Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust v. Raines

Opinion for the Court filed by Circuit Judge KAVANAUGH, in which Circuit Judge TATEL joins.

Opinion concurring in the judgment filed by Circuit Judge BROWN.

In 2004, Fannie Mae announced one of the largest corporate earnings restatements in U.S. history. Numerous investigations and official reports followed. The story of Fannie Mae told by these reports is disturbing. It thus comes as no surprise that the Fannie Mae accounting debacle has generated a wave of lawsuits. In this case, certain Fannie Mae shareholders filed a derivative suit on behalf of Fannie Mae against the Company’s directors. The complaint targets the directors’ failure to prevent the accounting irregularities. The complaint also challenges the directors’ decision to approve severance arrangements for two Fannie Mae officers, Franklin D. Raines and J. Timothy Howard.

The parties agree that Delaware law provides the substantive standards for evaluating plaintiffs’ complaint. Shareholders ordinarily must make a demand on the company’s board of directors in order to bring a derivative suit. Although these shareholders did not make such a demand, the law does not require demand when it would be futile. But consistent with the long-standing principle that directors and not shareholders manage a corporation, the Delaware precedents on demand futility make clear that the bar is high, the *783standards are stringent, and the situations where demand will be excused are rare.

Carefully applying the Delaware precedents, the District Court found that plaintiffs’ complaint failed to meet the test for demand futility and dismissed the case. We affirm.

I

Fannie Mae is a federally chartered corporation authorized by Congress in 1934 and created in 1938. Initially established as a public entity, Fannie Mae was privatized in 1968. Fannie Mae thus has shareholders, directors, and officers like other non-governmental corporations.

Fannie Mae’s mission is to increase affordable housing for moderate- and low-income families. It purchases mortgages originated by other lenders and helps lenders convert their home loans into mortgage-backed securities. The goal is to provide stability and liquidity to the mortgage market. This allows mortgage lenders to provide more loans, thereby increasing the rate of homeownership in America.

During the summer of 2003, Fannie Mae’s sister organization Freddie Mac disclosed accounting irregularities. Shortly thereafter, the Office of Federal Housing Enterprise Oversight, an Executive Branch agency, reviewed Fannie Mae’s accounting. In September 2004, OFHEO released an interim report that highlighted deficiencies in Fannie Mae’s accounting policies, internal controls, and financial reporting. OFHEO’s interim report led to an investigation by the Securities and Exchange Commission. On December 15, 2004, the SEC announced that it would require a $9 billion earnings restatement by Fannie Mae.

Six days after the SEC’s announcement, two Fannie Mae officers (CEO Franklin D. Raines and CFO J. Timothy Howard) resigned. The Board did not fire Raines or Howard for cause; as a result, they were able to leave the company with approximately $31 million in severance benefits.

In late 2004, shareholders filed multiple derivative suits on behalf of Fannie Mae against Fannie Mae’s directors. See In re Fed. Nat’l Mortgage Ass’n Litig., 503 F.Supp.2d 9, 13 (D.D.C.2007). As relevant here, plaintiffs allege that Fannie Mae’s Board of Directors failed to exercise sufficient oversight to prevent the accounting violations. Plaintiffs also contend that the outside directors on the Board should have (i) terminated Raines and Howard for cause, thereby denying them severance benefits, and (ii) sued to obtain disgorgement of previous compensation Raines and Howard received.

Shareholders bringing a derivative suit first must make a demand on the Board, in effect asking the Board to have the corporation pursue the claims itself. The shareholders here did not do so. They assert that demand is excused in this case because a majority of the directors could not render a disinterested and independent decision whether to pursue those claims.1 The District Court found that demand was not excused and dismissed the suit.2

*784II

Before turning to the merits of this appeal, we address jurisdiction. The parties all agree there is federal subject-matter jurisdiction based on 12 U.S.C. § 1723a(a), which authorizes Fannie Mae to “sue and to be sued, and to complain and to defend, in any court of competent jurisdiction, State or Federal.” Based on an independent assessment, we also conclude that this provision establishes federal subject-matter jurisdiction.

In American National Red Cross v. S.G., the Supreme Court considered a statute providing that the Red Cross could “ ‘sue and be sued in courts of law and equity, State or Federal, within the jurisdiction of the United States.’ ” 505 U.S. 247, 248, 112 S.Ct. 2465, 120 L.Ed.2d 201 (1992) (quoting 36 U.S.C. § 2 (now codified as amended at 36 U.S.C. § 300105(a)(5))). The Court held that this sue-and-be-sued clause conferred federal subject-matter jurisdiction over cases in which the Red Cross was a party. Red Cross, 505 U.S. at 257, 112 S.Ct. 2465. In so ruling, the Court articulated the general principle that “a congressional charter’s ‘sue and be sued’ provision may be read to confer federal court jurisdiction if, but only if, it specifically mentions the federal courts.” Id. at 255, 112 S.Ct. 2465 (emphasis added). The Red Cross Court stated that express reference to federal courts in a federally chartered entity’s sue-and-be-sued clause was “necessary and sufficient to confer jurisdiction.” Id. at 252, 112 S.Ct. 2465 (emphasis added).

The Red Cross majority repeatedly characterized this principle as a “rule,” see id. at 255-57, 112 S.Ct. 2465, noting that it had been “established” in the early 19th Century by Osborn v. Bank of United States, 22 U.S. (9 Wheat.) 738, 818, 6 L.Ed. 204 (1824), and subsequently confirmed in Bankers Trust Co. v. Texas & Pacific Railway Co., 241 U.S. 295, 304, 36 S.Ct. 569, 60 L.Ed. 1010 (1916), and D’Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 455-56, 62 S.Ct. 676, 86 L.Ed. 956 (1942). And the Red Cross dissenters similarly understood the rule’s clarity, although they disagreed with the rule’s content: “The Court today concludes that whenever a statute granting a federally chartered corporation the ‘power to sue and be sued’ specifically mentions the federal courts (as opposed to merely embracing them within general language), the law will be deemed ... to confer on federal district courts jurisdiction over any and all controversies to which that corporation is a party.” 505 U.S. at 265, 112 S.Ct. 2465 (Scalia, J., dissenting) (emphasis omitted).

Applying the Red Cross rule to the present case, we find that there is federal jurisdiction because the Fannie Mae “sue and be sued” provision expressly refers to the federal courts in a manner similar to the Red Cross statute. To be sure, the Fannie Mae sue-and-be-sued clause differs from the Red Cross statute in one respect: It refers to “any court of competent jurisdiction, State or Federal,” whereas the Red Cross statute refers to “courts of law and equity, State or Federal.” Compare *78512 U.S.C. § 1723a(a), with 36 U.S.C. § 300105(a)(5). We agree, however, with the majority of district courts that have confronted the question since Red Cross: Section 1723a(a) provides federal subject-matter jurisdiction in Fannie Mae cases. See, e.g., Grun v. Countrywide Home Loans, Inc., 2004 WL 1509088, at *2 (W.D.Tex. July 1, 2004); Connelly v. Fed. Nat’l Mortgage Ass’n, 251 F.Supp.2d 1071, 1073 (D.Conn.2003); C.C. Port, Ltd. v. Davis-Penn Mortgage Co., 891 F.Supp. 371, 372 (N.D.Tex.1994), aff'd, 58 F.3d 636 (5th Cir.1995); Peoples Mortgage Co. v. Fed. Nat’l Mortgage Ass’n, 856 F.Supp. 910, 917 (E.D.Pa.1994).

It is true that two district courts have reached the contrary conclusion, reasoning that applying the Red Cross rule to Fannie Mae is problematic because doing so, in their view, renders superfluous the words “of competent jurisdiction” in the Fannie Mae statute. See Knuckles v. RBMG, Inc., 481 F.Supp.2d 559, 563 (S.D.W.Va.2007); Fed. Nat’l Mortgage Ass’n v. Sealed, 457 F.Supp.2d 41, 44-46 (D.D.C.2006). We disagree with the Knuckles and Sealed district court opinions. Applying the Red Cross rule to the Fannie Mae statute does not render the words “of competent jurisdiction” superfluous. The words “of competent jurisdiction” help clarify that: (i) litigants in state courts of limited jurisdiction must satisfy the appropriate jurisdictional requirements, see Osborn, 22 U.S. (9 Wheat.) at 817-18 (finding federal jurisdiction because of statute empowering a federal corporation “to sue and be sued ... in all state courts having competent jurisdiction, and in any circuit court of the United States”) (internal quotation marks omitted) (emphasis added); (ii) litigants, whether in federal or state court, must establish that court’s personal jurisdiction over the parties, see Blackmar v. Guerre, 342 U.S. 512, 516, 72 S.Ct. 410, 96 L.Ed. 534 (1952) (noting that a “court of ‘competent jurisdiction’ ” for the purpose of hearing suits against civil service commissioners must be one that possessed personal jurisdiction over those commissioners); see also United States v. Morton, 467 U.S. 822, 828, 104 S.Ct. 2769, 81 L.Ed.2d 680 (1984); (iii) litigants relying on the “sue-and-be-sued” provision can sue in federal district courts but not necessarily in all federal courts, see Red Cross, 505 U.S. at 256 n. 8, 112 S.Ct. 2465; id. at 267, 112 S.Ct. 2465 (Scalia, J., dissenting); Brief of Petitioner-Appellant at 30-31, Am. Nat’l Red Cross v. S.G., 505 U.S. 247, 112 S.Ct. 2465, 120 L.Ed.2d 201 (1992) (No. 91-594) (“it is obvious that the district courts are intended” to receive the jurisdiction conferred in “sue-and-be-sued” clauses); and (iv) where the Tucker Act otherwise might funnel cases to the Court of Federal Claims, the federal district courts still possess jurisdiction, see Ferguson v. Union Nat’l Bank, 126 F.2d 753, 756 (4th Cir.1942) (applying “of competent jurisdiction” language in 12 U.S.C. § 1702: “It could hardly have been intended by Congress that suits for over $10,000 against the Administrator could be brought in any state court of general jurisdiction, but in the federal jurisdiction only in the Court of Claims-”). Applying the Red Cross rule to the Fannie Mae statute thus does not render the words “of competent jurisdiction” meaningless.3

*786The Supreme Court’s unanimous decision in Breuer v. Jim’s Concrete of Brevard, Inc. is consistent with our conclusion. See 538 U.S. 691, 123 S.Ct. 1882, 155 L.Ed.2d 923 (2003). There, the Court held that the Fair Labor Standards Act’s right-to-sue clause did not bar removal of suits from state to federal court. Id. at 694-97, 123 S.Ct. 1882; 29 U.S.C. § 216(b). In so holding, the Court stated that there was “no question that Breuer could have begun his action in the District Court” given the language in the FLSA statute — similar to the Fannie Mae statute — indicating that an action “ ‘may be maintained ... in any Federal or State court of competent jurisdiction.’ ” 538 U.S. at 694, 123 S.Ct. 1882 (quoting 29 U.S.C. § 216(b)) (alteration in original) (emphasis added). Therefore, despite the presence of an “of competent jurisdiction” phrase, the Court found no reason to doubt that the FLSA’s right-to-sue clause conferred federal jurisdiction.

Judge Brown’s separate opinion appears to acknowledge that the original Fannie Mae sue-and-be-sued clause in place from 1934 to 1954 conferred automatic federal jurisdiction in Fannie Mae cases, but says that Congress eliminated this jurisdictional grant in 1954 by adding the words “of competent jurisdiction.” We disagree. After the 1954 statutory change, the jurisdictional provision of the Fannie Mae statute continues to refer to federal courts, thus still falling within the Red Cross rule we are bound to follow. Moreover, we disagree with the separate opinion about the meaning and effect of that 1954 statutory change.

Under the original 1934 statute, Fannie Mae was a governmental entity that could “sue and be sued, complain and defend, in any court of law or equity, State or Federal.” Pub.L. No. 73-479, § 301(c)(4), 48 Stat. 1246, 1256 (1934). The Housing Act of 1954 maintained Fannie Mae’s governmental status, but completely revamped the 1934 legislation; the addition of the phrase “of competent jurisdiction” to the sue-and-be-sued clause was one of numerous changes. See Pub.L. No. 83-560, tit. II, 68 Stat. 590, 612-22 (1954). Unlike Judge Brown, we see no plausible reason that Congress in 1954 would have continued to refer to federal courts in the sue- and-be-sued clause — language understood since the Osborn case in 1824 to confer federal jurisdiction in cases involving federally chartered entities — and then used the words “of competent jurisdiction” in an attempt to negate automatic federal jurisdiction. If Congress in 1954 did not want to continue to confer federal jurisdiction in Fannie Mae cases, it logically would have omitted the word “Federal” from the statute, not attempted a bank shot by adding the words “of competent jurisdiction.”

This analysis finds support from the fact that in 1954 — the same year that Congress redrafted Fannie Mae’s charter — Congress also revised the “sue-and-be-sued” provision of the Federal Savings and Loan Insurance Corporation statute by deleting “Federal” from the original FSLIC law. *787The FSLIC statute as amended read: “[t]o sue and be sued ... in any court of competent jurisdiction in the United States.” Pub.L. No. 83-560, § 501(1), 68 Stat. 590, 638 (1954) (amending Pub.L. No. 73-479, § 402(c)(4), 48 Stat. 1246, 1256 (1934) (“[t]o sue and be sued ... in any court of law or equity, State or Federal”)). In other words, in 1934 Congress established two substantially identical “sue-and-be-sued” provisions, one for Fannie Mae and one for the FSLIC. And in 1954, Congress dropped the word “Federal” from the FSLIC statute while keeping the word “Federal” in the Fannie Mae statute. We must assume that Congress knew the jurisdictional consequences of what it was doing in 1954. The fact that Congress chose to keep that all-important word in the Fannie Mae statute but to delete it from the FSLIC statute is compelling evidence that Fannie Mae’s “sue-and-be-sued” provision was meant to ensure continuing federal jurisdiction in Fannie Mae cases.

The separate opinion’s analysis of the “of competent jurisdiction” language also does not account for the congressional expectations associated with “sue-and-be-sued” provisions during the middle of the 20th Century when this statutory change was made. A number of cases relevant to this issue had been decided in the years before 1954. To begin with, since 1824, the courts had concluded that express reference to federal courts in a sue-and-be-sued clause of a federally chartered entity would ensure federal jurisdiction. See Osborn, 22 U.S. (9 Wheat.) at 818; cf. Red Cross, 505 U.S. at 252, 112 S.Ct. 2465 (earlier cases placed Congress “on prospective notice of the language necessary and sufficient to confer jurisdiction”). In 1952, moreover, the Supreme Court’s decision in Blackmar v. Guerre made clear that using the phrase “of competent jurisdiction” would serve the objective of requiring a plaintiff to establish personal jurisdiction in cases involving corporate entities like Fannie Mae. See Blackmar, 342 U.S. at 516, 72 S.Ct. 410. Because of Blackmar, Congress might have thought the textual formula approved in 1942 in D’Oench, Duhme — “in any court of law or equity, State or Federal” — did not suffice to require a showing of personal jurisdiction. In addition, as of 1954, Congress would not have thought that using the phrase “of competent jurisdiction” could negate federal jurisdiction in Fannie Mae cases; several recent circuit precedents had interpreted sue-and-be-sued clauses that included the phrase “of competent jurisdiction” and found federal jurisdiction. See George H. Evans & Co. v. United States, 169 F.2d 500, 502 (3d Cir.1948); Seven Oaks v. Fed. Hous. Admin., 171 F.2d 947, 948-49 (4th Cir.1948); Ferguson v. Union Nat’l Bank, 126 F.2d 753, 756-57 (4th Cir.1942). The Evans and Ferguson cases specifically relied on the “of competent jurisdiction” language, moreover, to hold that federal district courts had jurisdiction over cases involving federal entities that otherwise might be considered subject to the Tucker Act and shoehorned into the Court of Claims. Therefore, we think it abundantly clear that Congress in 1954 would not have thought or intended the words “of competent jurisdiction” to negate automatic federal jurisdiction for Fannie Mae cases.4

*788In sum, in interpreting the Fannie Mae statute, we see no need to muddy the waters by departing from Red Cross’s clear rule for interpreting the text of a federally chartered entity’s sue-and-be-sued clause. And even if we were to go beyond that rule in this case, the legislative background to Congress’s 1954 statutory amendment strongly supports automatic federal jurisdiction in Fannie Mae cases. We therefore hold that Fannie Mae’s sue-and-be-sued clause confers federal subject-matter jurisdiction.

The jurisdictional issue resolved, we turn to the merits of the complaint.

Ill

Plaintiffs concede that they did not attempt to make a pre-suit demand on the Board as is ordinarily required for shareholder derivative suits. Rather, plaintiffs allege that a demand on the Board would have been futile because a majority of the Board was not “disinterested” and “independent.”

When plaintiffs filed the relevant complaint, there were 13 directors on Fannie Mae’s Board. This included three corporate officers: then-CEO Franklin D. Raines, then-CFO J. Timothy Howard, and current-CEO Daniel H. Mudd. It also included 10 outside directors: Stephen B. Ashley, Kenneth M. Duberstein, Thomas P. Gerrity, Ann Korologos, Frederic V. Malek, Donald B. Marrón, Anne Mulcahy, Joe K. Pickett, Leslie Rahl, and H. Patrick Swygert. To prove demand futility, plaintiffs must prove that a majority of the Board at the time of the complaint — here, at least seven directors — lacked the necessary disinterestedness and independence to evaluate the suit. For purposes of this appeal only, it is conceded that Raines, Howard, and Mudd were not disinterested and independent. So for demand to be excused, the complaint must create a “reasonable doubt” about the disinterestedness or independence of at least four of the 10 outside directors. See Aronson v. Lewis, 473 A.2d 805, 814 (Del.1984).

Federal Rule of Civil Procedure 23.1 mandates that a complaint in a shareholder derivative suit “state with particularity ... the reasons for ... not making the effort” to make a demand, fed. r. civ. p. 23.1(b)(3). Plaintiffs state three main reasons to support their argument of demand futility.

First, plaintiffs allege that demand is excused on their accounting-related claims. They argue that there was a “reasonable doubt” about the directors’ “disinterestedness” to consider a demand because, in plaintiffs’ view, there is a “substantial likelihood” that a majority of the directors would be liable on the accounting-related claims for failure to exercise proper oversight. See Rales v. Blasband, 634 A.2d 927, 936 (Del.1993) (internal quotation marks omitted).

Second, plaintiffs allege that demand is excused on their severance-related claims. They allege that there was a “reasonable doubt” about the Board’s “disinterestedness” to consider a demand because, in plaintiffs’ view, the directors did not exercise valid “business judgment” in approving the severance arrangements for Raines and Howard. See Aronson, 473 A.2d at 815.

Third, plaintiffs allege that demand is excused on both sets of claims because there was a “reasonable doubt” about a majority of the Board’s “independence” to consider a demand in light of the various *789professional, charitable, and personal entanglements among Board members. See Beam v. Stewart, 845 A.2d 1040, 1049 (Del.2004).

A

With respect to the accounting-related claims, plaintiffs contend that demand is excused because there was a reasonable doubt about the disinterestedness of a majority of the directors: They claim that a majority of the directors face a “substantial likelihood” of personal liability as a result of their failure to exercise sufficient oversight. See Rales, 634 A.2d at 934, 936.

Liability predicated on a Board’s failure to exercise oversight “is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” In re Caremark Int’l, Inc. Derivative Litig., 698 A.2d 959, 967 (Del.Ch.1996); see also Stone v. Ritter, 911 A.2d 362, 372 (Del.2006). The standard “requires conduct that is qualitatively different from, and more culpable than, the conduct giving rise to a violation of the fiduciary duty of care (i.e., gross negligence).” Stone, 911 A.2d at 369. As relevant here, plaintiffs must allege particularized facts demonstrating that the directors “knew that they were not discharging their fiduciary obligations” and failed to act “in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities.” Id. at 370.

According to plaintiffs, the complaint alleges that the directors crossed that line by failing to adequately respond to several “red flags”: (1) a $200 million audit difference originating in 1998; (2) a whistleblower’s complaints that Fannie Mae was improperly manipulating earnings; (3) signs that Fannie Mae management was using improper hedge accounting practices; and (4) sister company Freddie Mac’s disclosure in 2003 that it had understated profits. Plaintiffs’ Br. at 44-55. We disagree that these allegations create a “substantial likelihood” of personal liability for the directors. On each claim, the Board or its relevant committee looked into the matter and relied on internal or external accounting experts and officials responsible for those matters. As the District Court correctly stated, “plaintiffs’ own allegations demonstrate that the directors actually responded to each of the ‘red flags’ cited by plaintiffs.” In re Fed. Nat’l Mortgage Ass’n Litig., 503 F.Supp.2d 9, 19 (D.D.C.2007) (emphasis omitted). Under Delaware law, a Board of Directors is not a Board of Accountants. Although the allegations (if true) may show negligence by the Board, they do not meet the very high standards set by Delaware law for director oversight liability.

First, plaintiffs claim that the directors ignored a $200 million audit difference originating in 1998. Second Am. Comp, at ¶¶ 28-30. That year, Fannie Mae incurred $440 million of expenses on its mortgage holdings. Id. at ¶28. Instead of adjusting its income by $440 million, Fannie Mae adjusted its income by $240 million and deferred the remaining expenses to subsequent years. Id. at ¶ 29. Deferring the expenses and engaging in other manipulative accounting practices enabled Fannie Mae to meet its performance target and thus increased the company executives’ incentive-based compensation. Id. at ¶¶ 31-32.

Plaintiffs claim that the directors ignored the audit difference. But plaintiffs’ own allegations demonstrate that the directors did in fact address the issue. Second Am. Comp, at ¶ 30. The complaint states that the Audit Committee — a standing committee of the Board of Directors— met with KPMG, Fannie Mae’s outside auditor, to discuss the audit difference. *790And KPMG agreed with Fannie Mae’s treatment of the expenses. Id.

Under Delaware law, directors are insulated from liability when they rely in good faith on the opinions of outside experts who are acting within their expertise. See Del.Code Ann. tit. 8 § 141(e); Brehm v. Eisner, 746 A.2d 244, 261-62 (Del.2000). The complaint shows that the Audit Committee relied on KPMG’s opinions with respect to the audit difference, which turned this allegedly red flag into a green flag.

Second, according to plaintiffs, the directors ignored whistleblower Roger Barnes’s complaints that Fannie Mae was improperly manipulating earnings. Second Am. Comp, at ¶ 98. Barnes was a mid-level accountant; in 2003, he wrote a detailed memorandum to internal auditors regarding what he considered to be improper accounting practices at Fannie Mae. Id. at ¶¶ 98, 362. The complaint alleges that the Audit Committee of the Board learned about the memorandum but deliberately dismissed Barnes’s revelations, letting them lie without further investigation and permitting the accounting violations to continue.

But again, the complaint shows that the Audit Committee responded. Id. at ¶ 365. Shortly after learning of the memo, the Audit Committee, company executives, and KPMG convened to review and discuss Barnes’s allegations. Id.; OFHEO Final Report, Joint Appendix (“J.A.”) 714. At this meeting, the Audit Committee “expressed satisfaction with the results of the review” and commended company officers for working quickly to address the concerns. Second Am. Comp, at ¶ 366 (internal quotation marks omitted).

As explained above, directors are insulated from liability when they rely in good faith on the opinions of outside experts who are acting within their expertise. Directors also are “fully protected in relying in good faith” upon the “opinions, reports or statements presented to the corporation by any of the corporation’s officers or employees,” so long as the Board “reasonably believes” that such matters are “within such other person’s professional or expert competence.” Del. Code Ann. tit. 8 § 141(e). With respect to the Barnes Memorandum, plaintiffs have not put forth particularized facts undermining the Audit Committee’s reliance on officials who were responsible for these issues and who assured the Committee that the situation had been resolved. It is not as if the Audit Committee took the Barnes Memo from the in-box and put it in the out-box without taking any action.

Third, plaintiffs allege that the Assets and Liabilities Policy Committee — another standing committee of the Board of Directors — should have known that management was using improper “hedge accounting” practices. According to plaintiffs, Fannie Mae’s executives improperly applied “hedge accounting” principles to derivatives, thereby spreading the company’s losses on derivatives over a number of years rather than booking them immediately. But the complaint alleges only that the directors should have known about the accounting violations even though KPMG assessed the implementation of this accounting policy. Second Am. Comp, at ¶¶ 256-57, 399. Again, therefore, this allegation does not create a substantial likelihood of personal liability under the standards of Delaware law for director oversight claims.

Fourth, plaintiffs assert that the directors failed to sufficiently react after Fannie Mae’s sister organization Freddie Mac disclosed in 2003 that it had “understated profits” in an effort to “smooth earnings and maintain its image on Wall Street as a steady performer.” Second Am. Comp, at ¶ 343. Plaintiffs allege that *791the “similarities between Fannie Mae and Freddie Mac and the common issues that were the focus of the Freddie Mac violations should have ... serve[d] as ‘red flags’ ” alerting the directors to Fannie Mae’s financial manipulations. Id. at ¶ 346. The problem for plaintiffs is that the Board of Directors responded to the news about Freddie Mac. The directors met multiple times to discuss the Freddie Mac situation. Second Am. Comp, at ¶¶ 344, 345, 347, 348, 349, 351, 353. At those meetings, the company’s financial officers contrasted Freddie Mac’s practices with Fannie Mae’s and assured the Board that Fannie Mae’s accounting was sound. See OFHEO Final Report, J.A. 766-67. Again, because the outside directors relied on representations of internal financial experts, they are protected against personal liability.

In sum, the complaint fails to establish a substantial likelihood of personal liability for the outside directors on the accounting-related claims. Therefore, under Delaware law, the accounting-related allegations do not create a reasonable doubt about the disinterestedness of the Board to consider a demand with respect to those claims.5

B

On the severance-related claims, plaintiffs allege that the directors’ decisions to allow Raines and Howard “to resign or retire with more than $31 million in sever-anee benefits” and to absolve the executives of their “legal obligation to disgorge compensation that they had procured via accounting manipulations and insider trading” create a “reasonable doubt” that they were the product of a valid business judgment by the directors. Plaintiffs’ Br. at 29; Aronson, 473 A.2d at 814.6

The business judgment rule establishes a “presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” Aronson, 473 A.2d at 812. As plaintiffs acknowledge, the business judgment rule protects decisions unless “no reasonable business person” would have made the decision. Plaintiffs’ Br. at 41 (internal quotation marks omitted). Under this principle, courts rarely second-guess directors’ compensation and severance decisions because the “size and structure of executive compensation are inherently matters of judgment.” Brehm, 746 A.2d at 263. Plaintiffs thus must allege “particularized facts sufficient to raise (1) a reason to doubt that the action was taken honestly and in good faith or (2) a reason to doubt that the board was adequately informed in making the decision.” See In re Walt Disney Co. Derivative Litig., 825 A.2d 275, 286 (Del.Ch.2003) (Disney II).

To support their claim that the directors’ severance decision was not a *792valid business judgment, plaintiffs rely on the Disney II case. There, the Delaware Chancery Court found that the board’s decision not to seek a termination based on fault or to inquire into the terms and conditions of the termination agreement was not entitled to the protection of the business judgment rule. See Disney II, 825 A.2d at 286-87. As the Disney II court described it, the complaint demonstrated that the “defendant directors consciously and intentionally disregarded their responsibilities, adopting a ‘we don’t care about the risks’ attitude concerning a material corporate decision.” Id. at 289 (emphasis omitted). The court accordingly concluded that plaintiffs sufficiently alleged that the directors breached their “obligation to act honestly and in good faith in the corporation’s best interests” and thus their decision “fell outside the protection of the business judgment rule.” Id.

But plaintiffs here fail to allege particularized facts that demonstrate that the process was similarly flawed or that the directors acted without adequate information or deliberation. The complaint itself acknowledges that the termination decision was made in a series of board meetings held over several days. Second Am. Comp, at ¶ 414 (termination decision “discussed in Board meetings on December 19, 20 and 21, 2004”).

The complaint alleges that the “issue was not discussed by the Compensation Committee, which had no meetings during this timeframe.” Id. But that is a red herring because the Compensation Committee is a standing committee of the Board of Directors. The individuals who sat on the Compensation Committee also sat on the Board of Directors, and the full Board met at length to discuss the severance issue.

Plaintiffs also point to the fact that the directors made the decision without the assistance of any compensation consultants. But that is irrelevant: The question in this case is not about an initial compensation package but instead a judgment about for-cause termination and what kind of severance was best for the short- and long-term interests of the company.

Plaintiffs allege that even if proeedurally sound, the severance decision was substantively flawed because Raines’s and Howard’s fraudulent acts constituted grounds to terminate them for cause. But in the analogous case of Brehm v. Eisner, the Supreme Court of Delaware dismissed a similar claim because the complaint failed to allege that the directors did not act within their discretion in awarding an un-derperforming executive a severance package. 746 A.2d 244 (Del.2000). The court found two business reasons that could support the directors’ decision: First, the company would likely have to litigate any dispute over the reasons for termination and “persuade a trier of fact and law” that the decision was warranted under the contract. Id. at 265. Second, “that process of persuasion could involve expensive litigation, distraction of executive time and company resources, lost opportunity costs, more bad publicity and an outcome that was uncertain at best and, at worst, could have resulted in damages against the Company.” Id.

So too here. Even if the directors had grounds to invoke the “for cause” termination provisions, the directors reasonably could have decided not to invoke those provisions because Fannie Mae likely would have had to spend enormous time and resources over many years litigating the decision. The Board reasonably may have decided that going forward, it was more important to cut ties and dedicate the company’s resources to righting the ship.

*793Plaintiffs also contest the directors’ decision not to sue Raines and Howard for disgorgement under § 304 of the Sarbanes-Oxley Act of 2002. 15 U.S.C. § 7243(a). That statutory provision establishes that the SEC may sue the CEO and CFO of a company when the company has been required to restate its earnings due to noncompliance with securities laws. Id.

The problem is that § 304 does not create a private right of action. And contrary to the suggestion in plaintiffs’ brief, which relies on 1970s-era cases, courts today rarely create implied private rights of action; courts generally deem it Congress’s prerogative to make that decision. See Stoneridge Inv. Partners v. Scientific-Atlanta, — U.S. -, 128 S.Ct. 761, 772-73, 169 L.Ed.2d 627 (2008); Kogan v. Robinson, 432 F.Supp.2d 1075, 1076 (S.D.Cal.2006) (holding that § 304 does not create private remedy); In re Whitehall Jewellers, Inc. S’holder Derivative Litig., 2006 WL 468012, at *7 (N.D.Ill.2006) (same); In re BISYS Group Inc. Derivative Action, 396 F.Supp.2d 463, 464 (S.D.N.Y.2005) (same); Neer v. Pelino, 389 F.Supp.2d 648, 655 (E.D.Pa.2005) (same). As a result, the directors’ decision not to devote corporate assets to pursue such an uncertain cause of action was certainly a reasonable one.

In sum on the severance-related claims, the complaint fails to create a reasonable doubt about the Board’s disinterestedness to consider a demand because it fails to create a reasonable doubt whether the Board exercised a valid business judgment.7

c

Finally, plaintiffs argue that nearly all of the 10 outside directors lacked the necessary “independence” to evaluate the demand because (1) the Raines-controlled Fannie Mae Foundation made charitable donations to non-profit organizations affiliated with individual Board members, (2) the directors had other conflicting business and personal relationships with each other, and (3) Raines otherwise controlled and dominated the directors. See Rales, 634 A.2d at 934; Aronson, 473 A.2d at 814. “Independence means that a director’s decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences.” Aronson, 473 A.2d at 816.

The brief for the directors dismisses those allegations as plainly insufficient under Delaware law. Yet in their 30-page reply brief, plaintiffs make no mention of this “independence” argument. Although not a waiver, the reply briefs silence on the subject is a telling indication of this argument’s lack of weight under Delaware law.

The basic hurdle for plaintiffs stems from the fact that the kinds of relationships alleged in the complaint exist at many companies. Directors tend to be experienced and accomplished business persons; those individuals also tend to be comparatively wealthy and have a wide range of professional and charitable affiliations and relationships. It is usually considered in the interests of corporations and their shareholders to attract experienced *794and accomplished business leaders as directors. So as not to preclude service by such persons, Delaware law creates a very high bar for using the kinds of relationships alleged here as a basis for finding a lack of independence and thereby excusing demand in a derivative suit.

First, the complaint alleges that outside directors Duberstein, Gerrity, Ma-lek, Marrón, Swygert, and Korologos are beholden to Raines because he was Chairman of the Board of the Fannie Mae Foundation, which made charitable grants to non-profit organizations with which the directors were affiliated. Second Am. Comp, at ¶ 116. For those donations to be relevant, plaintiffs must allege that Raines “has the unilateral power ... to decide whether the challenged director continues to receive a benefit....” Orman v. Cullman, 794 A.2d 5, 25 n. 50 (Del.Ch.2002). But the complaint does not allege any particularized facts showing that Raines controlled who received donations or determined the size of grants. We thus conclude that the contributions to non-profit charities and organizations provide no basis for us to question the independence of the directors for purposes of Delaware law.

Second, plaintiffs allege that outside directors Duberstein, Pickett, Ko-rologos, Malek, Marrón, Ashley, and Swygert have “business and/or personal relationships with each other, or with immediate families of other defendants, that would conflict with their ability to objectively determine whether it would be appropriate to bring suit against other Fannie Mae current and former officers and/or directors.” Second Am. Comp, at ¶ 132. But allegations of “mere personal friendship or a mere outside business relationship, standing alone, are insufficient to raise a reasonable doubt about a director’s independence.” Stewart, 845 A.2d at 1050. Only professional or personal friendships that “border on or even exceed familial loyalty and closeness! ] may raise a reasonable doubt whether a director can appropriately consider demand.” Id. (internal quotation marks omitted). The Delaware Supreme Court has instructed that “[n]ot all friendships, or even most of them, rise to this level and the Court cannot make a reasonable inference that a particular friendship does so without specific factual allegations to support such a conclusion.” Id. (internal quotation marks and emphasis omitted). We need not dally long on this allegation: The commonplace business, professional, and personal relationships alleged in this case are not remotely sufficient under Delaware law to disqualify the challenged directors from evaluating demand in an independent manner.

Third, plaintiffs allege that the directors lacked independence because Raines “controlled” a majority of the Board. But the complaint cites no particularized facts to support this charge other than that the Board often approved Raines’s proposed decisions. This does not suffice under Delaware law to demonstrate that Raines so controlled the directors’ decisionmaking as to mean they lacked independence to consider a demand. As the Delaware courts have stated, the “shorthand shibboleth of dominated and controlled directors” is insufficient. Aron-son, 473 A.2d at 816 (internal quotation marks omitted).

In sum, under the standards set forth by Delaware law, the complaint’s allegations do not create a reasonable doubt about the Board’s independence to consider a demand.

* * *

We affirm the District Court’s judgment dismissing the complaint.

So ordered.