Contingent Value Rights - CVR

What are 'Contingent Value Rights - CVR'

Contingent Value Rights (CVR) are rights provided to shareholders of a company facing significant restructuring or of a company that has been acquired. These rights ensure that the shareholders receive additional benefits if a certain event occurs. These kinds of rights share similarities with options, as they frequently have an expiration date relating to the times that contingent events must occur.

BREAKING DOWN 'Contingent Value Rights - CVR'

For example, the shareholders of a company that has been acquired may receive a CVR that allows them to gain additional shares of a target company if said target company’s share price drops below a certain value by a predetermined date. Contingent value rights related to a company’s stock generally revolve around the price performance of the security.

Contingent Value Rights as Unsecured Obligations

In many cases, the true value of contingent value rights is dependent upon a specific stock’s future performance. In certain instances, these rights are similar to options in that an investor contractually maintains rights, but is under no obligation to complete a sale of a certain security at a specified price within a predetermined period of time. The New York Stock Exchange Listed Company Manual refers to contingent value rights as "unsecured obligations." Congruent with this, shareholders are not guaranteed that a right, or "reward," will actually be given to them when said right is based on the price of a certain stock. Furthermore, all contingent value rights have a date of expiration. Should the required event or events not occur in the specified contingent period of time, shareholders holding a CVR in a specified stock receive nothing above what the stock itself offers.

Additional Stock Shares

Contingent value rights can also serve to benefit shareholders of a company that has been acquired, by offering them the option to gain additional shares of stock in the acquired company as long as a previously established target price has not been met during the period of time set by the CVR. Because stock prices cannot be predicted with any certainty, the target price may be reached within the given period, at which point the CVR is of no value to the shareholders.

Risk

At the time of issuance, the true values of CVRs is not firmly set. The risk that shareholders face remains unknown because the rights are based entirely on the anticipated price of the stock in the future or on some unpredictable event.

If contingent value rights are part of a merger or an acquisition, a large part of the risk that would affect the acquirer is effectively transferred to the shareholders of the company being acquired, thus making it easier for the buyer to offer a more attractive price.

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