Contingent value rights

In corporate finance, Contingent Value Rights (CVR) are rights granted by an acquirer to a company’s shareholders,^[1][2] facilitating the transaction where some uncertainty is inherent. CVRs may be separately tradeable securities;^[3] they are occasionally acquired (or shorted) by specialized hedge funds.^[4]

These rights typically take either of two forms:^[5] (1) Event-driven CVRs compensate the owners for yet to eventuate positive developments in their business - hence protecting the acquirer against the valuation risk inherent in overpaying. (2) Price-protection CVRs are granted when payment is share based - protecting the acquired company, by providing a hedge against downside price risk in the acquirer's equity.^[6]

In the first case, CVRs are granted^[3] in scenarios in which the acquiring company does not wish to pay for a product that might not work, has a limited market, or might need significant investment;

In the second case, protection against price risk is facilitated by specifying that payment will be made at an averaged, as opposed to final, share price; a floor may also be set.^[7]

Under both, the CVR is in function, a form of option.^[8]

The first case: analogous to a call option, the payout to the CVR holder will be triggered by the event occurring, and will be zero otherwise. To determine the value of these rights, analysts will apply a modified option pricing model based on the probability of the event, the time horizon specified, and the corresponding payout rules; see Contingent claim valuation, Real options valuation, and Mergers and acquisitions § Business valuation.^[9]

The second: the CVR takes the form of a modified Asian option.^[6]

• Strip financing
• Hold-up problem
• Earnout

• CVR on Investopedia
• CVR on Motley Fool
• Shadowy Shares: The Dark Side of Contingent Value Rights, Forbes.com (Michael Stocker, Iona Evan. 2011)

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