# What Are Contingent Value Rights (CVRs)? Meaning, Types, and Risks

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> **Definition**
>
> Contingent value rights are rights granted to shareholders of a company facing restructuring or a buyout.

## What Is a Contingent Value Right (CVR)?

Contingent Value Rights (CVRs) are contractual agreements granted to shareholders during mergers, [restructurings](https://www.investopedia.com/terms/r/restructuring.asp), or [buyouts](https://www.investopedia.com/terms/b/buyout.asp). They offer potential compensation if future events, such as regulatory approval or performance milestones, are achieved within a specified timeline. CVRs help bridge [valuation](https://www.investopedia.com/terms/v/valuation.asp) gaps between acquiring and target companies, ensuring shareholders can receive additional benefits if the acquired company hits agreed-upon targets.

### Key Takeaways

*   Contingent Value Rights (CVRs) are financial instruments offered to target company shareholders during mergers or acquisitions to provide additional compensation if certain future milestones are achieved.
*   CVRs are often used to address valuation differences between acquiring and target companies, with payouts contingent on specific events like regulatory approval or performance achievements.
*   These rights are usually non-transferable, meaning they are only given to existing shareholders, but some can be traded on public exchanges.
*   Like options, CVRs have expiration dates and are considered unsecured obligations, meaning there is no guarantee of a payout.
*   CVRs carry risks as their value is uncertain at issuance and relies on future occurrences, potentially leaving shareholders with no compensation if the conditions are not met.

## How Contingent Value Rights (CVRs) Function in Mergers and Acquisitions  

A contingent value right is tied to a theorized future event, such as an acquisition. CVRs are created when the two companies in an [acquisition](https://www.investopedia.com/terms/a/acquisition.asp) come to different conclusions about the value of the [target](https://www.investopedia.com/terms/t/targetfirm.asp). The acquirer may feel that the current value of the target is limited by the potential for a higher value. The target, on the other hand, may value itself higher for any number of reasons, including a new product or technology.

CVRs bridge valuation gaps between companies. Acquirers pay less initially, and if the target company meets future performance goals, its shareholders receive extra benefits.

> **Important**
>
> CVR benefits are only given if the triggering event occurs within the set time frame. If not, the CVR expires worthless.

These benefits give shareholders additional shares of the acquiring company, or they may provide a cash payment. This is often linked to the acquired company's [share price](https://www.investopedia.com/ask/answers/07/secondary_offering.asp) dropping below a certain price by a predetermined date.

Shareholders might get extra shares of the acquiring company or a cash payment. This is often linked to the acquired company's [share price](https://www.investopedia.com/ask/answers/07/secondary_offering.asp) dropping below a certain threshold by a set date.  

CVRs come with some risks. Their real value isn't clear upon issuance, which poses unknown risks tied to the stock's expected price or unforeseen events. When CVRs are issued, a portion of the acquirer's risk is transferred to the target company's shareholders. This could have an adverse effect on any existing shareholders, depending on the price paid to acquire the company.

## Different Types of Contingent Value Rights (CVRs) Explained  

There are two ways that a contingent value right may be offered. They may be traded on a [stock exchange](https://www.investopedia.com/terms/s/stockmarket.asp) or may be non-transferable.

### Stock Exchange Traded CVRs

CVRs that trade on a stock exchange can be bought by anyone, which means they do not have to be current shareholders of the acquired company. An [investor](https://www.investopedia.com/terms/i/investor.asp) can buy a CVR on an exchange up until it expires.

### Non-Transferable CVRs

Non-transferable CVRs, on the other hand, apply only to current shareholders of the acquired company and are distributed at the time of the [merger](https://www.investopedia.com/terms/m/merger.asp). Companies prefer non-transferable CVRs as transferable CVRs listed on an exchange require regulatory work and incur higher costs.

## Understanding CVRs As Unsecured Obligations

The [New York Stock Exchange (NYSE)](https://www.investopedia.com/terms/n/nyse.asp) Listed Company Manual refers to CVRs as "unsecured obligations of the issuer." An unsecured obligation, also known as [unsecured debt](https://www.investopedia.com/terms/u/unsecureddebt.asp), carries no collateral or backing by an underlying asset. Shareholders do not have a guaranteed right that the reward will be granted to them.

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

Just like options, all CVRs have an expiration date. No additional benefit is paid to the shareholder other than the stock itself if the CVR expires.

## Real-World Example: CVRs in the AstraZeneca-CinCor Merger

In February 2023, the pharmaceutical company AstraZeneca purchased the pharmaceutical company CinCor. As part of the deal, shareholders of CinCor received non-tradeable contingent value rights, which are payable when the regulatory submission of a baxdrostat product is submitted by a specified time. The value of the CVRs is $1.8 billion.

## When Are Contingent Value Rights Used?

CVRs are issued at the time that one company acquires another. It represents the difference in the two companies' valuation of the target and provides a benefit to its shareholders. These investors receive the benefit when the acquired company achieves a certain performance achievement.

## Are Contingent Value Rights Guaranteed?

Contingent value rights are not guaranteed. The acquired company must meet certain performance metrics and/or targets for shareholders to receive the benefit. If the CVR expires before this happens, no benefit is granted.

## How Can a Shareholder Profit From Contingent Value Rights?

To profit from a CVR, investors must hold stock in the acquired company before it is delisted from the stock exchange. Companies tend to prefer non-transferable CVRs because it doesn't require listing the shares on an exchange. This costs less money and regulatory hurdles.

## The Bottom Line

Contingent Value Rights (CVRs) are contractual rights offered during mergers or acquisitions that provide target company shareholders with a potential future payout if specific milestones are met, such as regulatory approvals or performance targets. They serve to bridge valuation gaps between acquirers and targets.

However, CVRs carry inherent risks, as their value depends on uncertain future events, and they are typically unsecured obligations with no guarantee of payout. Investors should consider CVRs as speculative tools and understand that they may expire worthless if milestones are not achieved within the set timeframe.

> **Article Sources**
>
> 1.  NYSE. "[703.18 Contingent Value Rights](https://www.sec.gov/files/rules/sro/nyse/2019/34-85812-ex5.pdf)," Page 1.
>     
> 2.  AstraZeneca. "[Acquisition of CinCor Pharma Complete](https://www.astrazeneca.com/media-centre/press-releases/2023/astrazeneca-acquires-cincor-for-cardiorenal-asset.html)."