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Frank Aquila and Melissa Sawyer on Contingent Value Rights -- Means to an End: Using CVRs to Bridge Valuation Gaps in Public Company M&A Deals

In this commentary, Frank Aquila and Melissa Sawyer provide an overview of the flexibility of contingent value rights (CVRs), which are being more widely used by innovative M&A dealmakers when the deal price or valuation gap cannot be bridged.
The authors write:
     Setting a deal price is often the toughest issue in any negotiation, sometimes it is the only issue. In far too many deals, that gap cannot be bridged. Innovative dealmakers have long recognized that contingentvalue rights (CVRs) could be the perfect albeit highly structured solution. CVRs are derivative securities or contract rights that pay holders upon the occurrence of specified contingencies. While CVRs have been used in pharmaceutical and biotech M&A deals, they are not used widely in M&A deals. That could be changing because CVRs are an extraordinarily flexible tool that can be structured in an infinite variety of ways to suit the facts and circumstances of a particular transaction.

     Although the financial, tax, legal and other aspects of CVRs can add complexity to a deal, those issues are far from insurmountable. This article suggests that CVRs should become a regular component of an M&A lawyer's arsenal and highlights certain technical considerations associated with using CVRs. First, this article describes a number of potential ways in which CVRs can be used in M&A deals. Second, this article describes certain of the key characteristics of CVRs that factor into their design.
     There is a lot of untapped potential for the use of CVRs in M&A deals outside of the biotech and pharmaceutical industries. For the most part, CVRs could be especially useful in connection with acquisitions of companies that are distressed due to liquidity issues but that otherwise believe they have profit potential. As suggested, CVRs can be complex and do present numerous thorny issues that the parties and their advisors will need to address at the outset of the deal. This is a great opportunity for financial advisors and legal counsel to work together to structure "pareto optimal" solutions to valuation gaps in public company deals. With a little creativity, CVRs can be invaluable tools in bridging the value gap in M&A deals.
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