What are 'Contingent Value Rights - CVR'?

Contingent value rights are provided to shareholders of a company facing significant restructuring or a company that has been acquired. These rights ensure that the shareholders receive additional benefits if a certain event occurs. These rights are similar to options because they frequently have an expiration date beyond which the shareholders' rights to additional benefits will not apply.

BREAKING DOWN 'Contingent Value Rights - CVR'

For example, an acquired company's shareholders may receive a CVR that allows them to gain additional shares of a target company if that target company’s share price drops below a certain value by a predetermined date. CVRs related to a company’s stock are typically concerned with the price performance of the security.

CVRs as Unsecured Obligations

In many cases, the true value of CVRs depends on a specific stock’s future performance. In certain instances, these rights are similar to options because 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. The New York Stock Exchange Listed Company Manual refers to CVRs as "unsecured obligations." Congruent with this, shareholders are not guaranteed that a right or "reward" will be granted to them when the right is based on the price of a certain stock. In addition, all CVRs have an expiration date. Should the required event or events not occur within the specified contingent period, shareholders holding a CVR in a specified stock receive no additional benefits other than those that the stock itself offers.

Additional Stock Shares

CVRs also benefit shareholders of an acquired  company by offering them the option to gain additional shares of stock in the acquired company as long as the stock has not met the previously established target price during the period set by the CVR. Because stock prices are unpredictable, it may reach the target price within the period, making CVR of no value to the shareholders.

Risk

At the time of issuance, the true value of a CVR is not discernible. The risk that shareholders face remains unknown because the rights are based entirely on the anticipated price of the stock or on some unpredictable event.

If CVRs 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 target company, thus making it easier for the buyer to offer a more attractive price.

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