Comments are welcome on the design or content of this material. Among other requirements, the former Target shareholders must be entitled to exercise any voting rights of the escrowed Acquiring stock and to receive any dividends declared on that stock and the amount of stock issued into escrow cannot exceed the amount of stock issued outright. The former Target shareholders recognize gain or loss if escrowed Acquiring stock is used to satisfy a liability, as if escrowed shares had been sold at that time for their fair market value, if the number of Acquiring shares used is determined by the stock's then fair market value. No gain or loss is recognized if the number of Acquiring shares is determined based upon their fair market value at the time of the original acquisition. The maximum amount of contingent stock which could be issued can be no greater than the amount of stock issued outright in the merger, plus the amount of any escrowed stock.
Contingent stock is treated as issued only when the right to receive it matures.
Therefore, the receipt of contingent stock is considered receipt of a deferred payment and a portion of the stock is not received tax-free, but is recharacterized as interest income under the imputed interest or original issue discount rules.