United States District Court, S.D. California
IN RE BRIDGEPOINT EDUCATION, INC. SHAREHOLDER DERIVATIVE LITIGATION
ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS
JEFFREY T. MILLER, District Judge.
This is a shareholders' derivative suit brought on behalf of nominal Defendant Bridgepoint Education, Inc. ("Bridgepoint") against the members of Bridgepoint's Board of Directors (the "Board") Defendants Andrew S. Clark, Ryan Craig, Dale Crandall, Marye Anne Fox, Patrick T. Hackett, Robert Hartman, and Adarsh Sarma ("Individual Defendants"), and Bridgepoint's controlling stockholder, Warburg Pincus Private Equity VIII, L.P. ("WP VIII") and its affiliates Warburg Pincus & Co., Warburg Pincus LLC, and Warburg Pincus Partners LLC (collectively, "Warburg"). Defendants Bridgepoint, Clark, Craig, Crandall, Fox, and Hartman filed a motion to dismiss Plaintiffs' complaint for failure to first demand action from the corporation's directors prior to bringing a derivative action under Federal Rule of Civil Procedure ("Rule") 23.1(b)(3) and for failure to state a claim under Rule12(b)(6). (Dkt. No. 13). Defendants Warburg, Hackett, and Sarma filed a notice of joinder in the other Defendants' motion to dismiss, (Dkt. No. 14), as well as their own motion to dismiss the complaint under Rule 23.1(b)(3) and Rule 12(b)(6), (Dkt. No. 15). The motions have been fully briefed by both sides, and the court finds this matter suitable for resolution on the papers without oral argument pursuant to Civil Local Rule 7.1.d.1. For the reasons set forth below, the motions to dismiss are GRANTED WITH LEAVE TO AMEND.
I. The Parties
Plaintiffs currently own shares of Bridgepoint common stock, have owned such shares at the time of the events relevant to this action, and will continue to own Bridgepoint common stock throughout this litigation.
Defendant Bridgepoint is a provider of postsecondary education services. It operates two institutions, Ashford University ("Ashford") and University of the Rockies (collectively, the "Institutions"). The Institutions deliver programs primarily online, as well as at their traditional campuses. In total, 81, 810 total students were enrolled at the Institutions as of December 31, 2012. The majority of the students at these Institutions attend via accessible online platforms.
Defendant Warburg Pincus Private Equity VIII, L.P. ("WP VIII") is a majority stockholder of Bridgepoint and is managed by Defendant Warburg Pincus LLC. Defendant Warburg Pincus & Co. is the managing member of Defendant Warburg Pincus Partners LLC, which is the sole general partner of WP VIII. As previously noted, these Defendants will be referred to collectively as "Warburg." Warburg is a global private equity firm with offices in the United States, Europe, Brazil, China and India. Warburg has been a private equity investor since 1966 and currently has approximately $35 billion in assets under management and investments in a wide range of sectors.
Individual Defendants Clark, Craig, Crandall, Fox, Hackett, Hartman, and Sarma served as directors of Bridgepoint during the events relevant to this action. In addition to serving on Bridgepoint's Board, Individual Defendants Hackett and Sarma are also Warburg employees.
II. Factual Allegations
Bridgepoint was founded in early 2004 by defendant Clark with an initial $20 million investment from Warburg. Warburg's investment was the only outside money that was ever put into Bridgepoint. In 2009, Bridgepoint became publicly traded. In total, 13, 500, 000 shares of Bridgepoint common stock were sold in the initial public offering ("IPO"), with Warburg selling 9, 095, 297 shares. After the sale, Warburg retained 34, 589, 220 shares of Bridgepoint common stock following the IPO and remained Bridgepoint's majority shareholder. Warburg continued to own these shares as of November 13, 2013, comprising 63.4% of Bridgepoint's outstanding common stock.
In the past 6 years, Bridgepoint has realized significant growth, increasing its enrollment from 12, 623 students as of December 31, 2007 to 81, 810 students as of December 31, 2012, an increase of 548%. As it grew, Bridgepoint expressed concern at various times during this period that its growth might "place a strain on [its] resources" and that "failure to obtain additional capital in the future could adversely affect [its] ability to grow." In light of these concerns, Bridgepoint indicated that it "[did] not expect to pay dividends on shares of [its] common stock in the foreseeable future and [it] intend[ed] to use [its] cash position to grow [its] business. Consequently, [stockholders'] only opportunity to achieve a positive return on [their] investment in [Bridgepoint] [would] be if the market price of [Bridgepoint's] common stock appreciates."
In 2009, both of Bridgepoint's Institutions were accredited by the Higher Learning Commission of the North Central Association of Colleges and Schools ("HLC"). In order to derive revenue from federal student aid programs ("Title IV Programs") administered by the United States Department of Education ("DoE"), the Institutions must maintain their accreditation. Shortly after Bridgepoint acquired Ashford, it began an aggressive marketing campaign to increase enrollment, which eventually grew to 84, 713 students. These students were increasingly located in San Diego, California, which was outside the HLC's jurisdiction and endangered Ashford's accreditation when the HLC adopted a policy in 2010 that required institutions to demonstrate a "substantial presence" in the HLC's region.
This prompted Bridgepoint to seek to obtain accreditation from the Western Association of Schools and Colleges ("WASC") in August 2010. During the accreditation process, WASC indicated to Bridgepoint that there were issues that needed to be addressed in order to obtain WASC accreditation, including (a) inadequate student retention and completion, (b) insufficient student progress tracking, (c) an insufficient core of full-time faculty members, and (d) lack of an empowered and independent governing board.
Warburg Registers Bridgepoint Stock For Sale
With Ashford facing the possibility of losing accreditation and the associated revenue from Title IV Programs, Plaintiffs allege that Warburg sought to exit its position in Bridgepoint in its entirety. On July 22, 2011, Bridgepoint filed with the SEC a preliminary Registration Statement on Form S-3 (the "2011 Registration Statement") to register for sale all 34, 589, 220 shares of Bridgepoint common stock owned by Warburg.
Plaintiffs allege Warburg's exit strategy was strategically timed. By 2011, Warburg had been an investor in Bridgepoint for seven years, a substantial period of time for a private equity investment, particularly given that Warburg had not received a cash distribution since the IPO in 2009. Not only did the public not yet know of Bridgepoint's pending accreditation difficulties when Warburg registered its shares for sale, Bridgepoint's stock price was also trading at its all-time high. After closing at $16.41 per share on April 19, 2011, the stock price surged by more than 85% to close at $30.50 per share on July 22, 2011, the same day the 2011 Registration Statement was filed with the SEC.
However, Plaintiff contends the market reacted unfavorably to Warburg's intended exit from Bridgepoint. On July 25, 2011, the first trading day after the 2011 Registration Statement, Bridgepoint's stock price closed at $27.01 per share, down more than 11% from the previous day's close. On August 3, 2011, Bridgepoint filed with the SEC a prospectus on Form 424B3 (the "2011 Prospectus") pursuant to which Warburg was to sell its 34, 589, 220 shares of Bridgepoint common stock and exit Bridgepoint. The 2011 Prospectus stated that Warburg may offer to sell its Bridgepoint shares through public or private transactions at prevailing market prices, at prices related to prevailing market prices, or at privately negotiated prices. However, by August 8, 2011, Bridgepoint's stock price had deteriorated, closing at $19.87 per share that day, and as low as $16.52 per share on October 3, 2011. As of November 13, 2013, Warburg had not sold any shares of Bridgepoint common stock pursuant to the 2011 Prospectus.
Bridgepoint Stock Prices Fall Following Denial of Accreditation
On July 3, 2012, WASC informed Ashford's president and CEO that WASC would be denying Ashford's accreditation. On July 9, 2012, Bridgepoint disclosed Ashford's lack of accreditation to investors in a Form 8-K (the "July 9 8-K") filed with the SEC before the markets opened. Bridgepoint's stock price declined precipitously following the July 9 8-K. It closed at $21.50 per share on July 6, 2012, the last trading day before the July 9 8-K, and at $14.25 per share on July 9, a one-day drop of 33.7%. On July 10, 2012, the stock price closed at $13.07 per share, and by July 26, 2012, Bridgepoint's stock price fell to $8.40 per share, down more than 60% from its July 6 trading price.
Following the July 9 8-K, Bridgepoint's stock price has never again closed as high as $21.50 per share, its July 6, 2012 closing price. From July 9, 2012 to July 10, 2013, Bridgepoint's stock price closed at an average price of $10.57 per share, 50.8% below the July 6, 2011 close and 65.3% below Bridgepoint's all-time high stock price on July 22, 2011, when Warburg announced its intention to exit its position in Bridgepoint. Thus, even though Warburg's 34, 589, 220 Bridgepoint shares were registered and eligible for sale, Plaintiffs allege Warburg was unable to sell its Bridgepoint shares at a price that provided Warburg with adequate return on its investment.
Bridgepoint Stock Prices Rise Following Ashford's Accreditation
On July 10, 2013, Bridgepoint issued a press release announcing that WASC had granted Ashford initial accreditation for five years. On September 5, 2013, Bridgepoint issued a press release announcing that the HLC had removed sanctions against Ashford because Ashford had successfully established accredited status with WASC. On November 11, 2013, Bridgepoint issued a press release announcing that the DoE had notified Ashford that it had been approved for accreditation with WASC.
Following the initial announcement of Ashford's WASC accreditation, Bridgepoint's stock price began to rise, and Plaintiff asserts Warburg was presented with a renewed opportunity to sell its Bridgepoint stock. Between July 10, 2013 and November 11, 2013, Bridgepoint's stock price rose from $12.61 per share to $16.87 per share, an increase of more than 33%.
Bridgepoint's Board Approves a Self-Tender Offer
Before the markets opened on November 13, 2013, Bridgepoint filed a Form S.C. TO-I (the "Schedule TO") with the SEC to commence a self-tender offer. Pursuant to the Schedule TO, Bridgepoint offered to purchase up to 10, 250, 000 shares of Bridgepoint common stock at a purchase price of $19.50 per share, less applicable withholding taxes and without interest, subject to proration. However, Bridgepoint "expressly reserve[d] the right to purchase additional shares, up to 2% of [Bridgepoint's] outstanding shares (approximately 1, 091, 522, based on 54, 576, 091 shares of [Company] common stock issued and outstanding as of October 31, 2013), without extending the Offer, and could decide to purchase more shares, subject to applicable legal requirements." Thus, in total, Plaintiffs allege Bridgepoint could purchase approximately 11.34 million shares of Bridgepoint common stock in the tender offer, and potentially even more. The tender offer was not conditioned upon any minimum number of shares being tendered and was set to expire on Wednesday, December 11, 2013, at 5:00 p.m. New York City time, unless otherwise extended.
As set forth in the Offer to Purchase filed with the Schedule TO (the "Offer to Purchase"), both Warburg and Bridgepoint's officers and directors were eligible to participate in the tender offer, and the officers and directors were eligible to tender both their shares and vested stock options. Warburg indicated its intent to tender the maximum number of shares it can tender without potentially triggering a change in control of Bridgepoint under applicable regulations and accreditation standards, which Bridgepoint asserts is 8.6 million shares. In addition, Bridgepoint's directors and officers (excluding directors affiliated with Warburg) expected to tender approximately 4.2 million shares of Bridgepoint common stock.
In 2013, Bridgepoint's directors and officers (excluding directors affiliated with Warburg), collectively owned approximately 4.2 million shares of Bridgepoint common stock, including approximately 1.9 million exercisable stock options. Through the tender offer, Plaintiffs allege Bridgepoint's officers and directors (including the Individual Defendants not affiliated with Warburg) intended to tender their entire positions by tendering all of their shares in Bridgepoint, including all their exercisable stock options. Plaintiff alleges, among the directors' and officers' exercisable stock options are options with an exercise price of $17.10, which were "out of the money" immediately prior to the announcement of the tender offer when Bridgepoint stock closed at $16.86 per share, but well "in the money" at the tender offer price of $19.50 per share. Thus, according to the Offer to Purchase, Plaintiffs allege Warburg (Bridgepoint's controlling stockholder) and Bridgepoint's officers and directors collectively intend to tender up to 12.8 million shares, well in excess of the 10.25 million shares announced in the Schedule TO. Assuming Warburg and Bridgepoint's directors and officers sell the number of shares stated in the Offer to Purchase, Plaintiffs allege they would reap proceeds of $249, 600, 000.
According to the Offer to Purchase, the Board created a special committee to review a variety of alternatives for utilizing Bridgepoint's available financial resources with Bridgepoint's management. According to the Offer to Purchase, this review resulted in the ...