What Are Contingent Value Rights?

Alex Newth

Contingent value rights (CVRs) are given by certain companies to protect shareholders and to try to coax them into buying shares without fear. These contingent value rights typically are given by recently acquired businesses that are drastically changing their business practices, or businesses that are going through such a change without the recent acquisition. When CVRs are given out, they protect shareholders if the business fails to perform above a certain threshold. If this occurs, then shareholders usually receive money or additional shares to compensate them for any losses. CVRs expire so, if the business performs above its limit by the expiration date, then the rights are forfeited.

Man climbing a rope
Man climbing a rope

Most businesses do not offer contingent value rights, because they are considered stable or because they are not changing around their policies, employees and other factors integral to doing business. The most common type of business that gives out these rights is a recently acquired company, with the second most common being a business that is changing around its business procedures because of new management, new policies or a variety of other reasons. These changes can be seen as risk factors, so CVRs are given out to show shareholders that, even if the company does not do as well as promised, the shareholders still can make a profit from the benefits.

When a business gives out contingent value rights, it tells shareholders exactly how much they can expect. For example, the business may say each share will be valued at $50 US Dollars (USD). If the value drops below that point, shareholders will be compensated based on how low the real share value is.

There are two different ways in which shareholders will be compensated when contingent value rights are active. One compensation method with CVR is giving shareholders the difference between the stated value and the real value in money, and the other is giving them shares equivalent to the loss. To ensure that the company can pay this, it must set aside money that will only be used in this event.

Contingent value rights are not active indefinitely but are given an expiration date when the CVR is first stated. For example, the company will say that, by the beginning of December, each share will be valued at $50 USD. Even if the share value is lower than this limit the day after the expiration date, the CVR will have expired and shareholders will not be compensated.

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