heffernan and Allen & Co. under Securities Act § 12(2) and Illinois securities law, seeking rescission based on alleged misleading disclosures in the stock purchase agreement.
- Heffernan demanded indemnification and advancement of defense expenses from Holdings and GNB under Delaware General Corporation Law § 145 and corporate bylaws; the corporations refused.
- Heffernan filed a federal diversity action seeking declaratory relief establishing his entitlement to indemnification and advancement for the defense of Pacific’s suit.

## Issues

1. Whether a former director states a claim for indemnification and advancement under Del. Gen. Corp. L. § 145 and corporate bylaws when sued over a personal stock sale, if the suit may be connected to acts or knowledge arising from board service.
2. Whether it was proper to dismiss under Rule 12(b)(6) on the ground that the securities suit was, as a matter of law, not brought “by reason of the fact” that Heffernan was a director.

## Decision

- The Seventh Circuit reversed the Rule 12(b)(6) dismissal and remanded.
- The court held it was premature on the pleadings to conclude Heffernan could prove no set of facts showing the securities action was brought “by reason of the fact” of his directorship.
- The court rejected the view that being sued as a selling shareholder necessarily forecloses § 145 coverage where the alleged misstatements and transaction structure could be tied to director-level conduct or responsibility.
- The court did not decide entitlement to indemnification or advancement on the merits; it held only that the complaint sufficiently stated a claim.

## Legal Principles

- Del. Gen. Corp. L. § 145’s “by reason of the fact” language is construed broadly and turns on a factual connection between the proceeding and the individual’s service as a director or officer.
- A plaintiff may satisfy “by reason of the fact” even if the underlying complaint characterizes the defendant’s conduct in an individual capacity, where the alleged wrongdoing may relate to director functions such as corporate disclosures, approvals, or transaction negotiation.
- Whether indemnification or advancement is available under § 145 and related bylaws commonly requires fact development, including the nature of the defendant’s role in the events giving rise to the litigation and any statutory or bylaw conditions (e.g., good faith and corporate-interest requirements).
- Dismissal at the pleading stage is improper if the complaint plausibly permits a finding that the proceeding was brought at least in part due to the defendant’s former director status.

## Conclusion

The Seventh Circuit held that a former director’s indemnification and advancement claims under Delaware law and corporate bylaws cannot be dismissed at the pleading stage merely because the underlying suit concerns a personal stock transaction, where the allegations may be factually connected to the individual’s board service.


Heffernan v. Pac. Dunlop GNB Corp., 965 F.2d 369 (7th Cir. 1992)