Case Study: Sale of a Nonprofit
| Citado como | Vol. 50 No. 2 Pg. 0080 |
| Páginas | 0080 |
| Año de Publicación | 2009 |
2009 Fall, Pg. 80. Case Study: Sale of a Nonprofit
Volume 50, No. 2
Fall 2009
Editor's note: This article was reviewed by an editorial board member but not by the Issue Editor.
INTRODUCTION
After nearly five years of substantial economic growth, the engine of American prosperity started to sputter in 2006. During that fateful year, as housing values leveled(fn 2 ) and interest rates rose from their historic lows,(fn 3 ) defaults on adjustable-rate mortgages by subprime borrowers began to escalate at a feverish pace. By 2008, the disastrous marriage of these subprime loans to mortgage-backed securities was threatening even the most established financial firms. As the year progressed, with the collapse of such institutional giants as Lehman Brothers and the failure of Fannie Mae and Freddie Mac, the seemingly unceasing string of bad news only appeared to be escalating. Indeed, the speed and severity with which things appeared to be falling apart led legendary investor Warren Buffet to describe the turmoil as "an economic Pearl Harbor."(fn 4 )
For countless small, non-profit educational institutions, however, troubled times began well before the subprime mortgage crisis took its grip. Confronted with an increasingly competitive market, these unfortunate trendsetters have been toiling under distressed fiscal circumstances for more than a decade. As a result, for many of these organizations, the credit crunch that has attended the current market turmoil has been not the first, but rather the final, fatal blow in a long, hard-fought battle for solvency. With little hope of survival, these institutions are left with little choice but to dissolve, merge with another non-profit entity, or be acquired by a for-profit company.
To an increasing extent, the latter of these three alternatives has proven to be the only feasible option. To be sure, from the acquisition of Franciscan University in Iowa by the for-profit company Bridgepoint Education in 2005,(fn 5 ) to the more recent purchase of Myers University in Ohio by the for-profit investment firm Significant Partners in 2008,(fn 6 )these for-profit acquisitions are gradually becoming a staple of modern business in the education realm. But despite their increased prevalence, these transactions continue to raise interesting, and often unsettled legal questions as they result in an uncommon interaction between the non-profit and for-profit worlds.
In an effort to illuminate some of these considerations, this article explores the recently completed sale of substantially all of the assets of Daniel Webster College ("DWC") to the for-profit corporation DWC Acquisition Corp., a wholly-owned subsidiary of ITT Educational Services, Inc. (collectively, "ITT").(fn 7 ) Although not exhaustive in its discussion, the article will highlight for practitioners some of the larger issues that can arise when representing a non-profit seeking rescue from financial distress through a transaction of this nature.
DANIEL WEBSTER COLLEGE'S DEEPENING WOES
With a full-time enrollment of less than one thousand students,(fn 8 )DWC is a small college located on a fifty-acre campus to the south of Boire Field municipal airport in Nashua, New Hampshire.(fn 9 )Founded in 1965 as the "New England Aeronautical Institute," DWC was initially established as a non-profit technical school devoted to workforce training in the fields "of aeronautics and aerospace."(fn 10 )However, by an act of the Legislature in 1973, DWC was granted the authority to offer programs outside the field of aeronautics in the areas of arts and sciences.(fn 11 ) Since adopting the name "Daniel Webster College" in 1978,(fn 12 ) DWC has further expanded its curriculum to include degree programs at the bachelors' and masters' level, and offering courses in business, social science, computer science, and engineering.
Like many of its contemporaries, DWC had been struggling financially well before the global economic collapse in 2008. Indeed, with crushing debt and unstable enrollment, DWC had been suffering from operating losses since at least the turn of this century.(fn 13 ) In the 2004 fiscal year, for example, it received $12,864,442 in net tuition and fees, but had operating expenses totaling $18,634,484. Even taking into account other sources of revenue, including contributions and gains on long-term investments, DWC incurred a year-over-year decrease in net assets of over $ 150,000. This budgetary shortfall was not only jeopardizing DWC's viability, but was also stymieing the Board's ability to engage in the type of innovation and enrichment of programs and amenities that might bring in additional revenue through increased enrollment.
This was the financial predicament that Robert E. Myers inherited on July 1, 2005, when he was hired by the Board of Directors (the "Board") to serve as DWC's new president. Despite these fiscal obstacles, President Myers assumed his position determined to return the institution to solvency. To that end, within months of starting his tenure, President Myers set forth a proposed course of action for revitalizing DWC in a letter to the Board entitled "A Vision for 2015 and Beyond" ("Vision 2015"). While conceding in that letter that DWC was "financially fragile" and suffered from a "culture of poverty," President Myers expressed his belief that DWC could become one of "the top ten small colleges in the nation that have mastered the balance of developing today's workforce and preparing tomorrow's workforce for careers in aviation, business, engineering, and information technology."(fn 14 ) To achieve this transformational change, he noted DWC would need, among other things, to add new programs to its academic inventory, review and retool existing programs, and bolster DWC's modest endowment.(fn 15 ) On October 22, 2005, the Board adopted President Myers' Vision 2015 plan.
FUNDAMENTAL CHANGE IS NEEDED
DWC's management struggled mightily to achieve the goals set forth in Vision 2015, but progress was hobbled by the lack of financial resources. To be sure, following the Board's adoption of Vision 2015, DWC incurred operating losses in both 2005 and 2006.
This ongoing fiscal predicament became a cause for concern for the United States Department of Education (the "USDOE"). On April 10, 2006, DWC received written notice from the USDOE that it was at risk of losing its ability to participate in the federal student financial assistance programs (the "Federal Aid Programs")(fn 16 ) offered under Title IV of the Higher Education Act of 1965 (the "HEA").(fn 17 )Under the HEA, an educational institution must demonstrate that it can "meet all of its financial obligations" in order to participate in any Federal Aid Program.(fn 18 ) In its letter, the USDOE explained that DWC failed to meet this criteria and, as a result, would only be permitted to continue to participate in the Federal Aid Programs on a provisional basis if, among other things, it maintained a letter of credit in excess of $700,000.(fn 19 ) However, apart from the fact that this provisional form of participation could be revoked at any time if the USDOE determined that DWC could not "meet its responsibilities under its program participation agreement,"(fn 20 ) it would also automatically lapse on June 30, 2009,(fn 21 ) with no guarantees that DWC would be re-approved. Given that DWC received approximately 35 percent of its gross annual revenue (or approximately 51 percent of net annual revenue) through federal aid, loss of this funding would be fatal.
To make matters worse, DWC's financial frailty also caused the college's accrediting body, the New England Association of Schools and Colleges ("NEASC"), to issue a formal "Notice of Concern" in the spring of 2006. NEASC issues such notices when it "determines that an institution is in danger of being found not to meet one or more Standards of Accreditation if current circumstances or trends continue."(fn 22 ) In DWC's case, NEASC explained that the college was in danger of failing to meet the NEASC "standards on Financial Resources" because of DWC's: (1) heavy dependence on tuition; (2) mixed financial results, especially with regard to unrestricted assets; (3) thin or weak operating margin; (4) high level of debt; and (5) low cash reserves. Accordingly, NEASC required DWC to undergo a "focused evaluation" - which is a form of assessment involving a team of academics visiting a college's campus and assessing it progress towards addressing the issues raised in a Notice of Concern(fn 2 )- by the end of 2008. When that focused evaluation was complete! in 2008, the visiting team of academics reported that DWC had expe rienced "no significant improvement in financial stability" and wa now operating "on a year-to-year or perhaps semester-to-semeste basis."(fn 24 ) As a result, they concluded that "a dark cloud of uncertaii financial viability continues to hover over the [c] ollege: a challeng which must be resolved."(fn 25 ) In light of the fact that accreditation i necessary for an institution to grant degrees,(fn 26 ) if DWC had failed t
Though hobbled by the potential loss of its accreditation an its ability to participate in federal aid programs , DWC managed t struggle through 2008. However, it suffered a year-over-year decreasi in its net assets of $316,235, and was projecting an operating los in excess of $700,000 for the upcoming fiscal year. Faced with th stark reality that DWC was teetering on the brink of insolvency the Board came to the unanimous conclusion that a fundamenta change would be necessary in order to insure the survival of th institution.
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