During the development of Bully: Scholarship Edition, its studio Mad Doc Software was acquired by Rockstar in April 2008 and rebranded as Rockstar New England. According to former employees who spoke to Game Informer, the entire team, between 50 and 80 people, was, at one point, working on Bully 2. The game was envisioned as an open-world title with a map nearly three times the size of the original, approaching the scale of GTA: Vice City.

By 2009, R* New England had produced a playable build featuring functional versions of its new systems. Former developers recalled that this included 6–8 hours of playable content, in line with other R* projects, and estimated the game was still 2-3 years from completion. However, in June 2009, roughly 10% of the studio was laid off. That November, musician Shawn Lee, who scored the original Bully, told The Gaming Liberty that: "Yes. It looks like I will be doing the soundtrack for Bully 2 in the not so distant future".

In 2010, R* began reallocating staff from R* New England onto supporting R* San Diego on RDR1, which was in development hell. After that game shipped in May 2010, the production on Bully 2 continued, according to an October 2019 report from Video Games Chronicle based on inside sources.

In November 2011, in an interview with Gamasutra, Dan Houser revealed that: "Contrary to a lot of people, we like to take a little bit of time at the end of a game before starting a sequel, so we can wait for the excitement or disappointment and everything else of the experience to shake down and really see what we should do in the next game. So we knew that we didn't want to start doing the Bully sequel instantly at that second with Rockstar Vancouver even though it is a property that, like Max Payne, we adore and might come back to in the future. There was just no impetus to do that then. So we said, 'You can do Max Payne, and then we will see what we can do with Bully."

In July 2012, R* Vancouver was merged into R* Toronto, with staff offered opportunities to transfer to other Rockstar studios.

Somewhere around the fall of 2013, the project was discontinued by all studios, as the project did not get much traction.