What is a Contingent Issuance?

A contingent issuance refers to a possible issuance of common stock that will occur only if certain conditions have been satisfied. A business may set up a contingent issuance in order to make it more expensive for a hostile acquirer to buy it; thus, an event such as an offer to buy a majority of the shares outstanding will trigger the automatic issuance of more shares to existing shareholders, which the hostile acquirer must then purchase. Alternatively, the acquirer might agree to issue additional shares to the existing shareholders if the acquiree’s profits exceed a certain threshold level in the following year.

Examples of Contingent Issuances

There are several cases in which contingent issuances may be used. Here are several examples:

Warrants. A business might issue warrants to a third party that gives it the right, but not the obligation, to purchase the firm’s shares at a specific exercise price, and within a certain date range. Warrants are sometimes given to investors as an inducement for them to purchase a company’s securities.
Contingent convertible bonds. A business may issue bonds that can be converted into its common stock under conditions specified in the bond indenture agreement.
Contingent share issuances. A business may issue additional shares to investors if certain predetermined conditions arise. For example, a firm might be required to issue additional shares if the market price of its stock does not exceed $20 by the end of the year.