Contingent issuance definition
/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.
Types 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.
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Example of a Contingent Issuance
A real-life example of a contingent issuance is the Facebook (Meta) acquisition of WhatsApp in 2014, which included a contingent stock issuance. When Facebook (now Meta) acquired WhatsApp in 2014 for approximately $19 billion, the deal was structured with a combination of cash, Facebook stock, and a contingent issuance of additional shares. The total price included $3 billion in restricted Facebook stock, which would be issued only if WhatsApp’s founders remained with Facebook for four years after the deal closed. If the WhatsApp founders left before the four-year period, the additional Facebook shares would not be issued.
Jan Koum, co-founder of WhatsApp, stayed with Facebook until 2018, meaning he completed the four-year period and qualified for the contingent stock issuance. Brian Acton, the other co-founder, left Facebook in 2017 before the full four-year term, meaning he likely forfeited some of the contingent shares.
This arrangement qualifies as a contingent issuance because the issuance of additional Facebook shares to WhatsApp's founders was dependent on a future condition—their continued employment. Since Jan Koum met the condition, he received the shares, but Brian Acton, who left early, did not receive the full amount.