What Are Contingent Value Rights – CVR?

Shareholders of a company facing significant restructuring or a company facing a buyout may often receive contingent value rights. These rights ensure that the shareholders get additional benefits if a specific and named event occurs, usually within a specified timeframe. These rights are similar to options because they frequently have an expiration date beyond which the shareholders' rights to further benefits will not apply. CVRs are usually related to a company’s stock and are typically concerned with the price performance of the shares.

Contingent Value Rights – CVR Explained

For example, during an acquisition (the process where one company takes control of most, or all, of another business), shareholders in the acquired business may receive CVRs which allow them to gain additional shares of the acquiring company. Alternatively, they might receive a CVR that provides for a cash payment if the acquired company's share price drops below a certain price. Most often, contingent value rights will have perimeters which must be satisfied, such as that target company’s share price falling beneath a particular value by a predetermined date.

Key Takeaways

  • CVRs are provided to shareholders of a company facing significant restructuring.
  • CVRs ensure that the shareholders receive additional benefits such as options if a specific event occurs.
  • CVRs carry risks of unpredictable events and not reaching the anticipated price.

CVRs as Unsecured Obligations

In many cases, the real 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 particular security at a specified price within a predetermined period.

The New York Stock Exchange (NYSE) Listed Company Manual refers to CVRs as "unsecured obligations of the issuer." An unsecured obligation, also known as unsecured debt, carries no collateral or backing by an underlying asset. Congruent with this, shareholders do not have a guaranteed right that the "reward" will be granted to them when the right has a basis on the price of an individual stock.

So, while they hold an obligation from a company, investors who receive CVRs are more akin to options holders than to, say, bondholders—unlike the latter, they have no guarantee to be paid, and no claim on the company's assets should their payment not materialize.

Also like options, all CVRs have an expiration date. Should the required event or events not happen within the specified contingent period, shareholders holding a CVR in an identified 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, a company's shares may reach the target price within the period, making CVR of no value to the shareholders.

Risks of CVRs

At the time of issuance, the real 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 some unpredictable event.

If contingent value rights are part of a merger or an acquisition (M&A), 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.

Real World Example of CVR

In May 2015, common-stock shareholders of Safeway Inc. received CVRs as a result of the merger of Safeway into a wholly owned subsidiary of Albertsons Companies in late January of that year. They were issued in connection to the sale of Property Development Centers (PDC), Safeway's real estate subsidiary, back in 2014; Safeway's shareholders had been promised CVRs on that deal at the time.

The first distribution of $.017 per CVR occurred in May 2017. Nearly a year later, In April 2018, Albertsons made its final distribution of $0.00268 cash per CVR related to the sale of the PDC assets.

The former shareholders of Safeway stock reaped another payout from their CVRs, this one based on the sale of Safeway's stake in a Mexican retailer, Casa Ley. They did better on this deal, receiving $.93 per CVR in February 2018.

In short, CVRs allowed Safeway's stockholders to share in the proceeds from the selloff of the assets of their old company.