A contingent value right (CVR) is a type of instrument or arrangement that creates an obligation on a purchaser to pay a seller additional consideration on the occurrence of a pre-agreed future event – the instrument can be structured as tradeable or non-tradeable.
Unlike in private mergers and acquisition (M&A) deals where there are generally readily available and accepted market standard tools to determine and structure an acquisition price such as completion accounts and the locked box mechanism, among others, parties to a public M&A deal often must rely on a business valuation. In this scenario, the appropriate valuation method is often contentious – thus resulting in a fundamental disconnect between purchasers and sellers.
Due to this and other hurdles customary to transactions of such nature, parties can find it difficult to agree on valuation, often culminating in the collapse of what could otherwise have been a successful deal. With a CVR, you can buy now, and potentially pay (at least a portion of the purchase price) later, with both parties participating in the upside. Although debatable, partly because of the potential lucrativeness of the deal to both parties if the contingency does fall away, neither is likely to find itself worse off.
For the seller, the entitlement to a top up of the purchase price already received arises, and for the purchaser, fulfilment of commercial or regulatory milestones. A notable example is Johnson & Johnson's (J&J) recent acquisition.
On 1 November 2022, the pharmaceutical giant, J&J, announced a deal to acquire Abiomed (ABMD), a medical device company focused on circulatory support and oxygenation for a total acquisition price of about USD 16,6 billion. According to the terms of the merger agreement, J&J would acquire each ABMD share for an upfront cash payment of USD 380 (a 50.7% premium over ABM's closing price of USD 252.08). Additionally, ABMD shareholders would receive a non-tradeable CVR entitling each holder to receive up to USD 35 more per share, contingent upon the achievement of several clinical and commercial milestones consisting of:
- USD 17.50 per share, payable if net sales reach or exceed certain predetermined thresholds by the second quarter of 2027 through to the first quarter of 2028;
- USD 7.50 per share payable upon Food and Drug Administration (FDA) premarket application approval of the use of certain products in development by 1 January 2028; and
- USD 10.00 per share payable upon the first publication of a recommendation for the use of certain products in development by no later than 31 December 2029.
While the acquisition has been completed, it will be interesting to track developments (insofar as the CVR is concerned) over the coming years, especially as the first milestone is earmarked to be fulfilled in less than the next three years.
The J&J-ABDM deal is an example of an event-driven CRV.
In an upcoming article, we will explore the efficacy of using CRVs in public M&A deals.
