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Earn-Outs in Public Company Acquisitions: New CVRs Raise Unsettled Tax Issues

By: William R. Skinner

What You Need to Know

  • Contingent value rights (CVRs) have become frequent occurrences in public company acquisitions, especially in pharmaceuticals and biotech, allowing shareholders to receive future payments upon meeting specific milestones like Food and Drug Administration (FDA) approval or sales targets.
  • Tax treatment of CVRs remains uncertain, with no definitive guidance on whether payments should be classified as capital gains or ordinary income, posing complex challenges for both companies and shareholders.
  • Additional tax complications arise when CVRs are issued to holders of compensatory stock options, as the timing of exercising options can significantly affect the tax consequences.
  • When non-U.S. persons are involved in CVR transactions, questions emerge about the application of U.S. withholding tax under Section 881, further complicating cross-border payments.
  • This article provides an in-depth look at the different facets of the issue and the relevant theories and arguments for taxing receipt and collection of proceeds under a CVR.

Read the full article here. Originally published in Thomson Reuters' Journal of Taxation.