A contingent value right is a contractual promise from an acquiring company to pay the target company’s former shareholders additional money later if specific milestones are met after the merger closes. Acquirers use them when the two sides cannot agree on what the target is worth today, usually because a pending drug approval, lawsuit, or revenue target hasn’t resolved. The CVR lets the deal close now and gives you a right to extra compensation if the business hits defined targets under new ownership.
What You Actually Hold
A CVR is an unsecured promise, not an ownership interest. Holding one gives you no voting rights, no dividends, and no equity stake in the acquirer. Your rights begin and end with the CVR agreement, typically filed with the Securities and Exchange Commission as an exhibit to the merger documents. That agreement sets the milestones, the payout amounts, the timeline, and each party’s obligations. You are a creditor of the acquirer, governed by contract law.
That status matters if the acquirer runs into financial trouble. In a Chapter 11 bankruptcy, CVR holders generally rank alongside other general unsecured creditors: behind secured lenders and priority claims, ahead of equity shareholders. The value of your CVR ultimately depends on the acquirer’s financial health and willingness to honor the agreement.
What Triggers a Payment
Every CVR agreement spells out the exact conditions that produce a payout. They generally fall into two categories.
Price-based milestones tie the payment to the acquirer’s stock performance over a defined period. A typical trigger requires the acquirer’s shares to maintain a volume-weighted average price above a set dollar amount for a minimum number of consecutive trading days. If the stock stays below the threshold, the CVR expires worthless. If it clears the hurdle, you receive a predetermined cash or stock payment. These milestones protect you against a post-merger stock decline that would otherwise leave you worse off than the deal’s headline price suggested.
Event-based milestones dominate pharmaceutical and technology deals, where the target’s most valuable asset is still uncertain. Common triggers include FDA approval of a specific drug by a deadline, the business reaching a defined revenue target, or the favorable resolution of pending litigation. The agreement typically specifies the exact metrics, such as particular gross margin percentages, net profit figures, or regulatory submission dates, to minimize disputes about whether the milestone was hit.
Once a milestone is achieved, the acquirer generally must issue payment within 30 to 60 business days, though the exact timeline varies by agreement. Some deals require an independent accountant or a designated stockholder representative to certify the milestone before payment is triggered.
Whether You Can Sell Before Payout
Some CVRs can be traded; most cannot.
Transferable CVRs are registered under the Securities Act of 1933 and listed on a stock exchange with their own ticker symbol. Their market price fluctuates based on investors’ assessment of how likely the milestone is to be reached. If you don’t want to wait, you can sell on the open market, though almost always at a discount to the full payout value, because the buyer is absorbing the risk that the milestone never happens.
Non-transferable CVRs are private contracts that stay with the original shareholder who received them in the merger. You cannot sell, gift, or trade them. This structure is more common, especially in smaller deals, because it avoids the cost and complexity of SEC registration. The tradeoff is that you’re locked in until the milestone either hits or the agreement expires. That wait typically runs one to three years, and shareholders tend to discount the value of these instruments significantly because of the illiquidity and uncertainty.
How Hard the Acquirer Has to Try
Most CVR agreements require the acquirer to use “commercially reasonable efforts” to achieve the milestones. This language is one of the most heavily negotiated provisions in the agreement because it determines how hard the acquirer actually has to try. The standard generally means the acquirer must pursue the milestone with the same level of effort a similarly situated company would use for its own products or business objectives. The acquirer keeps control over business decisions, but it cannot simply shelve a drug candidate or abandon a revenue target without consequences.
Enforcement runs through a stockholder representative, an individual or entity appointed in the agreement to act for all holders. The representative, not individual holders, has authority to initiate legal action against the acquirer for breach. You generally cannot sue on your own; the representative acts at the direction of a specified threshold of holders, often a majority by interest.
Many agreements also give the representative the right to audit the acquirer’s financial records to verify milestones and payment calculations. These audits are typically limited to once per year, require advance notice (often 45 days), and must be conducted by an independent accounting firm acceptable to both sides. The acquirer can redact information unrelated to the milestone calculations, and anyone accessing the records must sign a confidentiality agreement.
How CVR Payments Are Taxed
Tax treatment hinges on whether the IRS treats the merger as a “closed” or “open” transaction. The distinction turns on a single question: can the CVR’s fair market value be reasonably estimated on the day the deal closes?
Closed Transaction Treatment
In most deals, the IRS treats the transaction as closed. The CVR’s fair market value is determined at the time of the merger and included in your total sale proceeds, even though you haven’t received any cash from it yet. You owe capital gains tax on that amount in the year the deal closes. If the CVR later pays more than the value assigned at closing, the excess is an additional capital gain. If it pays less, or nothing at all, you may be able to claim a capital loss. The IRS generally prefers this approach because it accelerates tax collection rather than leaving the government waiting for a contingency to resolve.
Open Transaction Treatment
Open transaction treatment is rare and applies only when the CVR’s value is so speculative that assigning a fair market value at closing would be unreasonable. Here, you defer recognizing gain until you actually receive payments or the CVR expires. The IRS scrutinizes open transaction claims closely and rejects most of them.
When open transaction treatment isn’t permitted but the selling price stays contingent, the installment method under Section 453 of the tax code often applies by default. You spread your basis recovery across the payments you receive over time. If the agreement specifies a maximum total payout, the IRS treats that maximum as the selling price and allocates your basis proportionally across expected payments. If there is no stated maximum but the payment period is fixed, your basis is spread evenly across the years you could receive payments.
Imputed Interest on Deferred Payments
When a CVR payment arrives more than a year after the merger closes, the IRS may recharacterize a portion of it as interest income rather than sale proceeds. Under Section 483 of the tax code, if the agreement does not provide for adequate stated interest, the IRS will impute interest at the applicable federal rate. That imputed amount is taxed as ordinary income, at rates ranging from 10% to 37% for 2026, rather than at the more favorable capital gains rates that apply to the rest of the payment. The remaining portion is treated as a return of your investment or as capital gain, depending on your basis.
Splitting Your Cost Basis
When you receive a mix of cash, stock, and CVRs in a merger, you need to split your original cost basis in the target company’s shares across all forms of consideration. The standard approach is proportional allocation based on fair market value: divide the CVR’s estimated fair market value by the total fair market value of everything you received, then multiply that fraction by your original basis. The result is the basis you assign to the CVR.
Getting this right matters because the basis allocated to the CVR determines how much gain or loss you recognize when the CVR pays out or expires. Allocate too little basis to the CVR, and you’ll overstate your gain when it pays. Allocate too much, and you’ll overstate your gain on the cash and stock you received at closing. Your brokerage firm may report the merger consideration on Form 1099-B, but CVR basis allocation often requires your own calculations, especially for non-transferable CVRs where no market price exists to establish fair value easily.
If the CVR Expires Worthless
If the milestone is never reached and the CVR expires with no payout, you can claim a capital loss. Under Section 165(g) of the tax code, a security that becomes wholly worthless during the tax year is treated as though you sold it for zero on the last day of that year. The loss is long-term if you held the CVR for more than one year, short-term otherwise. You can use it to offset capital gains from other investments, and if your capital losses exceed your gains, you can deduct up to $3,000 per year against ordinary income, carrying the remainder forward to future years.
Timing matters. The loss is recognized in the year the CVR becomes worthless, typically when the agreement’s deadline passes without the milestone being achieved. Claim it in the wrong year and the IRS can deny the deduction.
Watch for the Net Investment Income Tax
CVR payments that generate capital gains or interest income may also trigger the 3.8% net investment income tax. This surtax applies to investment income when your modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly. These thresholds are not indexed for inflation and have remained unchanged since the tax was introduced. A large CVR payout that pushes your income above these levels adds 3.8% on top of your regular capital gains or ordinary income tax rate.
If You Inherit a CVR
If a CVR holder dies before the milestone is resolved, the CVR passes to heirs as part of the estate. Under Section 1014 of the tax code, most property acquired from a decedent receives a stepped-up basis equal to the property’s fair market value at the date of death. For a CVR, establishing that fair market value can be difficult, especially for non-transferable ones with no market price. If the CVR is valued at close to zero at death because the milestone looks unlikely, the heir could end up with a very low basis and significant taxable gain if the milestone is later achieved. If the CVR appeared likely to pay out at death, the stepped-up basis may shield most of the eventual payment from tax. Given the complexity, inherited CVRs are worth discussing with a tax advisor before the payment deadline arrives.