2U's Bankruptcy Bonanza: Executives Pocket Millions in Bonuses

Last month, 2U declared bankruptcy. The company was once ascendant among online program managers, or OPMs, companies that design and market virtual curricula for colleges while pocketing a significant share of tuition revenue. But enrollment in its programs plummeted for years, spurring the bankruptcy deal that still requires court approval.

2U was aware of its continued financial decline. As early February, the company warned in U.S. Securities and Exchange Commission filings that it may not be able to stay afloat.

Yet in March, amid financial freefall, the company approved nearly $5 million in bonuses for a few top executives, including $2.3 million for 2U’s Chief Executive Officer Paul Lalljie, according to an SEC document.

That same month, 2U had reiterated in SEC filings it might not remain solvent.

Its decision to hand out hefty bonuses shortly before entering bankruptcy reflects a well-worn corporate playbook, one so common it even spurred Congress to pass a law restricting such practices.

And 2U almost certainly knew bankruptcy was looming when it promised those bonuses, considering how quickly the company moved from disclosing the payments to restructuring its finances, according to legal experts.

This move suggests the company's true priorities: funneling millions into the pockets of its executives.

2U has promised bankruptcy won’t disrupt services for students and colleges. But tens of thousands of students remain enrolled in 2U programs with no federal protections in place if the company collapses and colleges can't sustain OPM-created degrees and bootcamps on their own.

The bankruptcy reveals a troubling contrast — while 2U and its creditors can reorganize and restart, students, including some burdened with debt from its programs, may get no such chance.

Decades ago, financially ailing companies often asked bankruptcy courts to sign off on retention bonuses. The companies argued that key employees were at risk of fleeing during bankruptcy for other business ventures and they needed incentive to stay, said David Farrell, partner and bankruptcy specialist at the law firm partner Thompson Coburn.

Farrell said eventually retention bonuses became the norm in Chapter 11 bankruptcy, the kind 2U is pursuing, which allows companies to continue operating while they reorganize their finances.

But companies might just end up liquidating entirely, with top brass securing their payouts but rank-and-file workers losing their jobs, Farrell said.

One case that drew attention to retention bonuses was Polaroid’s bankruptcy in 2001, in which it pledged millions of dollars to 45 high-ranking executives.

After a bankruptcy court approved Polaroid’s retention bonuses and the overall deal, executives sold off assets to an investment fund, which left “many of the company’s employees and retirees with little recourse or recovery,” according to a Thompson Coburn summary of the incident.

Polaroid’s tactics drew the attention of the late Senator Edward Kennedy, a Massachusetts Democrat, who helped push through a rewrite of the federal bankruptcy code in 2005. The legislation essentially eliminated any possibility of locking in retention bonuses after a company entered bankruptcy, said Gregory Germain, a Syracuse University law professor.

Courts can approve such bonuses only under narrow circumstances, such as if executives already had a competing job offer. By that point, they were probably "already out the door," Farrell said.

To dodge these restrictions, companies started rebranding retention bonuses as “incentive” benefits — or, like 2U, they simply issue retention payments before filing for bankruptcy.

“We can pretty safely conclude that at the time 2U’s retention bonuses were granted, the thought of restructuring was well along the way,” Farrell said.

Overall, 2U’s bankruptcy deal seems designed to just benefit top executives and key creditors, according to Farrell and Germain.

Under the arrangement, 2U will pay the retention bonuses in installments through January 2025. In addition to the CEO’s bonus, Matthew Norden, 2U’s chief financial officer and chief legal officer, will receive about $1.2 million, while two other officials, Andrew Hermalyn and Aaron McCullough, will each get $726,000.

That’s on top of other recent employee expenses — 2U is paying its former CEO, Christopher Paucek, a $20,000 consulting fee monthly through April 2025. 2U also recently added a member to its board of directors, and will pay her $30,000 a month, according to an SEC filing.

The only caveat with the retention bonuses is that the executives can’t leave or be fired for cause before the end of June 2025.

Creditors would likely be the ones to challenge the bonuses — but they probably wouldn’t, Germain said.

For one, 2U probably sought creditors’ buy-in to the bankruptcy deal before announcing it, he said. The restructuring will see noteholders convert their loans into equity and become 2U’s primary owners. Stock market shareholders are “completely out of luck,” Germain said, as the bankruptcy package eliminates their equity entirely.

If creditors did try to recover the bonuses, they’d need to prove the payouts were worth more than what 2U received in return, which is a tough case to make.

Congress has limited power to intervene, unless it rewrites the federal bankruptcy code again.

Some lawmakers have proposed bills to block executives earning $250,000 or more from taking bankruptcy bonuses, but nothing has passed.

But Congress can still exercise oversight by investigating the predatory practices of 2U and other OPMs.

OPMs have thrived by exploiting a loophole in federal law.

The Higher Education Act prohibits “incentive compensation” for securing student enrollment or financial aid, with just one exception: recruiting international students. Admissions recruiters can’t earn bonuses for boosting enrollment because it shifts the focus from student welfare to profit, pressuring them into programs they may not be suited for.

However, federal guidance issued in 2011 allows OPMS to bypass the ban if they offer colleges additional services beyond recruitment, such as marketing or course design.

This “bundled services” exception enables colleges to pay OPMs based on student recruitment through tuition share agreements. These agreements can be problematic, as OPMs often take a large cut of tuition, sometimes over 50%, leading institutions to raise prices and leaving students with bigger loan debts. At the same time, OPMs focus their spending on marketing and recruitment over student support and instruction.

The U.S. Department of Education can end the incentive compensation exception and Congress then can help reign in the OPM industry — which, as 2U’s bonuses has proven, seems to care more about their own pay than ensuring students can earn a quality education.